Streetwise Professor

November 25, 2018

There Is a Great Deal of Ruin In a Nation, Venezuelan Edition (With Broader Lessons)

Filed under: Economics,Politics — cpirrong @ 8:03 pm

Igor is not pleased with Maduro’s Venezuela, which is stiffing him:

The head of Russian oil company Rosneft (ROSN.MM), Igor Sechin, flew to Caracas this week to meet Venezuelan President Nicolas Maduro and complain over delayed oil shipments designed to repay loans, two sources briefed on the conversation said on Saturday.

The visit, which was not publicly disclosed, is one of the clearest signs of strain between crisis-stricken Venezuela and its key financier Russia.

Over the last few years, Moscow has become Venezuela’s lender of last resort, with the Russian government and Rosneft handing Venezuela at least $17 billion in loans and credit lines since 2006, according to Reuters calculations.

State oil company PDVSA is repaying almost all of those debts with oil, but a meltdown in its oil industry has left it struggling to fulfill obligations.

Sechin and a large delegation of executives met with officials at PDVSA in a Caracas hotel this week. Sechin also met with Venezuela’s leftist leader Maduro, and chided him over oil-for-loans shipments that are behind schedule.

“He brought information showing that they were meeting obligations with China but not with them,” said one source with knowledge of the talks.

Two things strike me about this story.

First: Hahahahaha.  Suckers.

I remember vividly snickering at those who thought the Chinese and Russians were sooooo smart to extend credit to the Venezuelans..  How this was a geopolitical masterstroke.

Really?  How’s that working out?  Obviously not well.  Ask Igor!

Tell me again how it is GENIUS! to lend money to a country that is imploding because it is in the thrall of an insane crypto-socialist ideology.  Venezuela’s trajectory was obvious at the time the Chinese and Russians thought they would lend it money.  Seriously: lending to socialists is hardly ever a paying proposition, and lending to Bolivarian socialists was certainly so.

But by all means, keep pouring money down ratholes! Be my guest!

Second.  The Venezuelan experience demonstrates the truth in Adam Smith’s aphorism about there being “a great deal of ruin in a nation.”  The torment of Venezuela is extreme.  The populace lives in utter penury, which only grows worse by the day.  The inflation rate is currently in the 6 figures, and is on track to reach 7 figures late by the end of this year, or early in the next.   This is Weimar-Hungary-Zimbabwe territory.  Crime is rampant.  Human degradation is everywhere.

Yet the Maduro regime is largely secure.  It maintains the loyalty of the security forces, and this has deterred a serious popular uprising.   Indeed, the economic catastrophe is not causing Maduro to relent: to the contrary, it spurs him to crack down even more intensely.

This situation has been developing for years.  Indeed, you can pinpoint the decisive moment, and it relates to Sechin’s current target–national oil company PDVSA. In the aftermath of an abortive US-supportive coup in 2002, Maduro’s predecessor Hugo Chavez responded to opposition within the company by purging the technically and managerially competent, and replacing them with loyalists.  What was once one of the most competent national oil companies in the world began its descent into failure, and the entire country followed in its wake.

There is a broader lesson here: Smith’s dictum, empirically validated in Venezuela, implies that expectations that economic pressure on rogue regimes will lead them to moderate their behavior, or result in their overthrow, are chimerical.  Rogue regimes respond to pressure and economic failure by intensifying oppressive measures.  By doing so, they can survive for a very, very long time.

The problem of coordinating opposition against a steely regime is difficult to overcome.  Usually, such regimes fall only when they attempt to respond to popular discontent through “reforms” and a softening of repression (cf. Gorbachev in the USSR).  Hard men like those in Venezuela or Iran understand this lesson, and have no intention of relaxing their grips.

That is, economic failure, whether internally created (as in Venezuela) or the result of internal dysfunction exacerbated by external pressure (as in Iran or North Korea) almost never results in the collapse of repressive regimes.

This is not to say that economic sanctions or other forms of economic pressure are not justified.  It is just that the expectations for such acts must be realistic, and the goals chosen accordingly.  Realistically, economic pressure can reduce the capabilities of rogue regimes to wreak havoc outside their borders.  It cannot truly threaten the existence of these regimes.

Since there is so much ruin in countries–especially highly repressive ones–expecting to change them by ruining them is futile.

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  1. What do you think a post-Maduro Venezuela will look like?

    Comment by WZ — November 25, 2018 @ 8:13 pm

  2. @WZ–I thought about discussing that in the post. Thanks for bringing it up.

    By the time that a country is so ruined that even a repressive government collapses, virtually every aspect of civil society is destroyed, and social trust is non-existent. You are truly in Mad Max territory. Alas, this makes it vulnerable to rule by a strongman who promises stability.

    Comment by cpirrong — November 25, 2018 @ 8:39 pm

  3. When you say “crypto-socialist”, are you hinting at “the petro”? Can’t think of anything else “crypto” about this regime.

    Comment by Ivan — November 25, 2018 @ 8:40 pm

  4. @Ivan. Yes. That was a double entendre. Good catch.

    Comment by cpirrong — November 25, 2018 @ 9:04 pm

  5. The relief operation upon the eventual collapse of Venezuela’s government will be gargantuan in scope, rivaling post- WW I and WW II. We may have the opportunity to practice in Haiti in the near term and in Cuba in the not-too-distant future.

    Comment by Jim — November 25, 2018 @ 9:21 pm

  6. It would have been a nice touch for Igor to receive a rough mugging complete with an instant kidnapping on way to the airport. Maybe he could just add it to the unpaid bills.

    Thanks for the blog! You have loads more people to piss off!

    Comment by The Pilot — November 25, 2018 @ 9:21 pm

  7. Large countries have sufficient resources to live with autarchy. Small nations can’t survive sanctions so must seek a sugar daddy (in this case, Igor).
    Is Iran a large or a small country? If their oil smuggling is curtailed, we’ll find out.

    Comment by zut alors! — November 26, 2018 @ 4:24 am

  8. I was having a rough start to a Monday morning. I live for good laughs like this. Some between Shakespeare and Steve Martin, it was tragedy is comedy or the other way around…

    Comment by Carl Larry — November 26, 2018 @ 7:22 am

  9. I saw this in the news and thought about your blog immediately. If Igor had to go personally it says a lot. Another report says Russia is getting only about 40% of the oil promised monthly and they are more angry that the Chinese are getting 60% returns. I guess Maduro and company see China as the more important creditor.

    Comment by Daniel Rust — November 28, 2018 @ 10:19 pm

  10. Hilarious that the Venezuelans are endeavouring to keep the Chinese sweet but not the Russians. Speaks volumes about their respective geopolitical brand strength. On the topic of our friends in the east, I’m looking forward to your take on the Kerch incident.

    BTW pleased to hear you’ve sorted your comments problem. There’s me thinking you were enacting your own censorship… It was a shame because I had something awfully witty and insightful to say about ‘your’ bastard MBS, but for the life of me I can’t what it was.

    Comment by David Mercer — November 29, 2018 @ 4:35 am

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