Yet another country bearing uncanny resemblances to erstwhile
Soviet Union is heading towards financial collapse. The combined burden of
accumulated debt, dictatorial socialist regime, and a benefactor ready to
extend endless credit led to collapse to Venezuelan economy. Underscoring woes
of countries like Sri Lanka, Tajikistan, Pakistan who sought infrastructure
development loans from China to trigger growth, near collapse of Venezuela
economy highlights the role played by Chinese cash. The OPEC country, wadding
through severe financial crunches for the second year, sold its sovereign
bonds, slashed the imports by 50% to struggling to pay off debts. Plummeting oil prices, droughts, reduced
hydro-electric power production exacerbated the crisis.
For over a decade, when oil prices skyrocketed, Venezuela
proactively signed various infrastructure deals with China. With massive oil
exports keeping the socialist regime afloat, it doled out numerous subsidies
though unbridled expenditure, and state-owned companies began to drain the
economy. The extravagant burden of debt travails of Venezula hardly created any
ripples till the death of President of Hugo Chavez in 2013. Plummeting oil prices
in 2014, markedly depleted cash inflows paralyzing debt repayment. Mounting
debt trap began to ensnare the Latin American economy. The country was brought
to its knees with major debt-defaulter is state-owed oil company, PDVSA
(Petroleos de Venezuela), also the principal source for cash inflows started
grappling for funds for repayment. The wealthiest country in South America and
major oil supplier to Caribbean countries reeled under terminal loans.
Domestically, the cost of food imports began to shoot up. To
keep up with rising prices, wages were increased and to sustain this cycle,
more Bolivars are printed. This led to hyper-inflation reaching three- digit
mark. To cater the poor, government stores sold food at subsidized prices.
People queued up at these stores and resold them in black market. With many
businesses closing shops, unemployment peaked. People slowly began reselling
goods obtained from state stores to black marketers. Rampant black marketing,
intense domestic unrest and turmoil prevailed. Embattled, President Nicolas
Maduro’s government is finding it hard to survive until the Presidential
elections of 2018.
Though there was no historical, cultural, or religious connect
between China and Venezuela, Beijing’s unquenchable appetite for energy resources
and grand ambitions, propelled it towards resource-rich countries in the
American backyard. Ideological congruency and dislike for basic American tenets
deepened their relations. Besides, China which was eyeing for a larger role in
emerging geo-political realm, endeared to befriend Latin American countries, a
majority of whom recognize Taiwan. China’s rendezvous with Venezuela began in
2001 under President Chavez wherein both countries entered “strategic
development partnership” which was elevated to “comprehensive strategic
partnership” in 2014. Subsequently bilateral trade grew exponentially from less
than $100 million in 1999 to $5.7 billion in 2014. China which has been
steadily rising and maturing into a global manufacturing giant signed over 600
investment projects and lent $63 billion till now. Over a period, China emerged
as a key strategic player in Latin America and Caribbean region, effectively
weakening influence of Taiwan in the region. In 2004, China obtained permanent
observer status in the Organization of American States.
Venezuela’s largest resources of oil in the World had been
China’s lucrative catch. Beijing’s overtures bespoke its logistical approach of
clinching deals with resource-rich nations under the newly launched Resource
for Infrastructure Swap (R4I), program a forerunner of OBOR. In the first
decade of the millennium, China rolled out R4I contract forum in African
countries making huge investment in infrastructure development in return for
extracting/exploring the natural resources. China instinctively adopted similar
doctrine for Venezuela. Venezuela began shipping crude oil to China in return
for the huge infrastructure investment loans offered by National Bank of China
and the Export-Import Bank of China. Invariably all the investment projects
employed Chinese personnel who eventually dominated even the food and
agriculture sector. Massive investments in infrastructure failed to kickstart
economic growth. Instead country’s reliance on oil exports increased from 70% in
1998 to 98% in 2013 (1). This critical development reflected failure of
Venezuelan leadership in diversifying development and exclusive use of oil in
return for Chinese loans.
Sino-Venezuelan engagement which began with preferential
market access, stretched to arms purchase, launching of satellites to
guaranteed repayment through oil. This agreement worked well for both sides
till 2014 when crude prices were over $100. Unlike other countries, Venezuelan
crude is little heavier. Hence cost of extraction is high and not profitable
unless value of crude in global markets of over $60. With the collapse of
global oil prices, extraction of oil became less remunerative for Venezuela. As
oil prices continue to sink, financial crisis aggravated. By 2016, Venezuela could
make repayments to China only through crude oil deliveries as revenues dropped.
Operational crisis, financial disputes, power outages critically reduced the
functioning of state refineries of PDVSA. Crude output reduced and Venezuela struggled
to make loan repayments in crude oil to both creditors China and Russia. As oil
prices continued to decline, PDVSA stopped crude oil exports to India and US
which could make payments in cash. In a desperate bid to meet requirements of
crucial customers, Venezuela started importing oil from Mexico, Saudi Arabia
and Iraq.
If Venezuela continues to renege on its pledged supplies to
China and Russia, countries might eventually recover the loans in the form of
assets. Already Sri Lanka, is facing similar ordeal and is on the verge of
giving up 80% of share in Hambantota port to China. As of now, both Russia and
China have been supportive and flexible but a prolonged evasion of loan
payments is bound to have serious repercussions including losing control over
the Citgo, US subsidiary of PDVSA (since 50% of its was pledged as collateral
to Russia).
Reports indicate that China alone gave more loans to
Venezuela than Inter-American Development Bank and World Bank put together. In
2006, World Bank President cautioned Venezuela of worrying debt levels. To
greater dismay of Venezuelans, it is observed that majority of Chinese projects
are incomplete and some haven’t started yet. Insiders, indicate that huge
amounts of loans are siphoned off by corrupt socialist elites and the regime
loyalists. Transparency International ranked Venezuela as the 10th
most corrupt country in the world. No wonder, unofficial accounts puts that $11
billion was looted by cronies. Together, China under the guise of
infrastructure development offered non- concessionary loans with interest rates
on par with commercial banks. Interestingly, Beijing’s aspirations of expanding
its global influence through financial diplomacy had robust engagements with dictatorial
or authoritarian regimes (that had mild scrutiny and least checks/balances).
China had thus far effectively sold the dreams of growth and development to
emerging countries by way of infrastructure development regardless of long term
economic viability of the projects. Moreover, the attached strings with OBOR
like use of Chinese inputs, material, personnel had stunted the prospects of
domestic employment.
With PDVSA failing to pay workers, there are mass uprising
across Venezuela. Empty shelfs in stores, scarcity of medicines, absence of
jobs is triggering protests and creating refugee crisis. As per IMF report,
currently unemployment rate is 25%, economy has shrunk by 18% in last year and
inflation is expected to reach 720% (2). Over the past two decades, China
dominated domestic markets of Venezuela. Now most of the stores are owned by Chinese,
who also held high-profile jobs. Starved Venezuelans at started attacking and
burning down Chinese owned stores. With the Latin American country sliding into
financial abyss, Chinese government is evacuating its citizens. Approval
ratings of President Maduro have declined significantly for quelling the
simmering protests with an iron-hand. Street rioting, looting increased and
clashes between protestors and security personnel intensified leaving 47 dead.
US ambassador Nikki Haley, last week decried Venezuela “for rapidly
deteriorating human rights situation” and implored that the country should
withdraw from UN Human Rights Commission (UNHRC). Maduro’s outdated and communist styled
monetary policy is unlikely to stop the catastrophic collapse of Venezuelan
economy unless foreign debt burden is restructured. Despite deepening
recession, China offered $2.2 billion loan to Venezuela in November 2016. Telling
stories of Venezuela should thus be a revelation for all the countries warming
up to Beijing’s OBOR.
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