Cubanálisis El Think-Tank

ARTÍCULO ESPECIAL EN EL THINK-TANK DE CUBANÁLISIS

 

  

 

                                          

Venezuela and Cuba, Interdependence

 

Dr. Antonio Morales Pita, DePaul University

Brittany Scofield, Freshman Student of Economics, DePaul University

 

With the recent drop in oil prices, Venezuela and Cuba are struggling to maintain power amongst the people, more specifically Venezuela. With Cuba relying on its subsidized oil from Venezuela, Castro has provided much needed assistance to Chavez, “advising” the social programs and new found political control. Chavez’s socialist agenda has damaged Venezuela’s economy. With inflation on the rise, Venezuela and Cuba must find investors to maintain their government revenue, in order to hinder the spread of democracy.

 

This paper will discuss the role Venezuela and Cuba play in keeping each other’s economies afloat.  It will focus on the dependence the countries have on oil and maintaining profits to fund the socialist agendas.  It will also shed light on Cuba and Venezuela’s elusive trade relations, and the resulting economy that ravishes Venezuela due to a change in political application.   Finally, it will provide a conclusion that analyzes Venezuela and Cuba’s recent efforts to avoid democracy and their maximum efforts with minimum return, further jeopardizing their economies and the standards of living for their people.

 

Venezuela’s Dependence on Oil and its Current Economic State

 

Venezuela’s economy is subservient to the fluctuations of petroleum prices in the world market.  The price of oil directly affects government spending which, in turn, controls the socialist agenda of current president, Hugo Chavez. Chart 1 demonstrates the fluctuations in oil prices. Oil revenues account for about 90% of export earnings, 50% of federal budget revenue, and 30% of its GDP. Arbitrarily, when oil revenues are down due to a drop in gas prices, government spending goes down and Venezuela becomes sensitive to a recession and vice versa. 

         

Chart 1: Average Fiscal Year US$/Barrel of Crude Oil

 

 

Graph derived from averaged daily price values of Light Sweet Crude Oil through the years 1996-2010 provided by NYMEX 

 

Elected in 1998, Chavez was able to reap the benefits of soaring gas prices between 2004 and 2008 increasing public spending for subsidies, state job-creation, and social programs while also providing financial assistance to governments of countries considered to buy political allies. According to the United Nations Economic Commission for Latin America, “As the economy boomed, the share of Venezuelans living in poverty fell from 49.4% in 1999 to 27.6%,” but as prices decreased in the 4th quarter of 2008, Venezuela’s revenue greatly decreased and has yet to recover. Before the world recession, public spending, minimum wage increases, and more imports led to a rise in consumption and, inevitably, a twenty percent increase in inflation, one of Venezuela’s biggest concerns. Coupled with high inflation, is the continuing controversy over the nationalization of oil exploration and production ventures between the state-owned Petróleos de Venezuela, or PDVSA and other foreign companies. PDVSA is the world’s fifth largest oil exporter.¹

 

PDVSA, Venezuela’s national oil corporation, “represents a direct relationship between the industry and the country,” with industry operations alone making up forty percent of the country’s GDP. Employment of staff and contractors makes up one to three percent of Venezuela’s workforce, but, “demand for goods and services…and investments directly or indirectly creates more than 1 million jobs…one-quarter of the total workforce,” giving  PDVSA a very important role in the economy of Venezuela. The coup of 2002 put incredible pressure on the economy of Venezuela.  In hopes to persuade Hugo Chavez to call early elections, PDVSA stopped oil production for 2 months.  Concluding the coup, the government fired 19,000 employees. The strike pushed unemployment up five percent and up to twenty percent by 2003.¹

 

Chart 2 demonstrates the significance of the oil strike in 2002-2003. It is also important to relate what the chart is displaying to the significant effects of the role of oil production on Venezuela’s economy.  During the coup, PDVSA managers suspended oil shipments to Cuba.  Chavez allowed the suspension to continue until August.  Cuba had continued to supply social services to Venezuela. Chavez has yet to demand payment for debts that amount to eighty percent of PDVSA’s debt.

 

 http://www.wtrg.com/oil_graphs/PAPRPVE.gif

“Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day,”.¹

 

Venezuela’s and Cuba’s Trade Relations

 

Between 2004 and 2007 Cuba and Venezuela have established many economic agreements that have made oil consumption steady in Cuba after the ceasing of the Soviet Union’s subsidized assistance.  It is clear that Venezuela’s investments in Cuba’s oil projects have significantly increased their ability to extract and refine oil for consumption. It is also interesting to note that while Cuba’s Petroleum Consumption is rationed, and decreasing from 2000 to 2008, (as it can be seen in Chart 3) its Petroleum exports/imports are increasing while production has stayed relatively the same.  From this data it can be assumed that Cuba may be importing a small amount of oil from Venezuela with the intention to export it.  Two percent of Cuba’s export revenue is derived from Mineral Fuels. ¹

 

Chart 3: Cuba’s Oil Production, Consumption and Balance of Trade

 

 

Net Exports/Imports is calculated as Total Production-Total Consumption of Petroleum. ¹

 

Production has doubled in Cuba since the Soviet Union relinquished its provisions, from 25.998 thousand/barrels per day in 1995 to 52.632 thousand/barrels per day in 2009. ¹ It is estimated that, since 2004, Venezuela has invested €3 billion towards various projects in Cuba. €1 billion has gone specifically towards improving Cuba’s oil industry, transportation, and housing.  Some of these projects include: funding for oil exploration and drilling, transportation repairs, the installation of an undersea cable between Venezuela and Cuba, funds to better communication and railway equipment, and €450 million for the Cienfuegos oil refinery.¹  The other  €2 billion has helped improve Cuba’s Camariocas ferrous-nickel plant, €200 million in agriculture, manufacturing, and infrastructure, another  €68 million in housing, subsidized trips by Venezuelan tourists, hotel construction, and a thermal-electric plant in Mariel.¹ Not only has Venezuela provided an exuberant amount of funds to improve Cuba’s economic foundation, they have also supplemented subsidized oil, in return for imported services to Venezuela.

In October of 2000, Castro and Chavez signed the Convenio Integral de Cooperación or the Integral Cooperation Agreement, an agreement that established the trade that has consistently rattled the economies of both Cuba and Venezuela, since. The quoted, “oil for services” accordance brings 53,000-100,000 barrels of Venezuelan crude oil to Cuba each day.  That oil is refined in Cienfuegos, the oil refinery completed with the help of Venezuelan funds (It is estimated that Venezuela invested another €1 billion to improve the plants capacity in 2009).¹  The oil is subsidized by about 41%.  In 2007 it is estimated that due to this percent decrease in charge per barrel, Cuba received a subsidy worth €1.7 billion.¹ This exchange makes up 1/6 of Cuba’s imports making Venezuela Cuba’s number one trading partner. Adversely, Petróleos de Venezuela (PDVSA) only sends out two percent of its exports to Cuba. In exchange, Venezuela receives imports of services in technical support, education, medical professionals, sports and research.

“Oil for Service”

 

Alongside the 30,000 teachers, sports coaches, and physicians infiltrating Venezuela’s population, there has also been an increase in Cuban advisors who are taking positions in Venezuela’s, “key branches of armed forces, police agencies, president’s security guards, telecommunications, ports and airports, and national identification and public registries,” raising concern about their intentions in the country.¹² Andres Oppenheimer, a journalist for the Miami Herald, speculates that Cuba is beginning to supply advisors to help manage Venezuela’s policies due to recent stigma attached to Chavez’s presidency.  Oppenheimer notes that Cuba’s officials have been making headlines, disrupting the public and regulating the Venezuelan military. Recently, Chavez adopted the slogan originally recited by Fidel Castro during the Cuban Revolution: “Motherland, Socialism, or Death”. In February it was noted that the Cuban Vice President, Ramiro Valdes, helped Chavez “solve an electricity crisis”, and Oppenheimer points out that he has little experience with electricity issues, but is the head of Cuba’s Internet censorship office.¹² During the coup against Chavez in 2002, the European ambassador commented, “I don’t know which was a bigger factor in returning Chavez to power, the ineptitude of his enemies or the effectiveness of the Cubans, but I do know that both played a role,” clearly demonstrating the purpose of Cuba’s people in Venezuela.¹¹ In addition to Cuba’s increased unpopularity amongst the Venezuelan public, the service has gone unpaid by Cuba’s government, significantly affecting the GDP of Venezuela and Cuba.

 

ALBA, or the Application of the Bolivarian Alternative for the Peoples of Our America agreement, has not only strengthened the influence Cuba has on other Latin American countries, but has allowed Cuba to manipulate Venezuela into paying for subsidized services.  Under the ALBA agreement between Bolivia, Venezuela, and Cuba, it was made clear that Cuba would pay the salaries of medical professionals exported to Venezuela in return for subsidized oil.² Since 2005, it is estimated that Venezuela has been paying the salaries of over 23,000 medical professionals from Cuba.¹ Chart 4 demonstrates that Cuba’s GDP between 2005 and 2006 grew slightly due to the selling of services to Venezuela. It also elaborates on the trade deficit in the balance of goods that has been slightly offset due to exports of professional services to Venezuela that amounts to 71% of their exports to Venezuela.¹ Erikson notes that Cuba’s debt to PDVSA is $752 million, 80% of the company’s total debt.  He also mentions that Chavez is making little to no effort to collect. Barrio Adentro, Chavez’s Misiones that includes Cuban staffed primary healthcare centers, have been closing and the remaining public hospitals do not receive adequate funds due to PDVSA’s huge debts.  It is also important to note that Cuba is substantially hurt from supplying medical professionals overseas EXCEPT in Venezuela, where they do not have to pay the salaries of their employees.  

 

Chart 4: GDP Real Growth Rate Cuba and Venezuela

 

 

Data retrieved from IndexMundi

 

2004-2007 was good for both Venezuela and Cuba especially after the trade agreements established between the two countries in 2000.  Venezuela has seen a decrease in GDP every since oil prices dropped in 2008, and has yet to recover. (Since 2002) Due to the nationalization of the oil industry and its production in Venezuela, production has significantly dropped, so Venezuela has yet to benefit from the increase in oil prices that occurred shortly after their drop in the 3rd quarter of 2009.

 

Venezuela as Cuba’s Benefactor

 

In efforts to enforce his radical Bolivarian Revolution, Chavez has taken the forefront position against neoliberalism. By maintaining assistance to Cuba, Venezuela has become Cuba’s “benefactor”, enabling it to, “recentralize political and economic control,” according to Rogelio L. de la Torre.² Cuba and Venezuela have begun to integrate their governments, and in doing so, forged a military alliance.  For Cuba, oil is a necessity and with ties severed with the US and its location difficult to export to, Cuba must rely on using oil as a political tool.  Shortly after subsidized trade with the Soviet Union diminished and the US tightened the trade embargo in hopes to promote democracy, Cuba’s economy experienced a blow that lowered its standards-of-living to below the level it experienced before establishing trade with the Soviet Union.  In order to alleviate the economy from severe shortages, Castro allowed some market-oriented measures to occur.  The government also legalized the US dollar and encouraged tourism.  As tourism increased currency inflow (due to investments in hotels by the Venezuelan government to improve housing and subsidized trips for Venezuelans) the government relinquished US currency and incorporated the euro.

 

As mentioned before, ALBA has significantly increased the trade relations and thereby the GDP of Cuba. With Venezuela taking the forefront in neoliberal global confrontation, Cuba can rely on Venezuela’s government enabling it to avoid democratic transition.  Venezuela’s increased military expenditures have raised significant concern in the Western Hemisphere. The U.S. State Department has declared Cuba a “rogue” state; and, furthermore, has begun focusing on Venezuela’s recent case in “cooperation in the global war on terror…remaining unwilling or unable to control traffic arms, supplies, and drugs across the Colombian border,” establishing a strong anti-democratic alliance between the two countries.² With further assistance from Cuban officials, Venezuela’s policy has begun to mimic the Cuban Revolution. 

 

Cuban officials have infiltrated nearly 51 nations,   mostly in the sports sector.  Some Latin American countries, like Panama, have shown distrust in their motives.  Panama, with 10 baseball teams coached by Cubans believes that the coaches are “spreading political ideology.” The tension has even been brought to the attention of the U.S. Embassy.¹ Most countries only experience tension in sports, but Chavez’s socialist methodology has only benefited from the infiltration of Cuban political advisors. As Chavez experienced the benediction of the oil boom, it is rightfully assumed that his immense increase in public spending and subsidy job creating schemes were designed by Cuban advisors in order to increase his popularity amongst the poor.  Unfortunately, for Chavez and Cuba, Venezuela’s economy is only seeing depletion, threatening Chavez reelection and Cuba’s benefactor.

 

Venezuela’s Depleting Economy

 

With elections coming up in 2012, Chavez has a lot to be concerned about with the economy’s current state.  In the 2008 elections, the opposition regained 46.5% of the vote in mayoralties in Caracas’s metropolitan area, the biggest city and capital of Venezuela as well as Maracaibo, the second largest city. Chavez responded with a tightened fist, winning a referendum in 2009 eliminating term limits.  But with the economy exhausted, Chavez may not regain his position in 2012.  Oil prices have dropped from nearly $119 US in the 4th quarter of 2008 to $43 US in the second quarter of 2009.  With a decrease in oil prices and with more than 100,000 people on the PDVSA payroll, due to the events that occurred after 2002 (reducing economic efficiency in itself), “oil output has fallen, from a peak of 3.5 m barrels per day in 1998 to perhaps around 2.8m,” making oil profits a double edged sword. 

 

Inflation is nearing 30% and rising, while wages are slowly decreasing.  The welfare and social spending programs funded by PDVSA direct transfers that fuel the consumption of Venezuela have dropped from $7.1 billion in 2007 to currently $2.7 billion.¹³  Mercal’s, or state-owned subsidized grocery store chains that offer discounted goods of up to 40%, have seen a decrease in sales by 11% mostly because of stores shutting down.  Mision Barrio Adentro, or primary healthcare centers normally staffed by Cuban medical professionals, have been shutting down as well, and public hospitals haven’t been receiving funding.  Also, one of the most recognizable and immediate indicators of distress in the economy is the electricity rationing. ¹³

 

Daily two-hour power cuts had been enforced on every city, but Caracas, in hopes to subside social unrest.  Unscheduled blackouts often occur and government offices have been shutting down early to save energy.  Venezuela depends on seventy percent of its power to come from hydroelectricity.  The government has recently invested $16.5 billion in electricity generation, but little has been spent.  Minimal production due to unproductive generators means that PDVSA will have to reduce its exports if it wants to bring power to Venezuela.

 

In hopes to bring a surplus to the Venezuela’s trade deficit and to promote international competition, Chavez ordered a devaluation of the Bolivar in January 2010.  With the new multiple exchange rate mimicking that of Cuba’s, priority imports will be at 2.60 Bolivares, and 4.30 Bolivares for everything else. It increased in June to 5.3 Bolivares. ¹ With that said, hard currency for PDVSA doubled in Bolivares overnight. Furthermore, Chavez threatens the private sector, persuading them to attempt import-substitution projects but daring them to try to raise their prices.  If they do, the government will take over and give their business to the public.   Chavez may be able to provide more public aid, but consumers will see their dollar power decline with inflation that may reach up to forty percent.¹  The Economist quoted Jorge Giordani, the planning minister, implementing that the surplus in profits will be used to, “encourage import-substitution, reduce dependence on oil, and create new jobs,” but skeptics believe Chavez will simply increase the minimum wage and put more money into social programs in hopes to raise public support. ¹ Some critics believe that Chavez has created an authoritarian election, and may not need such radical support for the public during elections.

 

So much of Chavez’s energy is spent focusing on pleasing the general public, ridding the oligarchy of resources, and providing aid to other Latin American countries, generally Cuba.  In doing so he has provided Venezuela with many shoddy social programs that, due to nationalization and a drop in oil prices, have lost their stamina.  Many are starting to doubt the necessity of the public’s vote.  Although the opposition has begun to gain popularity, Chavez has enacted many policies and threats that have assisted in keeping him in office.  Manuel Hidalgo provides an example of campaign interventions made by public employees exerting threats.  He quotes an occurrence in the 2008 legislative elections when, “Chavez threatened to withhold government resources from areas that elected ‘counterrevolutionaries’ and spoke of ‘sending in the tanks’ if ‘the oligarchy’ won the governorship of Carabobo state,” defining the gaps in the rules. He also made note of “Tascón List”, a database used to blackmail voters, posted online.  Much of Chavez’s measures seem inadequate, but his broadening global platform has brought hope for his investments and social clout in some Latin American countries.

 

Venezuela’s Global Platform

 

Venezuela and Cuba have both seen an increase in trade relations from countries like China and Russia.  With investments, the countries can hope to avoid assistance from the World Bank and the IMF, swaying the threat of democracy.  Venezuela and China have been modest in regards to the other established  Sino-Latin American trade relations. This is mostly because trade with China is difficult because of the lack of refining capacity and expensive travel.³ The trading of oil would be beneficial to both countries. China wants to diversify its “sources of petroleum imports” while Venezuela hopes to cut ties with the United States, one of its largest petroleum importers.³  This may be why China has recently been so diligent in establishing trade and investments with both Cuba and Venezuela.

 

Cuba and China’s trade is odd considering Cuba’s long history of not paying back debts, but they relate in their political communist regimes.³ Partly because of their relationship, Cuba has received very generous trade with China.  China has invested $500 million in Cuba’s nickel extraction and refining. “Cuba has the world’s third-largest nickel reserves,” and both China and Cuba could benefit from profits in the future.³ They had also planned to invest in the Cienfuegos Refinery. Furthermore, China is buying sugar from Cuba.² China is also interested in investing in Cuba’s North West coast.  “The North Cuba basin could contain some 4.6 billion barrels of oil,” estimated by The U.S. Geological Survey, raising interests from China.²   Venezuela has seen even more trade negotiations with China in hopes to pursue oil in the Orinoco Belt.

 

China has been hesitant to import oil from Venezuela because it would rather maintain neutral relations with the U.S. than import petroleum when it does not need to, but recently China has shown interest in the Orinoco Belt.  The Orinoco oil region located in Venezuela is known to contain some of the world’s largest oil reserves. Venezuela has begun seeking foreign investors especially in a time where the PDVSA is struggling to support the economy of its country. ¹ Many global powers have begun to invest in Venezuela, including the U.S., providing Chavez with more and more funds to continue his, “heavy-handed controls over the economy,”. ¹ The China National Petroleum Corp (CNPC) is forming joint-venture in the Junín 4 block in the Orinoco belt and China’s bank will lend Venezuela a $20 billion ten year loan. China hopes that in the next 25 years, this investment will lead to a production of 400,000 barrels a day. Both Chevron (US) and Repsol YPF (Spain) have both invested in projects focused on extracting and refining.  Russian companies have also signed partnerships with PDVSA roughly worth $18 billion, but their arms purchases have been more significant in terms of political unrest. ¹

 

Conclusion

           

Since Chavez’s reelection in 2008, he has claimed that the people have voted for socialism, politically opening the door for him to unleash his referendums, social programs, and investments in Latin America.  Unlike many other Latin American countries, Venezuela, even though it has one of the largest oil reserves in the world, is struggling to keep up.  PDVSA has potential to be incredibly profitable for Venezuela, but with government control, it is producing below its potential output.  This, combined with a significant decrease in oil prices, has not only affected Venezuela’s economy, but has made it virtually stagnant without the ability to provide funds for social programs that generate most of the country’s consumption.  Living wages have decreased and inflation has seen an all time high, more drastic than any other Latin American country.  Chavez’s goal has not only been to control the resources of his country, but to make global connections with allied countries, especially with Cuba.

           

Cuba has not only benefited from its trade relations with Venezuela, but it has recovered substantially from the time it was displaced by the Soviet Union.  With subsidized oil, Castro can begin focusing on spreading the Cuban Revolution, much like he has in Venezuela with his advisors.  But the public of Venezuela are beginning to recognize the infiltration of the Cuban Revolution into their economy and are not pleased.  Chavez’s opposition is gaining in the reelections, and with profits from PDVSA so low, his political reach can only stretch as far as funds from foreign investment can take him.

           

Relying on investments from other political powers in the Orinoco Belt, Chavez has regained a bit of power in order to please the public with social program funding, but investments will only keep him in the clear for so long.  Chavez has inevitably avoided assistance from the World Bank and the IMF, pleasing Cuba in maintaining distance between itself and democracy.  As political and military allies, Cuba and Venezuela are facing the storm together, but one thing is certain, they need each other to survive. 

 

Works Cited

 

1. Baxter, Kevin, Chris Kraul. “Cuba’s Biggest Export in Sports.” Los Angeles Times. 28 July 2007. 21 May 2010. < http://articles.latimes.com/2007/jul/28/sports/sp-cubans28>

2. De la Torre, Rogelio L. “Cuba Under Fidel and Raul”. ASCE. 2007. 20 May 2010. <http://www1.lanic.utexas.edu/project/asce/pdfs/volume17/pdfs/delatorre.pdf>

3. Dominguez, Jorge. “China’s Relations with Latin America: Shared Gains, Asymmetric Hopes.” Inter-American Dialouge. June 2006. 20 May 2010. <http://www.offnews.info/downloads/china-latam.pdf>

4. Erikson, Daniel P. "Castro and Latin America: A Second Wind?." World Policy Journal 21.2 (2004): 32-40. Academic Search Premier. EBSCO. Web. 10 May 2010.

5. “Feeling the Heat.” The Economist. 13 May 2010. The Economist Newspaper Limited. 20 May 2010.<http://www.economist.com/displaystory.cfm?story_id=16104226>

6. Giusti, Luis E. "La Apertura: The Opening of Venezuela's Oil Industry." Journal of International Affairs 53.1 (1999): 117. Academic Search Premier. EBSCO. Web. 10 May 2010.

7. Hidalgo, Manuel. “Hugo Chavez’s ‘Petro-socialism’.” Project Muse: Today’s Research. Tomorrow’s Inspiration. Journal of Democracy, Volume 20, Number 2, April 2009, pp. 78-92 (Article). 23 May 2010. <http://muse.jhu.edu/journals/jod/summary/v020/20.2.hidalgo.html>

8. Index Mundi. Venezuela GDP – per capita (PPP). Index Mundi, 2010, <http://www.indexmundi.com/venezuela/gdp_per_capita_%28ppp%29.html>

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10. Mesa Lago, Carmelo. “The Cuban Economy at the Crossroads.” The Think Tank. 30, June 2008. <www.cubanalisis.com>

11. Naím, Moisés. "A Venezuelan Paradox." Foreign Policy 135 (2003): 96. Academic Search Premier. EBSCO. Web. 10 May 2010.

12. Oppenheimer, Andres. “Commentary: Venezuela’s Chavez is Giving Away Too Much to Cuba.” The Bellingham Herald. 15 May 2010. The Miami Herald. 22 May 2010. <http://pd.bellinghamherald.com/sp?aff=1100&keywords=Venezuela+Chavez&start=16>

13. “Socialism On the Never Never.” The Economist. 18 June 2009. The Economist Newspaper Limited. 20 May 2010.<http://www.economist.com/displaystory.cfm?story_id=16104226>

14. “The Weakening of the Strong Bolivar.” The Economist. 14 Jan 2010. The Economist Newspaper Limited. 20 May 2010.<http://www.economist.com/displaystory.cfm?story_id=16104226>

  15. United Public International. Petroleos de Venezuela. United Press International, 2010. <http://www.upi.com/topic/Petroleos_de_Venezuela/wiki/>

16. Martinez, Ana Isabel. “UPDATE 5-Venezuela Launches Forex System, New Bolivar Rate.” Reuters.    9 June 2010. Thomson Reuters.  3 July 2010. < http://www.reuters.com/article/idUSN0914035820100610>

17. U.S. Energy Information Administration: Independent Statistics and Analysis. 18 May 2010. Venezuela Energy Profile. 23 May 2010. <http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=VE>

18. “Venezuela/China Industry: Oil for Money.” ViewsWire. 19 April 2010. 27 May 2010. < http://www.eiu.com.ezproxy2.lib.depaul.edu/index.asp?layout=displayVw&article_id=157055200&geography_id=1540000154&region_id&rf=0>

19. Williams, James. “Oil Price History and Analysis.” WTRG Economics. 2007. Energy Connection. 24 May 2010. <http://www.wtrg.com/prices.htm>