Back in April, Brazil’s Folha de SaoPaulo ran an article entitled: “The Future of Venezuela Depends on China“ and highlighted this quote: Translation: “If Maduzo wins, he’ll have to regain the confidence of the Chinese.” TOM O’DONNELL, petroleum consultant
Indeed, it is now clear that the short-term strategy of the post-Chavez Maduro-Cabello administration was to escape the country’s severe dollar crisis by convincing Beijing to extend it a $5 billion cash loan alleviating food-import shortages before 8 December elections. In particular, the cash was to fund a new dollar exchange system (see El Nacional,25 Sept 2013).
President Maduro, oil chief Rafael Ramirez and other Chavista leaders went to Beijing in late September with high expectations. Their logic was that, after first giving CNPC, Sinopec, CITIC and other Chinese firms huge new contracts to develop Faja heavy-oil-fields and a gold mine, Beijing would be in the mood to hand over $5 billion in cash. They were wrong.
The expectation of a favorable response from Beijing was a major miscalculation by Caracas. Beijing had already made it perfectly clear to the late-Hugo Chavez’–as readers of GlobalBarrel.com knew long ago–that China would never again simply hand over cash to the Bolivarian state.
Context for China’s refusal: Chavismo had been warned
When China granted Chavez a record-sized $20 billion loan for oil in 2010, Beijing made it clear that this money would only be doled out piecemeal for projects specifically reviewed and pre-approved in Beijing. Furthermore, Beijing would only approve projects that enhanced China’s “access to oil.” (A senior Chinese diplomat explicitly told me this at the time, as did sources in Venezuela.) The funds could for example be spent for infrastructure projects, but never again would China give cash to support Chavez’ many poorly organized populist schemes only to have large parts disappear.
Consistent with this, in the summer of 2011, businessmen working with PDVSA in Caracas told me how any proposals for projects drawing on this Chinese loan were first being sent for approval to the Chinese embassy in Caracas, then passed to Beijing and, if approved, the money would be closely watched over when it was sent to Venezuela.
Not to put too fine a point on this, but Chavista functionaries directly knowledgeable of meetings in Caracas between leading Chavistas and Chinese officials also told me, in mid-2011, how Beijing had sent inspectors into Bolivarian ministries and national facilities to see what had been done with their previous grants and loans. And, they were very negatively impressed. This became widely known in Venezuela.
An unrealistic post-Chavez bailout strategy fails
Why did getting this cash become Maduro’s (unrealistic) plan? Consider his other alternatives: quickly raise oil production, go to the junk bond market (as Chavez had habitually done), institute austerity measures in public spending, devalue the Bolivar, increase taxes and raise subsidized prices, and so on.
Going to the bond market would be very costly. Raising oil production can, in principle, slowly begin within about six months to a year if PDVSA rapidly implemented some pragmatic steps (see my two recent articles here and here). But, relief was needed more rapidly in order to win the upcoming 8 December municipal elections.
As for the other possibilities, in consideration of how close the presidential elections had been in April, Maduro obviously felt he simply could not risk shifting the burden of the crises onto the popular classes via austerity, devaluation, price raises, new taxes, and etc.
So, it must have seemed to him that Beijing was the only palatable place to turn. But, the sharpness of Beijing’s rejection of the Venezuelan delegation’s proposal (i.e., the Chinese leadership reportedly didn’t even allow the Venezuelan delegation to present their well-rehearsed PowerPoint pitch) seems to have shaken Maduro. When Maduro left Beijing he skipped his scheduled speech at the UN General Assembly in NYC making the disingenuous excuse that his life would be in danger in the USA, and continued straight on to Caracas.
In a sign of the seriousness of the situation, Maduro and Ramirez immediately asked Colombia to sell Venezuela $600 million of food in return for bonds issued by Venezuela’s national oil company, PDVSA, Colombian exporters could then resell the bonds for dollars at junk-bond rates via Wall Street. (See a striking article: “Bonds-for-Chickens Barter Feeds Debt Selloff in Venezuela, By Nathan Crooks & Andrea Jaramill of Bloomberg’s Caracas office, 23 Sept 13).
On the surface, the trip might appear a great success for Chavismo in that a plethora of new multibillion dollar deals were signed by China’s oil giants Sinopec and CNPC for virgin Faja heavy-oil fields. And, after lengthy pre-negotiations–Beijing also approved upping the next tranche of a renewable loan-for-oil that Venezuela has already taken four times at $4 billion, now allowing $5 billion.
All this will contribute, longer-term, for PDVSA to increase its oil production. However, from the viewpoint of short-term, crisis management, from the point of view of getting dollars to import food to feed the population before municipal elections on 8 December, the Beijing trip was a failure.
Finance minister Merentes had previously announced, on 17 September, that a new less restrictive dollar-exchange system was being put in place soon. After the Beijing cash rebuff, he was relieved of his inner-sanctum position as vice-president for economy on 8 October–probably because the Chinese refused to loan the cash to fund his scheme, And, he was replaced in that position by oil minister Ramirez.
The chavista leadership is now constrained to consider less palatable, but more realistic options to address the dollar shortage. But, Chavista leaders are split on what to do. And, throwing out three more US diplomats (2 October) for talking to opposition activists and striking labor leaders won’t resolve this crisis.