Venezuela’s Collapse

(Bloomberg) -- Venezuela has more oil than Saudi Arabia and more poverty than Colombia. Once one of Latin America’s richest countries, it’s now plagued with shortages of everything from toilet paper to antibiotics and food. It’s been a steep downward spiral since the heady days when the late President Hugo Chavez set out to use an oil boom to light a socialist path to prosperity, not just for the poor in Venezuela but across Latin America. Chavez died in 2013, about a year before oil prices fell sharply. His protégé and successor, Nicholas Maduro, has sought to tighten his hold on power as opponents complain of economic mismanagement, corruption and political oppression. Critics inside and outside the country hope for Maduro’s departure but so far no solution has emerged that would protect Venezuela’s 30 million people from further harm.

The Situation

With inflation forecast to reach 1 million percent in 2018, Maduro in August lowered the official exchange rate of the currency by 95 percent — one of history’s greatest devaluations — and redenominated the money by lopping off five zeros. He also renamed the currency the “sovereign bolivar” and tied its value to the Petro, the world’s first state-issued cryptocurrency, which Maduro had introduced earlier. The U.S. calls the Petro a scam and has forbade Americans from purchasing it. The currency measures are a sign of Maduro’s growing desperation. When drones carrying explosives detonated over him during an August 2018 military parade, the televised assassination attempt showed how tenuous his grip on power may be. Maduro, 55, overwhelmingly won a new six-year term in a May 20 election widely seen as a charade. U.S. Vice President Mike Pence called it a "sham." Most of the opposition either boycotted the contest or were barred from entering it. Many Venezuelans didn't bother to vote: The electoral authority said turnout was 48 percent, the lowest in two decades. Many hundreds of thousands have fled to nearby countries in response to a violent crackdown on street protests, the lack of jobs and the inability to feed their families. In 2017, one aid agency said more than 11 percent of children under age 5 were suffering from moderate to severe malnutrition, yet Maduro has rejected humanitarian aid. Oil output has plunged to 1940s levels, partly for lack of money for maintenance but also because famished workers have grown too weak for heavy labor. Late last year, Venezuela defaulted on a portion of its debt. That included the $3 billion in so-called hunger bonds that Goldman Sachs Group Inc. bought at a deep discount, leading to criticism it was helping finance a regime that prioritized paying bondholders over feeding starving Venezuelans. Creditors have begun seizing the assets of the state oil company. The U.S. and the European Union have imposed sanctions against the country for human-rights abuses, political repression and graft. In a ranking of countries by corruption level, the non-profit group Transparency International puts Venezuela at number 169 out of 180 nations.

The Background

Chavez, a former paratrooper jailed for two years after leading a failed coup in 1992, was first elected president in 1998 and revolutionized Venezuelan politics with fiery anti-U.S. rhetoric. He nationalized thousands of companies or their assets, reducing the country’s capacity to produce anything but oil. He channeled revenue to the poor and expanded Venezuela’s influence in the region by doling out cheap oil. He used widespread support to transform a pluralistic democracy into a largely authoritarian system. With the oil bonanza’s end in 2014, Maduro could no longer rely on oil revenue, which accounts for 95 percent of foreign-currency earnings, to pay for imports, creating widespread scarcities. As discontent grew, Maduro and his allies have retained power in part by jailing opponents and curtailing press freedoms. After the opposition won control of the parliament, Maduro last year stripped the body of its power and handed it to what the U.S. says is a puppet assembly. The U.S. has designated Maduro's vice president, Tareck El Aissami, a drug kingpin, making him one of the most senior government leaders of any country to be sanctioned this way.   

Venezuela’s Collapse

The Argument

Unpopular at home and increasingly isolated from the rest of the world, Maduro has held onto power despite not having much of a plan for turning the country around. He has said some of the economic squeeze will be fixed with the Petro, which is backed by oil, but has offered no mechanism to exchange the digital tokens for hard assets. He hopes to negotiate a debt restructuring, but U.S. sanctions prevent American investors and banks from participating, complicating the process. Expatriates, diplomats and others have proposed responses to the worsening crisis, ranging from the modest (increased support for countries accepting fleeing Venezuelans) to the radical (military intervention, similar to the U.S.’s removal of Manuel Noriega from the presidency of Panama in 1990). When President Donald Trump in 2017 mused openly about the latter, Latin American countries quickly objected. Some Maduro critics instead hope for a military coup — the drone attack and a wave of officer arrests in early 2018 could signal growing dissension — while others find military rule unacceptable. Still others have suggested that the U.S., Europe and Asia could ban the country’s oil imports and hasten Maduro’s demise. But that would worsen the humanitarian crisis.

The Reference Shelf

  • QuickTake explainers on Venezuela’s need for debt relief and its so-called hunger bonds, Maduro’s constituent assembly to amend the constitution, and the likely effects of a ban on oil imports.
  • A Bloomberg series on “Life in Caracas” under Nicolas Maduro.
  • A Council on Foreign Relations report explains the economic, financial and humanitarian crisis.
  • A New York Times magazine article on Venezuela’s descent into crisis.
  • A Congressional Research Service report on Venezuela’s travails.
  • Opposition scholars blog about Venezuela’s problems at Caracas Chronicles.

Nathan Crooks contributed to an earlier version of this article.

©2018 Bloomberg L.P.