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Tensions Colombia & Venezuela

The Latin American Adviser

Venezuela: Proxy Battleground

Venezuela’s relationship with the U.S. deteriorated rapidly in 2005. Relations between the two countries were always strained, particularly since the election of Hugo Chavez in 2000, but the situation took a turn for the worse a month ago. On January 13, 2005, the Colombian military conducted a covert operation that captured Rodrigo Granda, a senior FARC guerilla living in Caracas. The incident was a major embarrassment for President Chavez, who repeatedly denied that members of the FARC were operating out of Venezuela The incident sparked a diplomatic row between the two countries, with Venezuela placing an embargo on all imports from Colombia. This, of course, was suicidal—given that Venezuela imports most of its manufactured goods from Colombia. Therefore, the two sides quickly patched up their differences. However, the Venezuelan government was left harboring a deep grudge against the U.S.—which was seen as lurking in the shadows behind the Colombian operation. Consequently, the Venezuelan government became confrontational with the U.S. Unfortunately, its actions are now raising concerns at the White House and relations between the two countries could deteriorate further.

Two weeks after the Colombian operation, President Chavez took actions that caught the U.S. by surprise. First, Chavez signed a major agreement with the Chinese government to increase oil and gas exports to China. A few days later, Chavez announced his intention to sell the Citgo refineries. The sale of the 8 refineries could be devastating for the U.S. economy. Venezuela is the third largest source of imported oil for the U.S. The Citgo facilities were specifically engineered to refine only Venezuelan crude, and they produce 140 million barrels of gasoline per year. A change in the upstream source of oil, due to a diversion of Venezuelan crude to the Asian markets, would result in a major disruption of the U.S. energy markets. It is too early to guess what actions U.S. policymakers will take against Venezuela, but something will happen. Of course, Chavez’s actions should not be too surprising. The Venezuelan leader has powerful enemies in Washington, due to his close ties with Cuba. The anti-Castro lobby argues that Chavez’s generous support of Cuba is the only reason why Castro remains in power. Unfortunately, the tension between Chavez and the U.S. transformed Venezuela into a proxy battleground. On one side of the pitch are countries, such as Colombia. It is evident that President Uribe sees Venezuela as another way to ingratiate himself with President Bush. His motivation to violate Venezuela’s sovereignty appeared to be an attempt to secure additional bilateral aid from the U.S. On the other side of the battleground, countries, such as Russia and Brazil, see the situation as another opportunity to goad the U.S. The Russians are the most blatant. In an attempt to extend their geopolitical reach into the U.S. backyard, Putin recently agreed to sell arms to Venezuela—including helicopters and 10,000 Kalashnikov assault rifles. Likewise, Lukoil announced that it was going to invest heavily in Venezuelan marginal and offshore oil fields. The announcement came on the heels of the Venezuelan government’s decision to review 33 contracts of U.S. oil operating companies. Not to lose an opportunity to confront the U.S., Lula announced that Brazil was going to sell Embraer military jets to Venezuela

These developments suggest that an arms race between Venezuela and Colombia may be starting to form. A military confrontation between the two countries is remote, but the probability is growing. Clearly, the oil windfall boosted Chavez’s confidence, but his moves against the U.S. are shortsighted. Over the recent days, Venezuela came under the scrutiny of the State Department and U.S. intelligence agencies. Venezuela is now a hot button. Castro gave a speech on Saturday warning about a possible assassination attempt against Chavez. Although such an event is unlikely, the probability of unrest in Venezuela is also growing. Bondholders should not be complacent. Regime change in Venezuela or military conflict between Colombia and Venezuela could be highly destabilizing for both countries. U.S. policymakers are also mistaken that Venezuelans would welcome regime change. Such an event could result in civil war. Last of all, the divestiture of the Citgo refineries marks the loss of a very important piece of collateral for bondholders. Unfortunately, the bull market atmosphere in the emerging markets reduced some of the wariness that is usually associated with our asset class. This complacency is making the region vulnerable to shock. There is a good chance that the shock may come from Venezuela Therefore, it is time to act prudently. Reduce Venezuelan positions, until the tension with the U.S. subsides.

By viewpoint on Feb 15, 2005, 05:38 in Politics & the war.

juancegomez says on Feb 15, 2005, 13:16:

Little is left to say on this matter, on my end. But perhaps someone might like to know that Chavez and Uribe are having a live press conference right now in Caracas , btw. Seems everything worked out pretty well after all.

0 funny, 0 helpful.