Issue

Context

• In an effort to weaken President Nicolas Maduro's government in Venezuela, the US has implemented sanctions against Petroleos de Venezuela (Venezuelan state oil company), and has been pilling diplomatic pressure on nations to cut imports from the firm, deadline for which ended on May 10, 2019.
• India's efforts in cutting down its Venezuelan oil imports has been recently appreciated by the US.

About

Situation in Venezuela

• Venezuela was once among Latin America’s most prosperous nations, holding the world’s largest proven oil reserves, but a recent fall in oil prices accompanied by corruption and mismanagement under two decades of socialist rule have left the economy in a historic economic and political crisis.
• Since the beginning of 2019, battle for legitimate President of the nation is underway.
• The US and most Western countries have recognized opposition leader Juan Guaido as Venezuela's head of state, but President Nicolas Maduro retains the backing of Russia and China as well as control of state institutions including the military and judiciary.
• Rampant inflation, along with food scarcity and blackouts have gripped Venezuela under Maduro, while thousands of localities fled to the neighbouring countries as shortages, political turmoil, and crime rates have soared.
• Rejecting offers of assistance, Maduro government is spending its resources on Chinese-made military-grade crowd-control systems to thwart public protests.
• Currently, it has installed an unconstitutional constituent assembly with full powers, deregistered the three main opposition parties, sacked elected mayors and deputies, and stolen three elections.
• Despite massive international diplomatic support, organized political opposition is weak.
• The US has slapped sweeping sanctions on PDVSA, Venezuelan gold, Venzuelan central bank with a view to put pressure on socialist President Maduro to step down.

Magnitude of the politico-economic crisis

• Wage rate: The minimum wage, which is earned by the median worker, buys less than 900 calories a day—not enough to feed a person, let alone a family.
• Food scarcity: A cup of coffee cost more than 2 million bolivars. The Catholic charity Caritas Venezuela projects that 280,000 children will die of hunger this year.
• Inflation: The country is facing a major economic crisis, with projections that inflation could soar to a mind-boggling 10 million per cent this year sovereign bolivar,'' the new currency printed with five fewer zeroes in a bid to tame soaring inflation.
• Oil production: Oil is the blood of Venezuela's crippled economy, accounting for 96% of exports. Venezuela produces around 1.57 million barrels of oil per day, half of what it produced two decades back.
• Excessive migration: As a result, Venezuelans have been leaving for neighbouring countries like Colombia and Brazil on foot, creating a refugee crisis of Syrian proportions, the biggest ever in the Americas. The UN refugee agency (UNHCR) has been urging countries to grant Venezuelans refugee status. The 1984 Cartagena Declaration commits them to it. But countries in the region, fearing a large number of refugees and the impact they might have on government budgets, have opposed such a move. Trinidad and Tobago has even deported Venezuelan refugees.

Indian Stand on Venezuelan crisis

• Maintained neutrality, India has not, till now, officially recognised Guaidó.
• India’s position is based on the principles of non-interference and sovereignty.
• However, the recent decision of not purchasing oil from Venezuela tilts the balance in favour of the US and its allies.

Background:

Factors contributing to high inflation level

• The government used the oil boom that started in 2004 to disempower society and enhance state control over production and the market, while borrowing massively in international markets.
• By 2013, the government’s excessive borrowing had caused it to lose access to international capital markets, triggering the start of the recession.
• In 2014, the price of oil fell sharply, making the previous import level unsustainable and triggering a much deeper collapse.
• Instead of more market-friendly policies and seeking international financial support, Maduro’s government deepened distortionary controls on the economy.
• Offers of humanitarian assistance were refused. With imports, output, and tax revenues collapsing, the government opted to print the money needed to cover the fiscal deficit, triggering hyperinflation.

Analysis

India’s stake in the crisis

Primarily economical: The trade between Venezuela and India is worth $6 billion, of which exports from India comprise barely 1%. Crude oil imports mainly dominate the trade. Venezuela’s import of Indian drugs, food and textile has fallen in recent years due to its financial crisis. 

• Oil needs- India importing over 80% of its oil needs and Venezuela is its third largest supplier of oil. India has also invested in oil assets of Venezuela.
• Costlier- As US sanctions kick in Iran and Venezuela, Indian refiners will face costly crude prices. This will particularly hurt private refiners like Reliance Industries and Nayara Energy which are importing about 300,000 barrels of Venezuelan oil per day. 
• Outstanding payments- Doing business in Venezuela and payments against supplies to that country have turned out to be extremely challenging due to the Latin American nation’s restrictions on transferring money out after it ran short of foreign exchange
• Alternate payment mechanism- Given the massive American influence on the international financial system, as an alternative oil payment mechanism, India will have to make entire payment in rupees as approved by Venezuela.
• Preferred destination- Indian refiners prefer the heavy sweet crude supplied by Iran and Venezuela, which helps them produce low-sulphur fuel oil ahead of new shipping emissions norms that kick in January 2020.
• Partner- Venezuela has also joined the International Solar Alliance, cutting it diplomatically and economically will affect its engagement at the platform.

Solution to Venezuelan Crisis

Long term:

Re-empowerment of Venezuelans-

• As both, the regime and the economic collapse, are the consequences of the elimination of basic rights. Venezuela’s problems will not be solved unless and until there is a regime change.
• This will require coordination between the Venezuelan democratic forces and the international community

Short term:

International military intervention-

• Venezuela’s National Assembly (VNA) has formally started the procedure to rejoin the Rio Treaty, an international pact that would give legal ground to regional military action to oust Nicolas Maduro from power.
• Self-declared ‘interim President’ Guaido, on the other hand, has requested US military cooperation to oust Maduro. US has recently violated Venezuelan waters.
• In the past too, Simón Bolívar gained the title of Liberator of Venezuela thanks to an 1814 invasion organized and financed by Colombia.

Targeted sanctions-

• Targeted sanctions, managed by the US office of foreign assets control (Ofac), have not been highly successful. Earlier, such sanctions have failed to change regimes in Russia, North Korea or Iran.
• Apart from being too slow at best, in Venezuela, they have become a collective punishment and has worsening the on-going humanitarian crisis.
• According to Centre for Economic Policy and Research, US sanctions has deprived Venezuela of lifesaving medicines, medical equipment, food and other essential imports and killed over 40,000 Venezuelans since 2017.

Learning Aid

Practice Question:

Briefly discuss on-going Venezuelan crisis. Examine how US sanctions on Venezuela will impact India-Venezuela trade.