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Venezuelan state’s economic response to protests: Rationing plus Chinese and Russian loans to float a liberal dollar market

The anti-government protest in eastern Caracas 13 March ended in clashes with Venezuelan police. Three more died in widespread protests

The anti-government protest in eastern Caracas 13 March ended in clashes with Venezuelan police. Three more died in widespread protests

As protests continue against Venezuela’s faltering “oil revolution,” the political strategy of the Chavista administration is striking for its intransigence. President Maduro has refused to recognise any grievances by students or other protesters. He calls protesters “fascists” and blames them for all the ills of the economy.  Protests are attacked by the national guard and often by state-organised paramilitary gangs on motorcycles who are praised by the president.

The administration’s strategy so far appears to be that protests will burn themselves out if they can be delegitimised and contained within middle-class areas.  Accordingly, the president’s rhetoric aims at inciting poorer citizens against protesters.  All in all, this is a risky strategy.  Protests have constantly intensified, with perhaps 25 persons dead now.

After a month of protests, the administration has taken urgent economic measures it hopes will undermine the protests and prevent their spread to poor and working-class barrios.

1. Ramirez announces Chinese and Russian loans and the launch of a very liberal Sicad 2

On 8 March, Raphael Ramirez, VP for Economy and President of PDVSA, announced that he had flown to China and Russia where he had secured extraordinary oil-linked loans totaling $7b. (Here is a video of the announcement, in Spanish, posted by El Mundo on 8 March 2014).

In China’s case, its $5 billion loan is to be repaid with oil exports, and in Russia’s case, its $2 billion loan is said to be for development of a joint Russian-PDVSA Faja oil field.

Then came a second announcement by Ramirez that the government was opening the new dollar market, Sicad 2, which it promised to do for almost a year–since shortly after Hugo Chavez died.  He promised it would have very liberal rules, quite different from the Chavez legacy.  According to Ramirez:

The state won’t impose restrictions on trading in the so-called Sicad 2 market  … “There will be no pre-set band or rate, it will be a market with a free supply of foreign currency,” and “We will also supply currency to help the market flow.” (Bloomberg, 8Mar14)

The government had delayed this market for lack of dollars to offer. The new Chinese and Russian loans have finally allowed it to act.  However, another reason it was delayed for so long appears to be insufficient consensus between Chavismo’s factions on how liberal a policy should be adopted.  The policy now announced, if honestly implemented, is clearly a blow to the old commandist economic policies of Hugo Chavez and his long-time economic mentor, Jorge Giordani.

In any case, getting these oil-backed loans from abroad, and pushing inside the government for a more market-oriented policy were made urgent by the growing protest movement.

2: Maduro institutes a food rationing system

Then came the second of the administration’s economic measures to cope with unrest: President Maduro announced on 10 March a national food rationing card (see here and here), using citizen’s identity cards to limit shopping frequency.  While this is a system to merely manage scarcity, it was presented as a way to prevent the supposed “sabotage” of the economy and “hoarding” orchestrated by the “oligarchy” that the state says is the real cause of shortages.

Two reasons Beijing reversed its previous refusal to float Sicad 2

In September 2013, Beijing flatly refused to extend cash to the Maduro administration to float Sicad 2. Chinese officials reportedly had refused to even watch the Powerpoint pitch that Maduro and Ramirez had prepared (see my post).  But, now Ramirez suddenly has a new $5 billion loan from Beijing. Has the Maduro administration finally proven to Beijing’s satisfaction that it is financially competent?

In the first place, Beijing rationally has concerns that protests could get out of control. So, it agreed, but under the rubric of the Fondo Chino, which must be repaid with PDVSA oil deliveries. This is more restrictive than what Maduro and Ramirez asked for in September 2013.

(Aside: A similar fear that things could get out of control explains Mr. Putin’s sudden $2 billion loan in the middle of his occupation of the Crimea and right after an announcement by Russia that it intends to build military bases in Venezuela. I was quoted on the Russian base issue by Fox News Latino. More on Russia and Venezuela another time.)

But, there is likely another factor.

Beijing has made strong demands upon chavismo in the past few years to improve its financial transparency, discipline and accountability. (See my posts on China’s frustrations.) Beijing was likely pleased with the new more-liberal version of Sicad 2, quite different from what had been discussed last year, and from previous institutions formed under Chavez, called “Cadivi” and “Sicad I. This time, the price paid for dollars is supposed to float.

Just to clarify: Ramirez said both of the old institutions will continue. Cadivi will still offer subsidised dollars at 6.3 bolivar/dollar, and Sicad 1 at 11.8 b/d. Businesses importing certain vital necessities and others the state approves will still get these rates.

Of course, nothing implemented by Chavismo is ever free from caveats and bureaucratic distortions.  See M. Octavio, a Caracas trader, on the complex and non-transparent details of Sicad 2.  Still, at the minimum, this amounts to a significant de facto devaluation of the bolivar. As veteran Venezuelan economist, Francisco Rodriquez (Bank of America) sees it:

“This is positive because the government is devaluing the currency,” … “If the government is effectively channeling dollars that were previously used in the Cadivi or Sicad 1 systems and selling them at a higher rate, this would allow it to reduce its budget deficit and they would have to print less money.” (Bloomberg, 8mar14)

It is not clear if these liberal characteristics of Sicad 2 were demands insisted upon by China, or if they come mainly at the initiative of the Maduro-Cabell0-Ramirez administration.  Either way, they indicate that the demonstrations have finally begun to incentivise Maduro and Ramirez to push aside financial policies represented by Giordiani and other chavista hardliners.

Further indication in this direction are recent rumours in Caracas that Ramirez might soon step aside as PDVSA president, in order, it was being said, to focus on his new work as VP for Economy which requires putting all his efforts into the internal factional struggle against the Giordani hardliners.

Why would Beijing care about chavismo’s predicament?

This is not to say that if the opposition were to come to power it would be anti-China. The realities of the global oil market, of increased oil production in the USA and Canada, etc, guarantee that China and East Asia will increasingly be Venezuela’s oil trading partners, no matter who is in power.

However, if things got too rapidly out of control in Venezuela, there is little confidence that either Chavismo or the opposition could soon stabilise the county or the oil sector. This would be problematic for China’s loans and investments in Venezuela, and for its investments in building refineries and other infrastructure inside China as it moves towards substantial horizontal integration with Venezuela’s oil sector.

Are matters getting out of Maduro’s control?

The government’s plan depends on keeping demonstrations isolated to middle-class areas.  However, many of the youth protesters demonstrating in middle-class areas of Caracas and other cities are actually impoverished youth from barrios who dare not protest openly in their own neighbourhoods. There, the pro-chavista paramilitaries (so-called “collectivos”) patrol, enforcing allegiance to chavismo.  The Tupamaros, of the high-rise 23 Enero barrio, are a prime example.  In fact, they controlled this area long before Chavez was on the scene.

In many middle-class areas residents give students shelter in their apartment buildings when such paramilitary gangs attack.  So too, contacts have told me that local police forces in middle-class municipal boroughs (alcaldias) tend to protect students from national guardsmen and paramilitaries.  These indicate dangerous confrontations, obviously of an armed nature, can easily take place, between different police forces, as seen in the killing of a state intelligence police officer by Chacao municipality police on 11 March. (See: 12mar14, Caracas Chronicles), and in other incidents.

It has become clear that there are protests taking place also in barrios of the capital, where youth have set up barricades on a hit-and-run basis, residents have banged pots in concert during evenings to protest of government policies (cacerolazos), and at times more open protest actions occur.  Though, indeed, the reports of relative calm there as compared to middle class areas are still generally accurate.

It remains to be seen if the new Sicad 2 market and the rationing cards will significantly reverse the lack of imports and widespread shortages of food and other goods.  Clearly, a floating value for dollars cuts the government costs for subsidising dollars.  And, while any rationing card might be resented, it also might reduce the lucrative resale of low-cost subsidised Venezuelan goods abroad–especially to Colombia–which has contributed to shortages.

Nevertheless, the fundamentally unproductive character of the economy, both the non-oil sector, and the highly inefficient oil sector, is not being addressed, and life for Venezuelans in both middle-class and barrio areas will remain very difficult and complex.

These economic measures may be far too little, too late. In which case, the chavista administration’s strategy of intensifying repression and waiting for demonstrations to burn out in isolation from barrios, may well backfire.

Source: Global Barrel – Venezuelan state’s economic response to protests: Rationing plus Chinese and Russian loans to float a liberal dollar market


About Tom ODonnell

[This bio with hotlinks is at: http://www.umich.edu/~twod/bio/ ] Dr. Thomas Wilfred O’Donnell is an international academic, expert analyst and writer working on energy and international affairs, particularly the global oil and gas systems. Regions of interest include the USA, EU (especially Germany), Russia, China and the OPEC states of the Middle-East and Latin-American (especially Venezuela, Iran and Saudi Arabia). He teaches graduate seminars in Berlin at Hertie School of Governance and undergrads at Freie Universitӓt’s FU-BEST (European Studies Program). He previously taught at The University of Michigan (Ann Arbor) and The New School University (NYC). O’Donnell blogs at GlobalBarrel.com and has recently written for Berlin Policy Journal (Berlin), King’s College European Centre for Energy and Resource Security (London), Americas Quarterly (NYC/DC),Petroguía (Caracas & Latin America), AICGS (DC); reprinted in Natural Gas World, and is often interviewed by the international press. In Spring of 2015, Dr. O’Donnell was a fellow of The American Institute of Contemporary German Studies (AICGS) & The German Academic Exchange Service (DAAD) in Washington, DC interviewing US energy experts on German and EU energy vulnerabilities. He spent two full years, 2008-09, as a US Fulbright Scholar and Visiting Professor in Caracas at the Center for the Study of Development of the Central University of Venezuela (CENDES/UCV), returning several times since. He consults on energy, geopolitical and market/tech matters and is Senior Energy Desk Analyst at Wikistrat, O'Donnell's award-winning PhD thesis is in experimental nuclear physics (U. Michigan, Ann Arbor, 2000), which included research in several national and university laboratories. He is author or co-author of about 40 peer-reviewed physics papers. While doing post-doctoral physics and complex-systems research at U. Michigan, he taught social-science-focused courses in Science Technology & Society (STS) on historical technological change drawing on his industrial/scientific experience and also taught on issues of oil and geopolitics in Middle East and North African (MENA) Studies, as well as courses on the “Information Era” and “Energy and Environment,” and spent several semesters teaching in the Physics Department’s “Advanced Physics Laboratories” encompassing several subtopics. After his university studies, he spent 10+ years during the mid-1970’s to mid-1980’s working in U.S. automobile manufacturing, railways, and energy engineering, while writing and gaining a reputation in the US Midwest as an analyst and organizer of labor and social-political movements, developing extensive ties with activists and others in minority and immigrant working-class communities. This followed his initial (undergraduate) university years focused on political science and China Studies, where he had been an activist and organizer within political protest movements of the day. O’Donnell speaks English (native), Spanish (fluent) and functional German; he is fluent in various programming languages and computing environments. He resides in Berlin, accompanied by family; and maintains close professional and other ties to the USA.


2 thoughts on “Venezuelan state’s economic response to protests: Rationing plus Chinese and Russian loans to float a liberal dollar market

  1. As you might noticed, SICAD II and as I forecasted is another fiasco, as SICAD I. There will not be any liberal foreign exchange market, since the core of exchange control system keeps running the market for dollars, the market for dollars continue to be “dry” no oil companies, has put a dollar into SICAD II. Parallel market is still, trading dollars 60% above SICAD II “rate”, it will continue like that, since the parallel market is feed by some oil dollars coming from government bosses associates. Corruption is the main force in Venezuelan economy, between Estate and government run nearly 70% of more profitable Venezuelan economy assets. Government open e new estate company which took over the whole import demand in the country. Several months after Maduro got the Habilitante Law, the control over the whole economy is even worst and tight. The main force behind government policies emerge from a national oil company running a negative oil rent cash flow, nobody would believe that, however, it can be easily conclude after a carefully revision of PDVSA balance. More than half of PDVSA external debt was issued to finance redistribution of oil rent. The main problem in Venezuelan economy, persist, there will be no quick fix, the pain restrictions is political, the economy rests on it


    Posted by Alexander Guerrero | April 30, 2014, 9:06 am
  2. Thanks for your comment. Indeed, many in Caracas are saying they are having a lt of trouble getting their Sicad II dollars. It appears the government doesn’t have enough to put in, and that the private sector hasn’t started to offer dollars. One friend says he expects the Sicad II is only ‘theater.’ We’ll know soon.


    Posted by Tom ODonnell | April 30, 2014, 2:36 pm

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