'Venezuela is squeezing a lemon that has already been squeezed'

In recent months, the government of President Nicolás Maduro has announced a series of economic measures to alleviate the economic crisis and hyperinflation in Venezuela.

As part of the recovery program, Maduro said the government will start charging international prices for gasoline in the domestic market, which has historically been subsidized by the state. Another measure was the monetary reconversion, eliminating five zeros from the local currency.

Control Risks associate director and Venezuela expert Raúl Gallegos talks with BNamericas about these measures, the political risk of the country, and the current situation for gold mining.

BNamericas: How do you see the series of measures the Venezuelan government announced in August?

Gallegos: Basically the issue is a screen for what they really want to do, which is rationing the availability of fuel nationwide. They want to ration fuel because the amount of funds the government is gaining from oil has dropped a lot, given that production has fallen. The government uses between 350,000b and 400,000b of oil per day in supplying the domestic gasoline market. That quantity is not available for export and generating funds. At this time, as they cannot increase production – for lack of investment and capacity – they have decided to squeeze the domestic market. That means that instead of selling 400,000b internally by refining it and converting it into gasoline, they want to reduce that in order to export the product and be able to earn more. That is the real reason for that policy. It is a palliative that has no greater future. They are squeezing a lemon that has already been squeezed and are not generating greater wealth or adopting measures that can encourage international investment.

The other measure is an adjustment of the exchange rate and the elimination of five zeros from the currency. I explain it that way to Venezuelans who know very well plastic surgery: It is the same as if you were to get a facelift. You go to the doctor, you stretch your face, but that does not mean that you are suddenly only 20 years old. The same happens with the Venezuelan currency, you can remove all the zeros you want, but that does not make inflation disappear. Inflation will continue to affect the currency if the government continues to create money from nothing to pay public employees, with excessive spending.

BNamericas: By how much more do you think will oil production fall?

Gallegos: The Venezuelan oil sector is being destroyed, even without US sanctions. Production has fallen tremendously in the last year and a half and continues to fall. Both Control Risks and Oxford Economics estimate that production will fall below 1Mb/d by the end of this year.

BNamericas: When do you think the situation is going to reverse?

Gallegos: We do not see an immediate floor. To reverse the situation, several things would have to be done. One, you need to clearly indicate that you will respect private property and that you will give a higher percentage of participation to international companies, so that companies have the incentive to put fresh money back into the business. None of that is going to change, at least in the next two years in our opinion, as long as the Maduro government does not feel comfortable with anyone contesting its power. At this moment, the Maduro government is in a consolidation stage and that implies that they want to get to feel as secure in power as the Communist Party in Cuba feels. When the government reaches that level of comfort, then perhaps we will see a little more economic pragmatism.

I do not see Chavismo falling in the short term. It is more likely that there will be a change of government but not of regime, unless a more radical, armed, opposition emerges, or the international community decides to intervene, something that we do not see either. It would have to become a more hateful regime in the eyes of the international community.

Now, suddenly there can be a blow that nobody imagined and that Maduro leaves the country, but the question is who will give the blow and who will take power. I think it is unlikely that there is an opposition leader who has the capacity to do so because most of them are imprisoned or disqualified. It would not be so easy.

BNamericas: What has to happen to make the US taking repressive measures against Venezuela's oil?

Gallegos: At this moment the US has decided not to go that way for several reasons. One factor is that this is an economy in which people are going through a lot of hardship such as hunger, lack of medicines for very controllable diseases. That has a very strong impact internationally; the world is witnessing the mismanagement of the government. The US does not want to put a series of sanctions that could serve as an excuse for what is happening in Venezuela. They do not want to get into the mess of being accused that because of them children are dying of hunger and don't have milk in Venezuela.

The US government clearly said that the Venezuelan military has to take care of the problem. But the armed forces are no longer an institution as they were almost 20 years ago. There is no institutionality. It is a whole generation of soldiers who have advanced in the shadow of Hugo Chávez and President Maduro and are subject to this ideology and designs.

BNamericas: How is the mining situation in Venezuela? Do you think illegal groups will continue to take control of gold mining?

Gallegos: This is going to be something that we are going to continue seeing. In our opinion, mining will continue to be in the hands of criminal groups. At this moment they want to maintain the unrestricted support of the armed forces. The government has not made efforts to handle the issue of crime more strongly because of two components. One is ideological, that according to them, going hard on crime is just something right-wing governments do. And the other component is that if they go hard on crime they know that it can affect many poor families. This way, over many years the issue of criminality got out of hand and became what we are seeing now.

Right now, some Colombian armed groups are already living inside Venezuela. It seems that the ELN guerrilla group controls a lot of illegal mining activity not only on the border with Venezuela but also on the other side of the country, on the border with Guyana. It is already being seen that criminal guerrilla forces openly operate in Venezuela and are exercising a control function in illegal mining, apparently with knowledge of the military and the government.

Those who are taking charge of what the government calls the "mining act" are from the military and quite corrupt. The political leadership has the incentive to allow this to continue because the government receives a slice of the gold that is extracted. It is a scheme that allows some stability to the government and at this moment everything focuses on maintaining control.