December 13, 2017:
Since early November the armed forces has been allowed to use air strikes against the thousand or so FARC members who refused to surrender as well as the drug cartels and other criminal gangs that have been eagerly recruiting former members of FARC and taking over FARC territory. The prospect of air strikes had the desired effect and the FARC renegades and the rural and urban gangsters have become unusually discreet and trying to avoid doing anything that would attract a lot of attention (and possibly an air strike).
Meanwhile the police and army are aggressively patrolling rural areas recently freed from FARC or drug gang control in an effort to get the economy, and local government, functioning a again. That has proved difficult as many of these areas were always lacking in much government control or benefits (like roads, power, education and so on).
Before November the armed forces had used the threat of being the only target for air strikes (and increased ground efforts) to persuade ELN (a third the size of FARC) to negotiate a peace deal. The government warned ELN that once the FARC peace deal was agreed to in 2016 and a ceasefire arranged the military would concentrate on ELN and that proved disastrous for ELN. Rather than risking such a confrontation in October ELN began its first joint (with the government) ceasefire. It will last until January 2018 with an option for renewal until a peace deal is worked out. The government wants ELN to deal with this incident, if only to prove ELN can carry out any peace terms it agrees to. There were a few incidents early on but the ELN acted quickly and now there is peace in areas where ELN has been active although not a lot of progress with the peace deal negotiations.
Venezuela Slides Faster
Venezuelan oil production continues falling and the current management of the state oil company has made it worse by not paying key foreign suppliers of goods and services essential to keeping oil production going. The government is blaming former (often fired) managers for current problems and accusing many of these fired (and often indicted) managers of stealing billions of dollars from the state oil company. Many of the accused are outside the country and liable to testify about conditions inside Venezuela and what they know about corruption. This sort of thing has already gotten several senior officials in trouble. The newly appointed head of the state owned oil operations is an army general whose career has prospered largely because of his loyalty to the socialist government, not his military or management skills.
As the overall economic situations gets worse the government is replacing a growing number of key (because special skills are required) officials with unskilled loyalists. This is not helping deal with the massive foreign debut Venezuela has and is now unable to repay, nor the problems with economy and crumbling infrastructure.
The socialist government is expecting its oil wealth to somehow solve the problems. China may have a solution, but Venezuelans, including the current government, may have a hard time accepting it. What it comes down to is Chinese intervention that will deal with the oil production problems without appearing like China gaining more control in Venezuela than people in the Western Hemisphere (especially the U.S. and its Monroe Doctrine) are willing to tolerate.
China may have found a way because Venezuelan oil production hit a historic low in October; just under two million BPD (barrels per day) and keeps falling. It has not been this low since 1989. Production averaged 2.373 million BPD in 2016 and 2.654 million BPD in 2015. The production decline accelerated in 2017 and is expected to fall to 1.6 million BPD or less in 2018. This is down from a peak of 3.5 million BPD in 1999, when the current socialist government took power. Subsequent government corruption and mismanagement has devastated the Venezuelan oil industry and caused a decline in oil production that has reached unprecedented low levels. This was made worse by socialist economic policies that destroyed the non-oil economy and eventually crippled the oil industry as well. Then the world oil price fell by half in 2013 stayed there providing no relief/
The production decline is continuing not so much because the government refuses to clean up the mess in the national oil company and the oil production facilities, but because it cannot figure out how to do it. To make matters worse the Venezuelan oil is exceptionally expensive to get process for local or export use because it is “sour” and tar-like. That makes it more expensive to refine and Venezuela must blend its sour crude with imported “light” crude or other diluent (like naphtha) to make their crude oil suitable for foreign refineries. Venezuela is so short of cash that it is not paying for these diluent imports and suppliers are refusing to ship anymore unless they get paid. Same with many other essential services for the oil industry.
This has become critical in 2017 because the Venezuelan refineries, also state owned, have suffered more accidents and received less adequate maintenance over the last decade. As a result domestic refining capability is now about a quarter of normal and getting worse. Shipping sub-standard crude is a violation of the sale agreement and customers are running out of patience. At the moment the largest source of cash sales for Venezuelan crude are Americans. Those buyers have invested heavily in U.S. based refineries modified to handle Venezuelan crude. If the U.S. customers give up on Venezuela they will reconfigure their equipment, at great expense, to handle crude from other sources and Venezuela will have to find new buyers and that will mean selling their sour crude at an even larger discount to more distant and less reliable customers. Currently most of the oil exports go to barter customers (like China) that made large loans that are repaid with oil. These customers are also not getting their oil on time or to the specified quality. No foreign investors are willing to commit the billions need to update and revive the Venezuelan oil operations, mainly because of the massive corruption and the sense that the government is not rational nor dependable. The collapse of the Venezuelan oil industry is doing long-term damage to the ability of Venezuela to process and sell its sour crude.
China has been a major lender to Venezuela and has provided over $50 billion since 2007. Most of these loans are repaid with Venezuelan oil. The amount of oil owed China increases as the oil price declines, which means Venezuela has less oil to sell or use for domestic needs. To make matters still worse Venezuela is now officially bankrupt and that is causing losses for China, which was not unexpected. The bankruptcy process will take months to unspool. China feared that they might not see a lot of their loans repaid and demanded more oil instead. These losses mean little to China and are seen as a cost of establishing themselves in South America and providing even larger, and riskier, opportunities. .
Venezuela is not the only nation in South America where China is increasingly active as a trading partner, banker and investor. Now Venezuela appears to be an opportunity China is willing to take some risks for. China would like to obtain long-term control of Venezuelan oil and do so legally. This can be seen in China allowing one of its state owned trading companies to sue Venezuela in a U.S. court over failure to pay for $43 million worth of steel products already delivered to the state oil company. The U.S. courts are involved because Venezuela has assets that could be seized if the Chinese can prove their case, which also involves accusations of deceit and fraud and thus the Chinese could be awarded even more money if the criminal activity can be proved.
This is how China deals with nations they have treated well (billions in loans and other forms of assistance) and yet allow state owned firms to deceive Chinese suppliers. Venezuela is responding to this by going through the motions of trying to blame all the bad behavior in the state oil company on officials the socialist government appointed but then went rogue. China sees through that (senior politicians always got a cut) but might be willing to show mercy if the Venezuelan government puts on a good show of contrition and gratitude towards China. This may turn out to be another deal Venezuelans will regret making. But if the current Maduro government wants to survive it may well be persuaded that whatever China proposes will work both financially and politically, at least in the short term.
December 10, 2017: In Venezuela the government banned political parties from participating in the 2018 presidential election because these parties had boycotted October nationwide mayoral elections. The opposition accused the government of rigging the mayoral elections, and others as well. Foreign observers who have been able to witness the disputed elections tend to agree that the government cheated. One aspect of the rigged elections was the use of food to coerce voters to support the current government. With the economy wrecked food is in short supply and the government controls most of what is available. In many parts of the country the government supporters (mostly soldiers, police and members of pro-government militias) are sufficiently numerous to make this “food for votes” scam work. Most coerced voters would be willing to defy the government threats at least once if they knew that would get rid of the current government. But that is less likely now that the government has declared it illegal for opposition parties to operate during the crucial 2018 presidential elections.
November 27, 2017: A large Chinese state owned company sued Venezuela in a U.S. court over failure of the Venezuelan state owned oil company refusing to pay for $43 million worth of steel products.
November 15, 2017: Russia has agreed to revise the terms for $3.15 billion of the debt Venezuela owes, reducing payments to token amounts for the next six years. But Venezuela would then have only four years to repay the full $3.15 billion. This is less helpful than it appears. China is owed $28 billion and Russia $8 billion while other countries are owed another $114 billion. About $45 billion of the $150 billion is owned to the Venezuelan state owned oil company. For Venezuela the worst aspect of this is the prospect of the state oil company bonds defaulting. If any debt connected with the state oil company is declared in default bondholders can go to foreign courts for authorization to seize overseas assets of the Venezuelan state oil company. That sort of thing tends to work. Once that happens Venezuelan oil revenue drops sharply and so does what is left of the Venezuelan economy. China and Russia are trying to come up with some way to help but so far they have no workable plan either. For example, none of the $3.15 billion in debt Russia revised terms on has anything to do with the Venezuelan oil company.
November 10, 2017: The long feared default of Venezuelan foreign debt officially began as the state oil company was declared in default on $650 million borrowed (at 8.5 percent) in 2008 by a Venezuelan electrical power producer that is now owned by the state. The interest payment was due October 10th, was not made and despite a 30 day grace period is still not paid. Thus the default begins and debt holders agree that more of the $150 billion in debt will follow over the next few months and that will wreck the ability of Venezuela to pump, ship and sell its oil.
Neighbors Colombia and Brazil are lining up foreign help for the millions of Venezuelans who may try and flee the starvation and record crime rates in Venezuela. Colombia has counted at least half a million Venezuelans arriving (not all of them legally) in the last six months. Fewer have gone to Brazil but that is mainly because it is easier to get to the Colombian border. The UN is limited in what it can do because Russia and China continue to use their vetoes to block UN efforts to do anything the current Venezuelan government objects to.