Venezuela: It’s the Economic War, Stupid!

“It’s the ‘economic war,’ stupid.”  In simple terms, that’s the Bizarro World version of Clinton strategist James Carville’s slogan that sums up Venezuela President Nicolas Maduro’s reasoning for his government’s loss in Venezuela’s December 6th congressional elections. Instead of owning the economic disaster of crashing GDP, massive shortages, unparalleled currency devaluation and hyperinflation caused by 15 years of unrealistic communist policies and promising to right the sinking ship in his Monday madrigal concession speech, Maduro blamed oligarchs and outside forces for the economy’s — and thus his — dismal performance.
Worse, in a telling statement, Maduro went on to argue that: “In Venezuela the opposition has not won. For now, a counter-revolution that is at our doorstep has won.” Then he insisted that what the country needed was more radicalization — not less — and promised to deliver it.  “The struggle for the construction of socialism is just beginning,” he declared, and went on to say he would double down on his disastrous economic policy.
Sadly, despite the opposition’s overwhelming victory in Sunday’s congressional elections, things will remain bad in Venezuela and will likely worsen as political infighting and retrenchment increase.  Here is why.
What will the Venezuela government do now?
Maduro has called for a week of discussion in his party.  He has called a special meeting for all the organizations that make up the GPP – the umbrella group of those who support the revolution.  Tuesday night Maduro announced that he was firing his whole cabinet.
Next Wednesday, Maduro will gather with all 900 of the government political party PSUV delegates to evaluate the situation, make plans and create proposals.
  1. The Communal Powers
More importantly, for Saturday, Maduro called a meeting of the presidential councils of popular power.  These “Communes” have been largely ignored by the opposition and the vast majority of the councils are heavily Chavista.  Venezuela passed the Organic Law of the Communes in December 2010, and the Ministry of Communes claims that there are over 40,000 community councils, with over 1000 communes.  Maduro increased the 2015 budget of the Ministry of Communes by 62% in preparation for their increasing importance in his strategy. In the Chavez-Maduro version of the communes, residents unite in a number of community councils with the object of self-governance through a communal parliament – a parallel structure to the existing municipal, state and national structures financed from the executive branch.  This is part of what the government labels its grass-roots “participatory democracy” that Maduro could turn to in order to get around the opposition-dominated National Assembly.
The government has followed the cut, isolate and neuter strategy before.  When Opposition leader Antonio Ledezma defeated the Chavistas for the important and symbolic Caracas mayor position  in 2008, the Chavista dominated National Assembly created a new “Capital District,” took away all the mayor’s power, money and responsibilities, and gave it to a new Chavez-appointed Caracas governor.  Ledezma was subsequently arrested on trumped up charges of participating in an “American plot to overthrow the government,” jailed and is currently still under house arrest after undergoing medical treatment.
  1. The Supreme Court
This is possibly the most important and primary tool in the Chavista arsenal to maintain power and, like the communes, the signs point to the work that the government has been doing to prepare for Maduro’s reliance on the Supreme Justice Tribunal (TSJ).  In October, the government persuaded 13 judges of the TSJ to take early retirement.  Some of the judges were of questionable loyalty and many were set to have their terms expire in 2016, which would have allowed the new opposition-controlled National Assembly to appoint them, so having them resign now allows Maduro to replace them with loyalists.
National Assembly President Diosdado Cabello – who participated with Chavez in the coup in 1992 – said Tuesday that the National Assembly would be appointing those 13 new TSJ judges before the end of the year (likely over the Christmas holidays, which is what they also did last year).  The government will, thus, rely on its fully-packed Supreme Court with its powerful 7 member Constitutional chamber to overturn, neutralize or block any movements from the incoming opposition-dominated National Assembly.  Since 2004 (after Chavez packed it with another 12 loyal justices after his original 20 appointed justices dared to rule against him), the Supreme Court has never ruled against the government.  And it only takes 4 justices of the Constitutional chamber to rule an action or law unconstitutional — in other words, 4 Chavista justices can defeat the whole of the elected National Assembly.
  1.  Rule-by-Decree Authority
The outgoing National Assembly will probably also pass a decree giving Maduro the power to make and pass laws without the National Assembly, a Rule-by-Decree authority called Ley Habilitante (Enabling Law).  Not only has Maduro been given this authority for most of his term in office, Chavez even did it in advance of the 2010 National Assembly elections which saw the opposition gain a substantial number of seats, though not a majority.  When, of course, the new opposition-dominated National Assembly tries to revoke this Rule-by-Decree authority with its supermajority, the matter will likely end up in the Supreme Court (see #2).
In short, we have a recipe for impasse and any needed economic reforms will likely take a backseat to the power struggles.  It is possible, of course, that some government officials and judges may see the writing on the wall and begin to negotiate about joining with the opposition to save their skins, jobs or just stay out of jail, but cornered rats do not as a general rule behave rationally.
While most news has been understandably focused on the election and its machinations, back in the economics department, things are bad.
 Oil Hits a New Low
First of all, cash inflows are collapsing as the price of Venezuela’s oil basket fell to $34.05 a barrel last week — its lowest since February of 2009.  Venezuela has been lobbying its OPEC partners for months to lower production quotas, but instead got the opposite result as OPEC decided to increase the quota last Friday.  As a result, Venezuela’s oil basket will fall even closer to $30 this week.
Financial Reserves Fall to a New Low
Venezuela Central Bank (BCV) reserves fell to a new low of $14.592 billion last week, the lowest since 2003.  The BCV has strangely not published any reserves figures this week so far.
Gold Reserves Fall to a New Low
The government quietly released October balances on Friday night under the penumbra of the run-up to the election which show that Venezuela’s gold holdings fell almost half-a-billion to $11 billion during October.  That means that Venezuela’s gold reserves have fallen over $3.5 billion so far this year.
Venz BCV Balance 31 Oct 2015.jpg
Unpaid Ships are Piling Up Offshore
Some 60 ships are waiting offshore waiting to be paid before they unload their cargoes, mostly light oil and oil components to mix with Venezuela’s heavy Orinoco oil, according to Reuters. But some are cargo ships. As of October, Venezuelan state importer monopoly Corpovex had only paid for $6 billion of the $19 billion of goods it ordered this year, according to an internal Corpovex document seen by Reuters.
When the anatomy of the government’s failure in the December election is written, this will be an important footnote:  To try to buy votes and create the last minute illusion of a land of plenty to gullible voters, the government had planned 5,000 megamarkets around the country.  In a testimony to the consistent efficiency of the Bolivarian government, the food never arrived.
There has been enormous interest around the country and world about Venezuela and its elections.  I spent the last several weeks travelling around the country and region and participating in various events speaking about Venezuela and nowhere was there more interest than in Washington, D.C., where the Senate Human Rights Caucus headed by Senator Chris Coons and Senator Mark Kirk convened a group of experts to speak about Venezuela and its elections.
Indeed, the U.S. government was following the Venezuela elections so closely that not only did Hillary Clinton speak about the results before they were released at an event on Sunday night (LAHT exclusive video here: ), but the U.S. also had a whole aircraft carrier task force off of Venezuela’s coast monitoring all the signal intelligence and wire traffic (LAHT exclusive here: ).
I also understand from contacts at both the State Department and the Executive Branch that, as part of its strategy to prove that it is getting tough on Venezuela and highlight the country’s corruption, the White House intends to release the names of the 56 Venezuelans who had their U.S. visas revoked this year.
And, finally, also in that focus on Venezuela corruption, it has gone unreported that there are actually 4 sealed indictments in the U.S. arrest of the nephews of Nicolas Maduro and Cilia Flores on narco-trafficking, not just the 2 who have been arrested so far.
So be aware that there are possibly 2 more indictments in that case still to come, should the relevant parties venture outside of the safety of Venezuela.
USA v Campo Flores et al - Docket showing more sealed def - November 2015.jpg
As you can see from the latest docket below, the docket has now been cleaned up to hide the existence of the other 2 sealed indictments in the vault (docket #3 and #4 from above are now missing), so just keep it between us!
USA v Flores Now Missing 2 Sealed Indictments - 4 December 2015.jpg
Thanks again for your continued readership and business.  Please let me know if there is anything else we can assist with.

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