Venezuela On Brink Of Civil War?

In the summer of 2017 I wrote the Venezuela crisis was nearing its endgame (see Impact Of New U.S. Economic Sanctions On Venezuela). It has been a long time coming, but based on recent events it appears the endgame is finally here for real, and it likely won’t be pretty.

After being moribund since President Nicolas Maduro successfully swapped the opposition-controlled National Assembly for the Chavista-dominated Constituent Assembly in the summer of 2017, anti-government forces struck back on January 23 with an ingenious new strategy to regain control of Venezuela — declaring National Assembly leader Juan Guaidó interim president on constitutional grounds, until free and fair elections can be held for the position.

To overthrow the Chavistas, the opposition is hoping to sideline their two key international supporters, Russia and China, and the country’s military, while further restricting the flow of funds to the government.

In fact, in our New Cold War era, the strategy is more likely to divide both the international community and Venezuela’s military — the Venezuelan people are already severely divided — leading to a prolonged civil war in the country rather than a smooth transition in power.

Venezuela’s oil industry has already been severely retarded by the economic incompetence and corruption of the Chavistas over the past two decades, but destruction associated with civil war would further devastate crude oil production in both the short and longer term. This should provide at least modest support for crude oil prices in coming years, especially for heavy-sour grades of crude.

New strategy

The Venezuelan opposition worked closely with the Trump administration to both hatch and implement its new strategy, based on press reports and co-ordinated actions since Guaidó’s presidential announcement at a massive anti-government rally in Caracas. According to NBC News, the Venezuelan opposition approached U.S. officials at the National Security Council and the American embassy in Caracas about a month ago with the idea of invoking Article 233 in the Constitution of Venezuela to trigger the ouster of the dictatorial Maduro and his Chavista government.

Article 233 allows the head of the National Assembly to assume power on an interim basis if the presidency is vacant — to allow for new elections — which opposition forces argue to be the case. Maduro claimed victory in the presidential election held in May of last year, but the result was widely viewed as fraudulent domestically and internationally since the Chavistas did not allow major opposition leaders to run, leading to record low voter turnout. Maduro’s second presidential term officially began on January 10, opening the door for the opposition’s new strategy.

Pivotal for the strategy’s success is international recognition of President Guaidó, and Venezuelan government assets and oil revenues being withheld from the Chavista government, and if possible, made available to the National Assembly instead — in effect, economic sanctions on steroids.

President Donald Trump recognized Guaidó as the legitimate interim president of Venezuela within minutes of his announcement, while U.S. administration officials are currently exploring ways to shift financial resources from the Maduro government to the Guaidó one. For example, on January 24, the U.S. State Department notified the Federal Reserve that the Guaidó government is now agent of access for Venezuelan assets in U.S. banks.

On January 15, the National Assembly passed an amnesty law for members of the military who help to restore democracy in Venezuela. Since claiming the interim presidency, Guaidó has asked his supporters to download and print copies of this amnesty law and hand a copy to soldiers on every street corner in Caracas.

In his first public comments since claiming power, on January 24, Guaidó said he would grant Maduro and his allies amnesty for peacefully stepping aside as well. The next day, he said Russia and China would be welcome in a post-Maduro Venezuela, hinting his government would honour huge debt owed to these two countries — hence, not have it declared “odious debt” under international law.

Domestic response

The Maduro government has responded with defiance, while severing diplomatic relations with the U.S. “We are defending the right to the very existence of our Bolivarian republic,” Maduro told supporters on January 24 from the people’s balcony of the Miraflores presidential palace in Caracas. “Do you want a puppet government controlled by Washington?” Maduro also urged his supporters to resist “at all costs … the coup-mongering, interventionist gringo empire” and the “fascist right.”

At the same time, Venezuela’s military brass continues to back the Chavista government, although the country’s top military envoy to the U.S. has defected to the Guaidó camp. Hours before Maduro’s speech, Venezuela’s defense minister and eight regional commanders all pledged support for the Chavista government on state broadcaster VTV. Defense Minister Vladimir Padrino, flanked by members of the military’s high command, said: “We will not bend to foreign intervention or a government not elected by the people.”

In contrast, on January 26, Colonel Jose Luis Silva, military attaché at the Venezuelan embassy in Washington, urged other members of the country’s armed forces to follow his lead and recognize Guaidó as their legitimate interim president. In an impassioned plea he said: “Enough! The leaders have become millionaires on the backs of the people … Captains, commanders: Think about everyone who suffers. Don’t forget that your wives also can’t find milk for your children. Don’t forget that your mothers and fathers also can’t find pills for their [blood] pressure.”

International response

The international response to Guaidó claiming the interim presidency of Venezuela has been mixed. Besides the U.S., Canada and most major Latin American countries, including Argentina, Brazil, Chile and Colombia, recognized Guaidó shortly after his announcement, further evidence of the co-ordinated nature of the opposition’s new strategy.

Since then, the Organization of American States (OAS) recognized Guaidó’s interim presidency, while on January 26 European heavyweights Britain, France, Germany and Spain all said they would recognize Guaidó if the Chavista government failed to call fresh presidential elections within eight days. The same day, Bloomberg reported that the Bank of England had blocked the Maduro government from withdrawing US$1.2 billion worth of gold.

On the other hand, Russia, China, Turkey and several less significant countries have come out in support of the Chavista government, with Russia leading the charge. Russian President Vladimir Putin offered Maduro his country’s strong support during a telephone conversation on January 24, according to a Kremlin press release, quoting Putin as saying Guaidó’s actions had been “provoked from abroad.” Russia’s Prime Minister, Dmitry Medvedev, has since referred to U.S. support of Guaidó as a “quasi-coup.”

In a sign the Russian leadership may be concerned Venezuelan military support for the Maduro government is waning, at least among the rank-and-file, Reuters reported on January 25 that Russia has flown private military contractors from the so-called Wagner group into the country over the past few days. Their key role is to serve as a Praetorian Guard to Maduro, to protect him from opposition sympathizers within his own security forces. The Kremlin has since denied this report, but on January 21 there was an attempted revolt by a small group of military officers about a kilometre from Venezuela’s presidential palace.

Civil war?

The battle lines have been drawn. How it plays out depends primarily on the level of loyalty of the Venezuelan armed forces and other security services to the Chavista government, and to a lesser degree on the commitment of international allies to each side.

The status quo appears untenable, as it would require near total loyalty from the military, despite funding for the Maduro government coming under increasing threat. President Hugo Chavez was able to install loyalists in command, and purge dissenters, after the aborted military coup of April 2002. The Chavistas have since bought their continuing loyalty through a combination of financial inducements and the transfer of power to the armed forces.

A peaceful transition to democracy appears equally unlikely, as it would require the military’s full-scale desertion from the “Bolivarian republic” — as would a successful coup d'état — and Russia and China acquiescing to the loss of their crown authoritarian jewel in the Western Hemisphere, and possibly a large amount of money as well.

That leaves civil war, once a significant split in the Venezuelan military occurs, in a country and international community divided. President Guaidó and the opposition are supported by roughly 80 per cent of the country’s population, but President Maduro and the Chavistas are revolutionary zealots. Ominously, both sides have been stockpiling light weaponry for years in case of armed civil conflict. In terms of potential longevity and amount of destruction, think in terms of the first civil war in our New Cold War era, the one in Syria.

A Venezuelan civil war would likely pummel what is left of the country’s oil industry, but should have no more than a modest positive impact on light-sweet benchmark prices. Venezuelan crude oil production has been in free-fall since December 2015, declining by roughly half to 1.2 million bbls/d, and is in inexorable decline under the Chavistas, with or without a civil war.

The world oil market could easily make up for the loss of Venezuela’s remaining crude production, with at least 2.5 million bbls/d of spare capacity at the present time, but replacement crude would tend to be lighter in grade unless the U.S. government decided to release heavy-sour crude from its Strategic Petroleum Reserve (SPR).

In the shorter term, Alberta would not be able to benefit from a Venezuelan civil war on the volume side, with curtailment and a shortage of egress from Western Canada, but it would benefit on the price side, especially due to narrower light-heavy differentials. Assuming a relatively long civil war, Alberta could also benefit on the volume side as new pipeline and rail capacity is added, with U.S. Gulf Coast refiners short heavy-sour crude.