Last week, Nicolás Maduro completed a triumphant state visit to China which saw him return home with $20 billion in investment and loan agreements. Maduro’s success came as a surprise to some, who felt that the Chinese, after already investing so much money in Venezuela, were growing weary of their revolutionary South American petro-ally. Among those sharing that belief, apparently, was the Bolivarian government itself. A well-connected Venezuelan friend told me (and plenty of other people, I’m not that important) that Venezuelan officials were sending out feelers to the International Monetary Fund (IMF) in case Maduro failed to secure additional Chinese investment. Clearly, the economic situation in Venezuela is deteriorating pretty quickly if Maduro was really worried the Chinese might not be willing to offer up funding and especially if his government is desperate enough to be seriously considering the IMF as a backup if that did happen.
As it happened, the head of the China in Latin America program at the Inter-American Dialogue, Margaret Myers, was in China during the same period and gave us a brief on her trip on Monday. Regarding Maduro’s visit to China, the most interesting tidbit was the utter lack of concern among the Chinese about Venezuela’s ability to pay back the loans. Considering that the Venezuelans themselves were apparently putting out feelers to the IMF in case they were unable to pry open the Chinese pocketbook, this seems incredible. How could the Chinese be so unconcerned about Venezuela’s default risk when elsewhere, Venezuela is perceived as such a risk that it’s backup plan was the world’s lender of last resort?
The answer lies in the details of the agreements, which, at least in the reckoning of Chinese policy makers, provide sufficient safeguards to effectively mitigate the default risk. As is typical with deals negotiated by states like Venezuela and China, details are scarce. This seems to suit Maduro, in particular, who would clearly prefer to focus on the big headline numbers—$5 billion in the Fondo Mixto China-Venezuela! $14 billion investment in the Orinoco Belt!—rather than the conditions and restrictions embedded within the agreements that actually convinced the Chinese to make the loans.
The $5 billion credit to the Fondo Mixto exemplifies the essence of the headline-versus-details nature of these deals. While a very significant sum of money, the money put into the fund only allows for investments in infrastructure. While there is little doubt that Venezuela desperately needs to invest in infrastructure, this is of little actual short term benefit to Maduro. Currently, his biggest problem is a looming balance of payments imbalance; something that a $5 billion infusion of cash could certainly alleviate, but not when it’s specifically earmarked the way these are. Moreover, the majority of the $5 billion will probably be spent importing Chinese equipment and supplies for the projects themselves. Maduro succeeded in getting the Chinese to loan him a significant amount of money, but in a way that doesn’t immediately deal with the most pressing problems he faces—getting hard currency into Venezuela—and in a structure where much of the loaned money will immediately leave the Venezuelan economy and return to the Chinese economy.
The Orinoco Belt investment in the Junín II block has a similar logic. There is a distinct benefit to Venezuela in developing the significant, but extremely heavy oil reserves there but it lacks both the competency and solvency to do on its own. However, once again, the headline is far more impressive than the reality. The problem is that, while it will probably lead to dramatically increased oil production after years of stagnation and decline, most of the increased production will be given to the Chinese as repayment for loans already received—perhaps totaling as much as $40 billion. This aspect of the arrangement is the major reason why the Chinese are relatively unconcerned with the risk Venezuela poses as a borrower; whether Venezuela defaults or not, China is guaranteed a stable source of petroleum.
All of this really accentuates the dire straits in which the Venezuelan economy finds itself. These deals really signify a dramatic surrendering of sovereignty to a foreign country. In order to get these loans and investments, Venezuela essentially had to prostrate itself to a foreign country and all for financing that will, at best, delay the really awful consequences of chavista political economy over the last decade and a half (I say really awful because the situation is already objectively terrible but really does have the potential to get dramatically worse in the coming years).
The fact that Maduro had apparently put out feelers to the IMF has fueled speculation about the amount of conditionality the Chinese included in the deals, if any. It is entirely possible that the conditions the Chinese demanded were as stringent as those that the IMF might have required just without the public disclosure and IMF agreement would have envisaged. I doubt this is the case, and would guess that the conditions in the Chinese agreements—and there certainly was some conditionality—were some minor policy changes (loosening currency controls?) and the aforementioned loan structures. There might even have been some implicit threat similar to the United States’ gunboat diplomacy modus operandi from the early 20th Century where the US would actually take control of the customs house of a delinquent country to extract payment.
Is any of this better than the Plan B deal Venezuela would have gotten by begging to the IMF had it fallen through? Economically, it’s different but probably not any better and possibly worse in the long term. Politically, however, it’s much better. As I’ve argued ad nauseum here, Venezuela, and to a lesser degree, Argentina, is boxed in economically by its own ideological stances. Fourteen years of railing against orthodox economic policies and developing 21st Century Socialism doesn’t make the policies less deleterious, but it does make it extremely difficult politically to reverse course and implement reforms. Going to the IMF would have been a double blow for Maduro. On the one hand, he would have been a traitor to Hugo Chavez’s legacy simply by virtue of agreeing to a deal with the talisman of neoliberalism. Then, he would have had to deal with the political fallout from the painful process of actually implementing the reforms the IMF would have demanded. Going to the Chinese, and succeeding in extracting additional loans, gave him a brief reprieve from the increasingly acute problems facing the Venezuelan economy and, perhaps, also gave him a means to backdoor in a few of the reforms he would have had to publicly own had he been forced into a paquetazo in exchange for IMF help.
None of this changes the fact that sooner or later Maduro will still have to implement some serious reforms or face a crisis, or both. The currency is still staggeringly overvalued and a devaluation is an inescapable eventuality. The public sector will have to be trimmed—or macheted—eventually. And, as a consequence, a period of even higher inflation and slower growth is going to happen. Maduro also remains of middling competence (if any at all) and questionable legitimacy both within chavismo and among the general population. The difference is that now it will definitely happen after the municipal elections this December 8, which the opposition is successfully casting as a referendum on his presidency. Hardly an auspicious sign for Venezuelans, but for Maduro, every day he can buy himself is a day more that the state can block off channels for opposition, and perhaps most importantly, is a day in which a crisis can spark a dramatic increase in oil prices, which is really all he’s got left to hope for.