About a year ago, Venezuelan President Hugo Chavez died. Although the political system was ostensibly democratic during his reign in office, Chavez was a charismatic leader that completely dominated the political situation in Venezuela. In the year since his passing, elections were held and Chavez’s handpicked successor, Nicolas Maduro, won in what turned out to be an unexpectedly tight race.



Since the elections, the Venezuelan economy and society have struggled. Inflation remains rampant, running at 56% on a yearly basis. To contain inflation, the regime uses price controls; recently, the government condoned customer raids on retail establishments, forcing retailers to either slash prices or see their wares forcibly removed from stores. There have been anecdotal reports that Venezuelans cannot find airline tickets out of the country if the
fare is denominated in Venezuelan bolivars; the airlines are quietly only accepting foreign currency, mostly dollars, to secure a seat. Foreign reserves are falling to dangerously low levels; currently, the country has $20 bn in reserves and has commitments for $17.5 bn in principal and interest payments this year. Two-year government notes yield 16.8% and it costs 1700 bps to insure the debt via the credit default swap market, essentially suggesting  that this market is expecting default.

The country uses a two-tiered exchange rate system that is routinely used by the powerful in the regime to import at the preferred rate and sell at the black market rate. Imported goods have become scarce. Because the regime uses the state oil company, Petroleos de Venezuela (PDVSA), as a funding source, the company has not had the funds to maintain investment. Oil production has fallen to 2.4 mbpd from 3.5 mbpd just before Chavez took power. And, of this production, 0.3 mbpd are committed to paying a loan to China, 0.4 mbpd are sold at below market prices to allies, mostly Cuba, and 0.6 mbpd are used domestically.
Exacerbating domestic consumption is the policy of heavily subsidizing gasoline prices, currently at 6 cents per gallon. The estimated cost to the government for fuel subsidies is $30 bn per year. Given the claims on Venezuelan crude production, only 1.1 mbpd is available for sale at world prices.

Crime rates are very high and have affected the notable of Venezuelan society. In January, Monica Spear, a former Miss Venezuela and actress, was murdered in a roadside attack. Last week, former WBA super bantamweight and featherweight boxing champion Antonio Cermeno was kidnapped and killed. It is generally believed that Venezuela has the highest
murder rate in the world in a nation not at war. In fact, crime rates are so high that the
government no longer publishes data; however, it is estimated that a murder is committed every 21 minutes.

In 2009, the homicide rate of 75 per 100,000 people was four times higher than Iraq! The latest report, in 2013, indicated that there are 122 homicides per 100,000 in Caracas.

Although crime was becoming an increasing problem during Chavez’s reign, it never became much of a political issue for him because of his popularity. Essentially, Chavez was able to overcome the problems of the economy and crime due to the force of his personality. Maduro is struggling to replicate that power.

Over the past month, civil unrest has been increasing, with large protests and counter protests developing. Although these protests are substantial, at this point, we would not expect the opposition to gain control from this dissatisfaction. Instead, the protests may lead to new leadership from within the coalition that Chavez created.

In this report, we will examine the underlying structure of Venezuela’s political system, showing the divisions that exist. We will compare and contrast how Chavez was able to manage these divisions and how Maduro is struggling to replicate his success. We believe the opposition is not capable of ousting the Chavez-inspired leadership. Thus, any changes that occur will come from within the coalition. As always, we will conclude with potential market ramifications.

The Coalition

Chavez created an umbrella group of socialists called the United Socialist Party of Venezuela (PSUV). Eleven parties are in the coalition. A dozen other leftist parties declined membership, although they remain ideologically sympathetic to the PSUV. For many of the groups that decided not to join, concerns about corruption and the high crime rate led them to remain independent.

In the last election, the coalition did gain a majority of seats but did not capture a two thirds majority, thus limiting the power of the PSUV.

Like most dictators, Chavez maintained power by manipulating various power centers within the country. Essentially, there are three major groups within the power structure. These are the ideological left, the military and the technocracy.

The Left: There are a number of figures within this group. The most important is Maduro, simply because he was hand-picked by Chavez. However, Maduro didn’t get the nod because he was the most powerful candidate. In fact, it is quite likely he got the nod because he was not a threat to Chavez. Maduro was the foreign minister and spent most of his time in Cuba. It would not be surprising that the Castro brothers encouraged Chavez to select Maduro because he was aligned with their interests. Like most dictators, Chavez eliminated or marginalized any potential replacements and so, with his passing, Venezuela will be run by someone who is probably unsuited for the task.

Other prominent leftists include Chavez’s older brother Adan, who is the current governor of the Venezuelan state of Barinas. Adan is a more doctrinaire leftist and thus less popular. Elias Jaua, the current foreign minister, was a long-serving vice president under Chavez. Jaua supports the pre-Raul Castro model of Cuban socialism which would entail full state control of the economy and little tolerance of dissent. Because Jaua has his own base of support, Chavez eliminated him as a candidate.

The Military: The second major power center in Venezuela is the military. Chavez himself had a military background. In 1992, as a lieutenant colonel, he led a coup against the government of President Carlos Andres Perez. The coup failed; after a short stint in prison, Chavez entered public life and was elected president in a landslide in 1998.

Chavez was leery of the military; as his own history shows, the military can spawn coups
that might overthrow the government. In fact, a military coup in 2002 briefly ousted Chavez. After that event, Chavez changed the military from an apolitical professional force to an instrument under state control. He systematically purged high level officers who were thought to be disloyal. He also introduced a rather large contingent of Cuban military figures who have been placed in training and intelligence roles. The Cuban presence has not been popular with many officers; those who oppose the “Cubanization” of the military usually find
themselves facing retirement. Venezuela implemented a “two-year or out” promotion program. A soldier that fails to be promoted within two years is forced out. This makes it easy to push out disfavored soldiers and allows loyalty to be rewarded.

Finally, Chavez created a paramilitary group, called the “Bolivarian Circles,” consisting of lightly trained citizens, armed by parts of the military, who stand guard, ready to protect the fatherland. In reality, the circles were created

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