Venezuela: Economic Crisis and Political Chaos Part II

By | October 19, 2021

5: Natural resources and the competition for territorial control

At the same time as Maduro has secured even stronger control over central state institutions, he has lost more and more control over the country. Various armed groups now control parts of the territory, where they engage in smuggling and illegal extraction of natural resources. Venezuela is a large country with a very varied landscape and great natural resources. In the northwest, around Lake Maracaibo, and in the center of the country, around the river Orinoco, there are large amounts of oil. To the west, towards the border with Colombia, are large agricultural areas. South of the Orinoco River, in the states of Amazonas and Bolívar, are gold and other minerals.

Oil production has accounted for around 97 percent of export revenues, but oil production has been reduced to less than half of what it was in 2015. To compensate for lost oil revenues, the government decided in 2016 to open up mining south of the Orinoco River, in an area that is more than twice as big as Denmark. The hope was that foreign investors would invest, but they do not.

The reason for the lack of investment is not only the political chaos in the country, but that the areas in the south have long been partly controlled by armed, criminal gangs and networks. After the peace agreement in Colombia was signed in 2016, defectors from the Colombian FARC guerrillas (who entered into the peace agreement) and members of the remaining ELN guerrillas have also come to the area and are competing for control .

The Venezuelan military also plays an important role in these areas. Due to inflation and declining revenues to the state, the salaries of the military have become worthless. One of their sources of income is now to control illegal mining, both in alliance and competition with other armed groups. Only 16 percent of Venezuela’s mining revenue comes from legal channels . While the criminal violence in the capital Caracas has declined somewhat in the last couple of years, these areas are the scene of both a wave of violence and an environmental crisis .

6: From Russia with (a little) love

The Maduro government has also lost control by giving foreign actors, especially Russia, more influence. It is nothing new that foreign companies have had power in Venezuela. Since oil production began in full force in the 1920s, companies from the United States have been dominant. An important goal of Hugo Chávez’s “Bolivarian Revolution” was to secure national control, especially over the oil industry. The state oil company PDVSA was nationalized before Chávez came to power. One of the changes he implemented was to organize oil extraction through collaborative projects with foreign companies, where PDVSA was in control.

At the same time, Venezuela took out large loans from China. A large part of the loans were to be repaid with oil. A quarter of oil production now goes directly to repay loans , primarily to China. The remaining oil production takes place in collaboration with China National Oil Corporation (CNOP), American Chevron and Russian Rosneft. But there have been several conflicts with the Chinese , and it is now Russian companies that want to invest in Venezuela, as a country located in South America according to EHEALTHFACTS. To do so, they will have stronger control over oil recovery .

For the past 15 years, Venezuela has been one of Russia’s closest allies in Latin America. One of the reasons for both the fact that relations with Russia have become even closer in recent years, and that the extent of the criminal economy has increased, is the sanctions from the United States . The aim of the sanctions has been to force Maduro to resign. It has failed, but the sanctions have changed the Venezuelan economy. One consequence has been that more of the economy has become informal or illegal in order to circumvent the sanctions. A calculation showed that a third of all income to the country now goes through the black market .

7: For a handful of dollars

An important goal of the “Bolivarian Revolution” was to better distribute Venezuela’s oil revenues. Almost all of Venezuela’s food and consumer goods are imported, and the state has previously subsidized dollars to make imports cheaper. To prevent local merchants from taking the profits themselves and selling the goods more expensively in the store, price controls were also introduced. This system was expensive and inefficient, and it provided fertile ground for corruption.

When the price of oil fell, the state had no money for imports, and there was a shortage of goods. To pay off debts and government salaries, the state began printing money. Together, all of this created a huge price increase. A monthly minimum wage was eventually worth no more than a packet of eggs.

In 2019, the Maduro government took action to reduce inflation. It stopped subsidizing foreign currency and allowed anyone to buy dollars at market price. Price controls were also lifted and lending from private banks was restricted. The result is that the Venezuelan economy has become more and more “dollarized”. You use dollars to buy goods and services since you do not trust what the local currency bolivar is worth. However, most wages are still paid in bolivar.

It also means that there are now new items in the shops in the big cities. Much has been purchased directly from Walmart and other major chains in the United States . But people with regular salaries have no way of paying the prices in the new dollar stores. The authorities no longer survey the proportion of the population that is poor, but the latest large survey conducted by universities showed that 87 per cent of the population now live below the poverty line .

Nicolás Maduro 2