Why is Maduro Still in Power in Venezuela?
There is another alternative in regards to the Venezuelan situation that not many people are considering: Brazil.
Sizing up the Venezuela opportunity
A Venezuelan regime change is on the radar of many fund managers.
They are sizing up the possibility of Venezuela becoming one of the biggest global macro opportunities of the decade.
Once one of the richest countries in Latin America, Venezuela’s economy of about US$400 billion just a few years ago, is now just US$75 billion.
As recent as 2015, Venezuela was producing 2.4 million barrels of oil per day. That amount has collapsed to about 1 million barrels per day (BPD) currently and is forecasted to fall even further.
Venezuela’s liabilities total approximately US$130 billion. These include: Venezuelan sovereign bonds, PDVSA bonds, bilateral loans from Russia, loans from Russia’s state oil company Rosneft, and liabilities outstanding to PDVSA oil service providers.
PDVSA liabilities account for approximately 45% of Venezuela’s total debt.
The possibility of a regime change
The Lima Group, led by President Duque of Colombia and Bolsonaro of Brazil, has been a key supporter of the interim government under Guaido.
More and more nations around the world are paying attention to the situation and vowing to support a new democratic Venezuela.
This seemingly profound support promises to be a game changer in terms of the new regime's sustainability.
However, the more than 2 million Venezuelan immigrants living in Colombia remain skeptical.
Many have underestimated the resilience of the Maduro regime and have erred in their predictions of regime change.
The question here is not when the regime will change but how the Chavez-Maduro regime has managed to survive for so long.
Handbook of a Dictator
There is no better book to help illustrate the mindset of Maduro than one from Bruce Bueno de Mesquita, entitled: “The Dictator's Handbook: Why Bad Behavior is Almost Always Good Politics.” He uses game theory to better understand the essential coalitions that dictators use to sustain their power.
He thinks of politics in terms of three dimensions: the interchangeables, the influentials and the essentials.
In the United States, the voters are the interchangeable aspect.
As for the influential, the electors of the electoral college really choose the president (just like the party faithful picked their general secretary back in the USSR). However, the electors nowadays are normatively bound to vote the way that their state’s voters have decided. They don’t really have much independent clout in the practice.
The essentials in the United States are the smallest bunch of voters, properly distributed among the states, whose support for a candidate translates into a presidential win via the electoral college.
The larger the number of essentials, the more democratic the governance system. The smaller the number of essentials, the more autocratic the governance system.
The key steps to remaining in power using Bueno de Mesquita’s framework
Rule 1. Keep your essentials loyal and as small as possible. Maduro, since the beginning of the economic crisis in 2014, has increased his number of essentials. He has promoted more than 1000 generals in an effort to buy loyalty. He has given control of the mining and oil industry to various production companies. The larger the group of essentials, the higher the probability of a regime change.
Despite the fact that the essentials have grown larger, Maduro has centralized power in a bipolar system. One controlled by the Cuban intelligence service and other under the influence of Diosdado Cabello.
A game changer here is to implement a strategy to undermine the power that Cuba has over Venezuela.
Rule 2. Keep the interchangeables as large as possible The electoral system in Venezuela is large, dysfunctional and polarized. This makes Maduro’s governance concentrated to just a few influentials.
Rule 3. Control the flow of revenue. Maduro used to have control over a large amount of oil related assets, Gold and the debt markets, which has allowed his regime to pay for loyalties. However, since the collapse of oil prices in 2014, the finances of the regime are in trouble.
Low oil prices are key for improving the probability of a regime change. The interesting thing is that if Venezuela were to recover their previous production capacity, it would put further downward pressure on the price of oil.
Source: Adapted from Ricardo Hausmann Lima Group Presentation.
Rule 4: Pay your key supporters just enough to keep them loyal. Maduro has ensured his chair in power by paying tons of money to his key supporters. The game changer here was the US embargo and the confiscation of many people’s accounts with ties to the regime. This step is extremely important in undermining the structure and backers of the regime. Another strategy could be to provide an exit for influential players. If they see a survival option with a new regime, the probability of a new government will increase.
Foreign policy options
Meeting between Brazilian President Jair Bolsonaro and US President Donald Trump.
According to Bueno de Mesquita, there are three ways to remove an incumbent leader. The first, and easiest, is for the resignation of the leader. If that convenience does not present itself, a challenger can make an offer to the essential members of the incumbent’s coalition.
If the offer is sufficiently attractive, members of the coalition may defect to the challenger’s cause.
Third, the current political system can be overwhelmed from the outside, whether by military intervention from a foreign power, or through revolution and rebellion. If it comes from within, it will generally be led by the masses rising up, disposing of the current leader, and destroying the existing institutions.
According to Ricardo Haussman’s recent presentation for the Lima Group, there have been 19 economic crisis to hit emerging markets since 1980, 7 have ended in war and 9 have resulted in a regime change.
There is a possible scenario pointing to US military intervention as the clearest path to ensure a regime change in Venezuela. This however would without a doubt trigger a Cold War type of situation, where US interests will be in direct conflict with those of Russia and China, triggering a proxy war with nefarious casualties.
US intervention would be a mistake and would trap Venezuela in a game of chicken, with no clear winners and a humanitarian catastrophe.
However, it could be a military intervention that undermines the power structure of the Maduro’s backbone that also incentivizes China and Russia. That is a military intervention led by Brazil. This is a very low probability scenario but it would be a complete game changer that not many people are expecting.
For Brazil, Venezuela is a national security problem and they have a military structure in their current government. Brazil has a good relationship with China, Russia and the US.
The recent US foreign policy strategy has been to boost regional powers to deal with their geopolitical issues. It is in the interest of the Trump administration to boost Brazil as a super regional power, which could neutralize China’s influence in the region and also offset the cost of a potential military intervention.
A potential Brazilian military intervention would also create a big signal to the essentials that it makes no sense to be loyal to a regime close to collapse.
As we’ve said in other reports, our favorite trade is being short globalization and long localism.
The world is moving from a US centric globalization model towards a multipolar system where regional powers will emerge.
We are seeing this emergence in Brazil. This geopolitical configuration of multipolar powers is very similar to the one that triggered WWI and the rise of populist movements.
If you are interested in how to size different opportunities and actionable global macro trade ideas, do not hesitate to contact us.
Bogotá, Colombia.
Guillermo Valencia A.
Videos :
We highly recommend this Real Vision TV documentary about Venezuela:
https://www.youtube.com/watch?v=9qdO2pFoGgw&t=467s
Books:
The Dictator's Handbook: Why Bad Behavior is Almost Always Good Politics by Bruce Bueno de Mesquita.
https://www.amazon.com/Dictators-Handbook-Behavior-Almost-Politics/dp/1610391845