My thoughts and prayers are with the people of London this past day. The war on terror is a real war: long, painful, expensive, uncertain. Islamacist terror is a very real threat to civilization, as Tony Blair and the other G8 leaders affirmed yesterday.
But that is not the ONLY threat to geopolitical and economic stability in our time. It's important that we keep our eye on emerging events elsewhere as well. For example, a while back we took a look at recent arms purchases by Venezuela's Hugo Chavez from Spain, Russia and Brazil, as well as his intent to train and arm a paramilitary force loyal only to him. It's time to take a look at events in that country since April. The trend isn't reassuring.
Today's Financial Times reports that Chavez intends to seize over $5 billion, or 1/6 of the foreign currency and other reserves, of the central bank and divert them to ... well, officially to fund social programs. In practice, this means short-term offsets for the chronic deficits his government has run despite very high prices in the oil markets over the last few years.
It also means two more insidious things. First, this move will undercut confidence in the Venezuelan national bank and its currency, the bolivar. And second, it is highly unlikely that this will be the last expropriation.
The move is not justified by true need.
Critics say other state entities, such as state oil company Petroleos de Venezuela and Bandes, a state development bank, have about $10bn in overseas accounts, and the government should use some of that money instead of the bank's international reserves.
However, the last thing Chavez wants is either to withdraw funds he controls outside of the country or to do so in a venue where there might be some visibility into his use of the monies. Which gets us to the second story of interest regarding Venezuela. But first, let's look a little closer at this move.
Economists predict that the expenditure of part of the reserves will stoke inflationary pressures, although the impact may be limited in the medium-term because of the existence of price and exchange controls.“Investors are more concerned with the signal that is sent by the measure, especially given what they see as potential for the seized funds to be used in a non-transparent fashion,” said Vitali Meschoulam, emerging markets strategist at HSBC Securities in New York. “There is a concern that these funds will not be used for productive investments but rather to finance current spending, increasing the risk that inflation may get out of hand.”
Fewer international reserves may harm Venezuela's ability to service its foreign debt if oil prices decline.
Under the draft law, some of the reserves are earmarked for vaguely-worded “strategic situations”.
Mr Chávez, who has been in power for more than six years, faces presidential elections at the end of next year.
Fewer international reserves may harm Venezuela's ability to service its foreign debt. So watch this move carefully, because if there is a global recession and oil demand falls, so will oil prices. And at that point a repudiation of its debt by an oil producing country like Venezuela could be the first pebbles in a financial avalanche.
But on to the second story. I said that the last thing Chavez wants is transparency. And that's because it appears he's been a busy boy with the assets of the Venezuelan people:
The storm of denouncements of corruption that broke out over Brazil’s officialdom the last few weeks—and which has already cost the most powerful cabinet minister his job—promises evermore spicy details. The denouncements by an old ally of Lula’s has exposed how it was that the hierarchy in the Workers' Party managed party finances; according to what has been proven up to this date, the Workers' Party kept a parallel set of books with money presumably diverted from state enterprises. These funds may have been used to bribe legislators whose votes were necessary for the government in Parliament.What with the exposé of recent days, some people with good memories—most of them parliamentarians—assure that the Workers' Party also was not transparent at the time it received the millions for the electoral campaign of 2002, which resulted in the presidential victory of Lula da Silva. And they easily list the main foreign benefactors of the Workers' Party candidate; Hugo Chávez, they assure, contributed 10 million dollars to the campaign of the one whom he calls his compañero. Fidel Castro and Muammar Qaddafi may have contributed 5 and 3 million dollars respectively, so swear the informants. Chavista solidarity must greatly explain the Worker's Party and Lula's fidelity toward Chávez, whom they have been defending since the days when Lula was merely president elect and Venezuela was struggling with the oil workers’ strike.
In the futuristic Congress building in Brasilia it is assured that as the Workers’ Party’s dirty laundry floats to the surface, those contributions made by the Venezuelan president to the Brazilian’s campaign in 2002 will also be made public.
If this is true, it is explosive. Lula is a left wing politician, but he has proven to be relatively well grounded in economic principles and realities, unlike Chavez. His administration has been under attack on several grounds and the latest revelations that monies were used to bribe members of parliament have badly deteriorated support for him in Brazil.
If, in fact, it turns out that those monies in turn came from the likes of Castro, Qaddafi and Chavez then Brazil will probably lose a fairly effective president. Add to this the fact that Chavez appears to have a hand in unrest in Equador and has been threatening to cut off official relations with Columbia.
It would appear that El Chavez is at the center of events that threaten to unravel Latin American stability, both political and economic.
Which brings us to the last line of the FT story quoted above. Chavez must stand for elections at the end of 2006. Daniel, a Venezuelan blogger, has a long analysis of the current political structures and the players in his country, including ways he sees the election outcome being rigged today. It is not reassuring but well worth the time to read.
Expect events in Venezuela to play out with significant impact on the region, and possibly on our economy and our trading partners, this year and next.
(crossposted at Random Probabilities)
Not sure I agree with your entire post, but I'll second the reading of Daniel's analysis, which I linked to on my blog last night. Daniel does a great job laying out the ways Chavez has manipulated the rules in Venezuela to maintain power and the issues and problems the opposition must overcome to win.
When traveling I often pick up the Atlantic because they tend to come up with provocative angles. Abgles that a) I find interesting and b) will send me in a new learning direction as I discover how flimsy their approach can sometimes be (especially with their more dramatic articles).
The July/August issue has an interesting hypothetical scenario giving a blow by blow of a total Financial disaster in America (that takes place in the future). The three crumbling pillars leading to our hypothetical demise are, of course, the tax cuts, An exclusive oil deal between Chavez and China barring the US from Venezuelan oil, and to get that deal Chavez requires that china manipulate it's currency to increase the cost of US debt and dramatically devalue the dollar waging and economic war against the US.
It's all gloom and doom apocalyptic hypothetics, but it is fascinating and since your close to the topic I'd be interested in whehter or not you've read the article and what your thoughts are there.
Thnx.
China has as much or more to fear from a devalued dollar than the US does. The exports to the US will greatly drop of the dollar falls. In fact, it is by pegging their currency to the dollar and resisting pressure to let it float that they devalue their own currency in order to keep exports stoked.
You know, there is an old Chinese saying that goes something like:
"Before you head out for revenge, dig two graves."
Seems applicable to The Atlantic's scenario.
I'm sure that China has been active in Latin America and given their need for oil, I'd not be surprised if they were cultivating Chavez.
Several factors mitigate against the Atlantic's scenario, however. First, Venezuelan oil is primarily refined in US refineries. Oil grades and refineries are not interchangeable, so our country and theirs are locked together as trading partners for a good while. If necessary, we could decouple from that relationship more easily than they can as very few other refineries currently could process their oil easily.
Or cost-effectively. It's a long way to China, a lot shorter shipping route to the US. Both of these factors could be overcome, of course, but it would be a mistake to underestimate their influence in the next 5-10 years.
Re: currency, China is desperately trying to milk the US as a market for their cheaper goods until they have stolen or developed enough technologies to make more value-added exports. That will take time and their demographics may not favor longer term success. They have a very large cohort of young males maturing who do not have a reasonable chance at marrying a Chinese woman. This provides a deep pool of nationalistic pride and energy but may also become a source of both political and economic instability within China itself.
Which does not mean that we should not take their competition and potential aggression, both military/political and economic, seriously. But I found the Atlantic article to be a bit overwrought.
Blinder, et al -- Dusting off the old geologist's cap from some decades ago (my first two degrees are in geology) Venezuelan crude tends to be on the heavy side and requires special refining techniques. Citgo (largely Venezuelan owned) has a major refinery in Houston for handling the heavier crude and giving PdV a retail presence in the US.
The last thing the Chicoms need is another source of oil that has to come through a chokepoint ... in this case the Panama Canal in small tankers, and from the Middle East via the Straits of Malacca. The Chicoms are much more interested southeast Asian crude, most of which inconveniently belongs to someone else at the moment. Net result, China has no reason to be interested in Venezuelan crude. BTW many of Unocal's holdings are in those Asian fields, but that's another post.
Finally, Robin-- you seem to have overlooked (presumably for length considerations) the significant and damaging Venezuelan involvement in Bolivian instability over the last few years. And how in Venezuela itself Chavez is sheltering the now-hard-pressed FARC guerrillas from Colombia--guerrillas who have a working relationship with Hezbollah--and is actively arming them with 'surplus' Venezuelan arms. Chavez' Circulos Bolivarianos remind me of nothing so much as the Tonton Macoute during the long and bitter Haitian Duvalier dictatorship.
When you realise that Chavez is basically a Castro-Duvalier hybrid, with solid financial and military connections to Iran, Libya, and (formerly) Saddam, and is actively supporting a guerrilla / terrorist organisation with clear ties to Hezbollah and back (again) to Iran ... you have to wonder why we haven't already taken him out as part of the GWOT, outdated Executive Orders be damned.
The Atlantic Monthly has become a joke. The scenarios it has floated in the past six months are ludicrous. All of them.
I don't know Tom; Richard Clarke's doomsday scenario of increasingly futile and costly efforts to protect transportation, malls, every place where more than 50 people might gather, etc. convinced me that the WOT cannot be won without addressing root causes. That's what he intended, right?
Seriously, though, I like the Atlantic Monthly. They simply need to cut down on the number of Fallows articles by about half.
Increase the cost of US debt? Or are you trying to say increasing the cost of servicing US debt by increasing interest rates? Because the former isn't possible since US debt is denominated in dollars. China could try and play games, but if they do it to soon, the US-China trade relationship will breakdown and the US will make it very hard for China to acquire technology that they need to improve life in China. Moreover, the masses of Chinese employed making things that only American consumers would buy in large enough quantities would lose their jobs, which would lead to signficant social unrest in China.
Now we should be more proactive. We should be increasing consumption taxes and reducing production taxes. I suggest we get rid of payroll taxes, or at least reduce those that employees pay and eliminated those that employers pay and replace them with VAT, and then increase IRA contribution limits and rebate any surplus SS and Medicare VAT tax revenue to IRAs or 401ks. By shifting to a VAT we can get more tax revenue out of goods imported that are displacing FICA taxes collected from goods that were domestically produced before. And we can rebate a VAT, so SS taxes won't increase the cost of American labor used to make goods for export.