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Dependent on Venezuela’s Oil Diplomacy

Cuba’s Cienfuegos refinery, revived thanks to support from Venezuela. Credit: Jorge Luis Baños/IPS

RIO DE JANEIRO, Mar 18 2013 (IPS) - Venezuela’s economic challenges, more than the uncertainty over who will succeed late president Hugo Chávez, could threaten the oil diplomacy he practiced in the region.

Cuba is the most obvious example. Oil imports from Venezuela cover half of the country’s energy needs, and have made Venezuela the Caribbean island nation’s top trading partner.

Cuba’s foreign trade grew fourfold between 2005 and 2011, to 8.3 billion dollars. And Venezuela’s share of the total increased from 23 percent in 2006 to 42 percent in 2011, according to an online article by Cuban economist Carmelo Mesa, who lives in the United States.

Cuba’s growing dependence on Venezuela has raised fears of a repeat of the severe shortage of essential goods, as well as frequent, lengthy blackouts, that Cuba suffered during the economic crisis of the 1990s triggered by the collapse of the Soviet Union and East European socialist bloc.

Cuban economist Pável Vidal, a professor at the Javeriana Pontifical University in Cali, Colombia, said “Venezuela today represents around 20 percent of Cuba’s total trade in goods and services, while the Soviet Union represented 30 percent, and dependence was even stronger.”

This means the actual risk is lower, although “a decline, even a gradual one, in the links with Venezuela would spark a recession,” he told IPS in an email exchange.

He said an econometric projection indicates that a decline in Venezuela’s trade with Cuba could lead to a contraction of up to 10 percent of GDP and a two to three year recession as a result of a drop in foreign revenue and investment, external financial restrictions, and more costly imports, without payment facilities for oil.

A crisis of this kind would require “a complex and painful adjustment process,” Vidal said.

But technological dependence is not as marked as it was with the Soviet Union, Cuba’s foreign trade has diversified, and Cuba now has a strong tourism industry, which did not previously exist, as well as new instruments of macroeconomic regulation, he added.

However, the country is not in a position to weather a new crisis, he stressed. “Public wage earners and pensioners paid for the adjustments made to survive the crisis of the 1990s, but they could not do so today, because their buying power is just 27 percent of what is was in 1989,” Vidal said.

Furthermore, the state, pressured by “growing foreign debt,” cut social spending, as reflected in a decline in health and education services. Against that backdrop, the economist said, it would be difficult to identify “who could shoulder the cost of a new crisis.”

But researcher Carlos Alzugaray is confident that bilateral ties will remain strong, because “they have gradually been institutionalised, and they benefit both parties.” He also said “the opposition in Venezuela would not be so irresponsible as to destroy them,” in the unlikely event of an opposition triumph in the Apr. 14 presidential elections.

While Cuba buys oil from Venezuela on preferential terms, it sends over 50,000 doctors, teachers, agronomists and sports coaches to Venezuela. The export of medical services, including some 30,000 physicians, is worth some 1.2 billion dollars a year.

The sudden return of so many people to Cuba would be another risk, but at the moment that is in the realm of pure speculation.

According to Cuban analysts, six years more of a Chavista government would be essential to allow Cuba to seek out new suppliers of oil on terms similar to those provided by Venezuela – possibly Angola or Algeria; make progress in developing its own oil industry; and expand on reforms that have already begun to be implemented.

In Nicaragua, another country that has benefited from Venezuela’s oil-discount programme, drastic changes are not expected as a result of the 58-year-old Chávez’s death from cancer on Mar. 5

Oil supplies, which since 2007 have been worth 500 million dollars a year, have enabled the impoverished Central American country to stabilise its economy and turn around the fiscal deficit, according to independent economist Adolfo Acevedo.

The country’s newfound economic fortitude, also achieved thanks to compliance with the recommendations of international financial bodies, would help Nicaragua withstand any change in Caracas, Acevedo told IPS.

Venezuela provided 2.56 billion dollars in oil cooperation to Nicaragua between 2007 and June 2012, according to Nicaragua’s Central Bank.

Both Bayardo Arce, economic adviser to Nicaraguan President Daniel Ortega, and Venezuelan ambassador in Managua, José Arrúe, said that cooperation would not be affected because it was based on agreements that were reached before Chávez came to power in 1999.

The San José agreement, under which Mexico and Venezuela jointly supplied oil on preferential terms to 11 Central American and Caribbean nations, was signed in 1980, the diplomat noted.

But Chávez drastically increased that development cooperation with the creation of Petrocaribe in 2005.

Venezuela also planned to build a 6.6 billion dollar refinery in Nicaragua – plans that will have to be renegotiated with the winner of the Apr. 14 elections, who is expected to be acting President Nicolás Maduro.

In Brazil, which does not depend on Venezuelan oil, economic problems in the neighbouring country would affect exports, which grew sixfold in the last 10 years, as well as the investments of transnational companies.

Trade with Venezuela represents just 1.3 percent of Brazil’s foreign trade. But it is important because it is fast-growing and due to the trade surplus, which stood at 4.06 billion dollars last year and is only smaller than the country’s surplus with China, said Rubens Barbosa, a retired Brazilian ambassador who now presides over the São Paulo Industrial Federation’s Foreign Trade Council.

Venezuela’s economic challenges could affect Brazil’s interests because Caracas “will have to adopt some measures” against the high inflation rate and hefty public debt, including unpopular ones like tax hikes and a gasoline price increase, Barbosa told IPS.

But he said no economic collapse would occur in Venezuela as long as oil prices remained high.

Barbosa said Brazilian construction companies were executing projects worth some 20 billion dollars in Venezuela.

In comparison, he said, Caracas provides Cuba with a total of seven billion dollars a year in oil at discounted prices and financial aid.

Economic interests link Brazil and Venezuela, above and beyond political considerations, neighbourly relations, the fact that they share the Amazon jungle, and the focus on regional integration, said another retired ambassador, Marcos Azambuja.

Under Maduro, there would be a “more rational” government, with no disadvantages for Brazil, he said. “The Venezuelan economy is a sub-product of oil” and Caracas will be able to “continue to be reckless” without sinking its economy as long as a barrel of oil costs more than 100 dollars, Azambuja said.

But Brazil has already suffered losses because of that “recklessness,” he said. He was referring to the Abreu e Lima refinery under construction in the northeast Brazilian state of Pernambuco, which is at least three years behind schedule and has cost eight times more than the initial projection.

Part of the problem, he said, was due to the failure to comply with an agreement by Venezuelan state oil company PDVSA, which was to provide 40 percent of the investment.

The delays in construction of the refinery, which is to be completed in 2016, has other costs for Brazil as well, which must import large quantities of gasoline and gasoil at high prices, even though it produces crude, which it exports at lower prices.

* With reporting by Patricia Grogg in Havana and José Adan Silva in Managua.

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