By Jephraim P. Gundzik
Condor Advosers
November 22, 2005

MAMMOTH LAKES, Calif. -- Defiance has characterized the foreign and domestic policies of the Chavez government since its first days power. Rather than provoking the collapse of Venezuela's political and economic systems, defiance of convention has greatly strengthened governance and the economy. Venezuela's future looks brighter now than at any other time in the past 25 years.

Defying The Culture Of Over-Production
Immediately after taking office as President of Venezuela in 1999, Hugo Chavez began work to shore up international oil prices. At that time, weak production discipline within OPEC led to excessive production quota violations, sharply increasing global crude oil supply. The resultant weakness of international oil prices had a strong negative impact on Venezuela's economy.

Chavez appointed Ali Rodriguez, a former Communist guerrilla, as head of Venezuela's Ministry of Energy and Mines (now the Ministry of Energy and Petroleum). Immediately, Rodriguez embarked on a tour of OPEC and non-OPEC oil producing countries. Rodriguez was charged with instilling greater production discipline within the cartel and convincing non-OPEC producers to reduce oil production.

In 2000 Chavez repeated Rodriguez's tour of OPEC and non-OPEC oil producing countries, consolidating commitments to restrain oil production. In addition, Chavez invited OPEC leaders to Caracas for a summit, which was held in September 2000. Chavez used this summit, only the second to be held in OPEC's history, to convince OPEC members that controlling oil prices was much more beneficial to all members than over-production and high oil price volatility.

The appointment of Ali Rodriguez as Secretary General of OPEC in late 2000 cemented Venezuela's growing influence over the cartel. From his position within OPEC, Rodriguez convinced members to implement the first-ever price band for OPEC's basket of crude oil. OPEC oil production cutbacks, encouraged by Venezuela, were instrumental to the three-fold increase of oil prices between January 1999 and September 2000.

Defying Conventional Foreign Relations
Traditionally, Venezuela's foreign relations were defined by the country's strong relationship with the U.S., regional and global relations generally took a backseat to its relations with Washington. President Chavez has made stronger regional and global ties a foreign policy priority at the expense of relations with the U.S.

Venezuela has strengthened its relations in South America both bilaterally and multilaterally. In addition to infamous ties with Fidel Castro, President Chavez has strengthened relations with governments in Argentina, Bolivia, Brazil, Ecuador and Uruguay, all of which are politically left of center.

In addition to fostering regional commercial ties, the Chavez government has used its oil wealth and technical expertise as a regional diplomatic tool. This is clearly seen in such ventures as PetroCaribe, PetroAndina and PetroSur. While these ventures strengthen Venezuela's regional economic integration they also provide varying amounts of subsidized Venezuelan oil to participating countries.

This "oil diplomacy" as it has been labeled in Washington has raised howls of protests from Bush administration officials. However, it is innocuous compared to Washington's IMF-directed loan-based diplomacy that has been foisted on Latin America for decades. Other multilateral regional initiatives that Venezuela has played a strong role in creating are the South American Community of Nations (CSN) and Telesur.

Defying The Bush Administration
The Chavez government's increasing influence over oil prices and expanding regional relations became a major concern of the Bush administration in early 2001. In an effort to thwart Chavez, Washington began to funnel money to Venezuela's anti-Chavez opposition organizations via the National Endowment for Democracy (NED) and the U.S. Agency for International Development (AID).

According to U.S. public records, NED allocations to political organizations in Venezuela amounted to about $1 million annually between 2001 and 2004. In addition to funding the organization of the 2004 recall referendum against President Chavez, NED resources also found their way into the pockets of those organizing the failed 2002 overthrow of President Chavez and the subsequent public sector strike and private sector lockout. Funding for Venezuelan opposition groups provided by AID amounted to about $500,000 in 2003 and $1.5 million in 2004.

As much as $9 million was earmarked by the U.S. Congress for NED and AID operations in Venezuela in 2005. In September 2005, the U.S. House of Representatives agreed to allocate an additional $9 million for NED and AID ventures in Venezuela in both 2006 and 2007.

As with efforts to depose the Chavez government by supporting opposition political parties, Washington's attempts to isolate Venezuela internationally, which were stepped-up dramatically in 2005, have also failed miserably. The Bush administration set the stage for isolating Venezuela in January 2005 during U.S. Secretary of State Condoleezza Rice's confirmation hearings. In testimony to the Senate, Rice described President Chavez as a "negative force in the region." In February 2005, Deputy Secretary of State Robert Zoellick described the Chavez government as a "new breed of authoritarianism."

In March 2005, U.S. Secretary of Defense Donald Rumsfeld traveled to Latin America in an attempt to gain regional support against Venezuela for what he described as the Chavez government's unhelpful involvement in Bolivia's ongoing political crisis. Rumsfeld repeatedly painted the Chavez government as a threat to regional stability. A similar trip to Latin America by Secretary Rice in April 2005 held the same message.

Rumsfeld's and Rice's admonitions against Caracas fell on deaf ears. Rather than join Washington's cause, Brazil's President Lula voiced the opinion of other Latin American leaders when he said, shortly after Rumsfeld's visit, that "We don't accept defamation and insinuations against a companero. Venezuela has the right to be a sovereign country, to make its own decisions."

In a further affront to Washington's efforts to isolate Venezuela, Latin American leaders refused to support a U.S.-sponsored initiative at the Organization of American States (OAS) calling for members to intervene in countries where democracy is under threat.

This thinly veiled attempt to gain support for intervention in Venezuela was soundly defeated at the OAS meeting held in June 2005 in Florida.

Defying The Domestic Political Opposition
After seven years, President Hugo Chavez's Bolivarian Revolution, the president himself and his Fifth Republic Movement (MVR) have enjoyed growing popular support in Venezuela. While vocal foreign and domestic opposition begs to differ, the Chavez government's increasingly strong ballot performances clearly indicates the strength of this support despite what many consider high abstention rates.

Regional elections in 2004 and municipal elections in 2005 handed Chavez allies control over most of Venezuela's local governments. Meanwhile, these victories have demoralized and fragmented the Chavez government's domestic political opposition, minimizing electoral challenges in important upcoming elections.

Legislative elections slated for December 2005 are very likely to give Chavez and his allies control of two-thirds of the seats in Venezuela's National Assembly. With domestic opinion polls giving him approval rates of around 70 percent, it appears certain that Chavez will be re-elected for another six-year term as president of Venezuela in late 2006.

Chavez won Venezuela's 1998 presidential election with 56 percent of the popular vote. In April 1999, the Chavez-initiated referendum seeking constitutional reform passed with 92 percent of the popular vote. In the July 1999 Constitutional Assembly election, candidates supported by Chavez gained 56 percent of the popular vote. In December 1999, 72 percent of voters supported the new constitution and in the July 2000 presidential election, 60 percent of voters supported Chavez.

In August 2004, Chavez won a recall referendum initiated by the U.S.-supported anti-Chavez opposition with almost 60 percent of voters indicating their preference that the president remain in office. Despite opposition accusations of fraud in the recall referendum, the official results were certified by the U.S.-based Carter Center and the OAS.

The subsequent implosion of Venezuela's anti-Chavez opposition allowed Chavez-allied parties to gain seven governorships in the October 2004 provincial elections. Chavez supporters also made important gains in the simultaneous mayoral elections, including the mayorship of Caracas. Mayors in about 80 percent of Venezuela's 335 municipalities, and similar percentage of governors, are now aligned with the Chavez government.

A similar outcome occurred in municipal elections held in August 2005. Candidates from the Chavez government party list won about 80 percent of the roughly 6,000 local council seats being contested. While high abstention rates characterized all of these polls, high abstention has been pervasive in Venezuelan elections since the late 1980's.

Venezuela's anti-Chavez opposition has consistently argued that high abstention has undermined the legitimacy of the Chavez government - a sentiment shared in Washington. Ironically, high abstention rates are more indicative of the opposition's inability to rally support for their candidates and causes. Abstention in Venezuela is highest among the country's poor population, which is the Chavez government's primary constituency.

The consolidation of political power and the collapse of the domestic opposition has stabilized Venezuela's political and social environments. Violence has typically been associated with past elections in Venezuela. Election-related violence has been practically absent since 2004. Demonstrations and strikes have also abated.

Defying The Washington Consensus
Political and social stabilization, combined with rapidly rising international oil prices, produced a very strong economic rebound in Venezuela in 2004. The extension of political and social stability and the further increase in international oil prices have buttressed rapid economic growth in 2005. For the second consecutive year, economic growth in Venezuela will be the strongest in Latin America.

Higher oil prices have substantially increased government revenue, a large portion of which has been channeled into increased government social expenditure and public sector infrastructure investment. Heavy social expenditure has pushed incomes higher and poverty much lower. Public sector infrastructure investment has inspired a substantial increase in private sector economic activity, pushing unemployment down.

Many foreign and domestic analysts have become alarmed over how land reform, the seizure of unutilized factories and changes to regulations governing the petroleum sector will undermine private sector investment. None of these analysts seem to be aware of the fact that domestic private investment has been practically absent in Venezuela over the past 20 years.

The Chavez government's U.S. and domestic opposition have decried land seizures as an attack on private property rights. However, the government has repeatedly stated that private land targeted for seizure is limited to estates where owners have no legal title. Lacking a legal title, such land cannot be considered private. While a vocal U.S.-backed minority may object to the Chavez government's land reform program, it is important to understand that land redistribution is supported by the majority of Venezuela's voters.

This has been strongly reinforced by the government's recent overwhelming electoral victories and is exceedingly likely to be reinforced, once again, in the upcoming legislative elections. If the majority of Venezuela's population did not support the Chavez government's land reform program or Chavez's Bolivarian Revolution, high abstention could easily be turned into activism, leading to the government's electoral defeat. This is an important point missed by Chavez detractors in Washington and in Venezuela.

Another gripping issue for many analysts has been recent enforcement of regulatory changes in the petroleum sector that were originally legislated in 2001. These changes have forced foreign operators to increase their royalty payments to the government and to cede majority control of their operations to Petroleos de Venezuela (PdVSA.)

Despite this renewed regulatory zeal, almost all foreign companies operating in the petroleum sector had brought their operations into compliance by October 2005. Foreign companies have also agreed to pay several billion dollars in back taxes to Venezuela's government. Contrary to popular belief, the enforcement of regulatory changes in the petroleum sector have not undermined foreign investment, especially in Venezuelan syncrude projects.

Syncrude is refined from Venezuela's extra heavy crude oil found in the country's Orinoco region. Venezuela's conventional crude oil reserves are the sixth largest in the world and amount to 77 billion barrels. This does not include an estimated 270 billion barrels of extra heavy crude in the Orinoco region.

Adding extra heavy crude oil reserves to Venezuela's conventional reserves gives a total reserve amount of 340 billion barrels. This compares to oil reserves in Saudi Arabia, home of the world's largest conventional reserves, of 260 billion barrels.

Undoubtedly, oil price developments in the past two years have helped Venezuela's economy. However, the Chavez government has played an important role in pushing international oil prices higher. Venezuela's close relations with Iran, Russia and China suggest that international oil prices will remain high over the long-term.

Venezuela and Russia, where oil production is now state-controlled, in combination with Iran, account for 30 percent of the world's total oil exports. These three countries can control oil prices by adjusting oil production. Venezuela, Russia and Iran have strong incentive to keep oil prices high as they are dependent on high oil prices for continued political, social and economic stability.

Rather than squandering Venezuela's oil-related revenue windfall in the past two years, the Chavez government has plowed this windfall into a myriad of social programs and socially-related infrastructure investment. Though such policies are anathema to the Washington Consensus, President Chavez is proving that another, more socially oriented, way of promoting economic growth is possible. Strong economic growth and improving social indicators are becoming entrenched in Venezuela.
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Jephraim P. Gundzik is President of Condor Advisers, Inc. Condor Advisers provides country risk analysis to individuals and institutions globally.