Venezuela: The End Game

Joseph V. Micallef is a best-selling military history and world affairs author, and keynote speaker. Follow him on Twitter @JosephVMicallef.

The Venezuelan regime of Nicolas Maduro is widely seen as being on its deathbed. Maduro served as vice president under Hugo Chavez, assuming the presidency at his death in 2013.

Some 52 countries have recognized Juan Guaidó, president of the National Assembly, as the interim president of the country. Widespread public demonstrations against the legitimacy of the Maduro government have become a regular event. There have been several low-level defections among army troops, and a few senior officers have joined in with demonstrators.

The economic situation continues to deteriorate, with essential goods, food and medicines in short supply, while U.S. sanctions on the Venezuelan National Oil company, PDVSA, are reducing the income of the national government from oil sales. Rampant hyperinflation, around one million percent in 2018, has made the Venezuelan currency, the Bolivar, worthless, and large portions of the economy are in a virtual state of collapse.

The drama unfolding in Venezuela is one that has played out repeatedly in South America. A "strongman," typically from the military, takes power and introduces policies to redistribute income to the poorer segments of society and, in turn, leveraging their political support to stay in power. Invariably, these policies lead to a combination of widespread corruption, economic mismanagement, confiscatory taxation policies, high debt levels and hyperinflation created by the government overspending and debasing the national currency.

As former British Prime Minister Margaret Thatcher so eloquently put it, "The trouble with socialism is that eventually you run out of other people's money."

Even based on the past history of Latin America, however, the Venezuelan case has been an extreme one. Two factors, in particular, are responsible for the Chavez-Maduro regime lasting as long as it has: the leveraging of its oil reserves and widespread criminal activity at the highest levels of the government.

Venezuela has the largest oil reserves of any country in the world. The bulk of these reserves, however, are represented by heavy crude oil.

Heavy oil has an extremely low viscosity. It is difficult to extract and process, requires significantly more capital investment to bring on line, and has the added complications of being high in sulfur and heavy metals. The U.S. Geological Service has estimated that Venezuela's recoverable reserves of heavy crude exceed 500 billion barrels, roughly double Saudi Arabia's recoverable reserves.

The Maduro regime has been able to obtain loans, via PDVSA, of $74 billion -- $57 billion from China and $17 billion from Russia. In addition, Rosneft, the Russian state-owned oil company, has invested $2.57 billion in six oil fields in the Orinoco heavy oil belt and loaned PDVSA an additional $2.78 billion. Rosneft has earned an average of $500 million yearly from its direct investment in Venezuela's oil sector. In addition, PDVSA owes another $23 billion to other creditors.

The bulk of these loans were to be repaid via oil exports to China and Russia. As of January 2018, the amount of production earmarked to repay these loans amounted to 1.1 million barrels of oil per day (BOPD). At the time these loans began, Venezuelan oil production was running at around 3 million BOPD. But it was at 1.3 million BOPD in 2018 and is continuing to drop. It is clear that these loans cannot be repaid based on current production levels.

Some of these loans were made in accordance with Venezuela's constitution and were ratified by the National Assembly. Others, however, may be declared to have been illegal and canceled or disavowed by whichever government follows Maduro. Both Beijing and Moscow are acutely aware that they are at risk of losing billions of dollars if Venezuela defaults on its debts. That is one reason why both governments have continued to support the Maduro regime.

In addition, the Maduro government surreptitiously arranged for the sale of approximately $2 billion of Venezuela's gold reserves at a discount. These sales were not sanctioned by the Venezuelan National Assembly. It's likely that a new government will attempt to rescind them.

The Chavez-Maduro government used PDVSA as a piggy bank to fund its income distribution schemes. In the process, it also starved the company of badly needed capital investment to maintain its production capacity. Add a healthy dose of mismanagement and corruption, and the result is crashing oil production. It will likely take a decade of effort and substantial new investment from the major international oil companies to bring PDVSA's production back up to three million or more BOPD.

In addition to Venezuela's petroleum reserves, both China and Russia have tried to use their links to the Maduro government to expand their influence in Latin America.

Venezuela has also been a strong supporter of the Cuban government, which often functions as a Russian proxy, and has supplied it with, among other things, low-cost oil. Cuba, in turn, has supplied Maduro with a 250-member presidential security detail. And, according to Luis Almagro, secretary general of the Organization of American States, there are an additional 15,000 Cuban military and intelligence personnel in various roles in Venezuela.

Additionally, Iran and Venezuela have developed a strong working relationship. There have been approximately 300 members of the Iranian Revolutionary Guard Corps Quds Force (IRGCQF) in Venezuela since at least 2010. There are unconfirmed reports that the number of IRGCQF personnel have been increased significantly. Iran has invested heavily in developing Shiite communities in Latin America and has used Venezuela as a base from which to expand its influence throughout the continent.

The IRGCQF is involved in intelligence gathering, training of paramilitary groups in Colombia, and possibly elsewhere, and in the recruitment and training of operatives drawn from Venezuela's small, but influential, Shiite community. In addition, Quds Force (QF) trainers have been extensively involved in organizing, arming and training the government sponsored militias called the Redes de Movilización Immediata (REMI). The militias are modeled after the Iranian Basij militias -- the same template that was used to organize the Iranian-backed Shiite militias, the Popular Mobilization Forces, in Iraq.

These militias have already been used to break up anti-Maduro street demonstrations. They appear to be based primarily in Caracas. Their scope, however, is unclear. In recent weeks, there have been unconfirmed reports that the REMI have been given access to heavy-caliber weapons drawn from Venezuelan military depots.

A second element of Iranian influence in Venezuela is the role of the Iranian proxy Hezbollah. That organization has an extensive role in Latin America and has established broad links with a variety of criminal organizations there. Hezbollah is a major supplier of heavy-caliber weapons to the Mexican drug cartels, in particular the Sinaloa cartel -- the largest and most violent. It has also facilitated drug shipments of Colombian cocaine and Mexican heroin through Venezuela to West Africa and the Middle East and from there into Europe. In addition, it has been implicated in a range of money-laundering activities, both on behalf of its own criminal activities, and for Mexican and Colombian drug cartels.

In recent years, Venezuela, with the collaboration of the Venezuelan military, has emerged as an important logistical node in Hezbollah's worldwide criminal empire, as well as an important source of revenue with which it funds its activities throughout the Middle East.

The extent of Iran's and Hezbollah's influence at the highest echelon of the Venezuelan government is underscored by Maduro's appointment of Tareck El Aissami as the country's vice president from January 4, 2017, through June 14, 2018. Currently, he is the minister for industries and national production. El Aissami, who is of Lebanese and Syrian Druze origin, has long-standing ties to both Hezbollah and the IRGC.

When El Aissami was head of Venezuela's passport and naturalization office (ONIDEX), he was accused by American intelligence sources of issuing Venezuelan passports, citizenship certificates and identity documents to scores of Iranian security officers, as well as to Arab members of Iran's proxy organizations. He is also believed to be the front for a large number of Hezbollah-owned businesses based in Panama and Venezuela. Additionally, he has been accused by opponents of Nicolas Maduro with recruiting young Venezuelan Arab Shiites for paramilitary training with Hezbollah in Lebanon.

El Aissami also has long-standing ties to the Ayman Joumaa drug network in the Middle East. The Joumaa network is a major smuggler of narcotics into Europe. It has relied on Hezbollah to launder money and often relies on Hezbollah to provide security for drug shipments.

Recently, he was also implicated in an attempt by two of Maduro's nephews to smuggle 800 pounds of cocaine, worth an estimated $80 million, into the U.S. Called the Narcosobrinos (narco-nephews) affair by Venezuelan media, it was alleged that El Aissami facilitated the logistics, including at one point, supplying a Venezuelan military plane to move the cocaine from Venezuela to Honduras.

On February 13, 2017, the U.S. Treasury Department sanctioned El Aissami, under the Foreign Narcotics Kingpin Designation Act. According to the U.S. Drug Enforcement Administration, he was accused of facilitating drug shipments from Venezuela to Mexico and the U.S., as well as money laundering. Tens of millions of dollars of assets, purportedly under his control, were subsequently frozen by the U.S. government.

The billions of dollars in drug money, among other criminal pursuits, has created widespread corruption, not only throughout the government of Nicolas Maduro, but also throughout the senior leadership of the Venezuelan military. That is one reason why the Venezuelan military has, by and large, continued to support the Maduro government.

The End Game

The final phase in the collapse of South American strongmen is typically the point at which the military switches sides. The typical scenario is that troops deployed to quell civil unrest begin to openly side with protesters. As the military's rank and file begin to move away from the government and its own military leadership, senior military officers are forced to choose between maintaining the integrity of the armed forces and some semblance of the chain of command or continuing to support the government. Invariably, they opt to switch sides, since in doing so they preserve their own influence within the military and their leverage going forward.

The Venezuelan military has not yet reached this point. The opposition movement, led by Juan Guaidó, has made an offer of amnesty for senior military officers. To date, however, the senior leadership has continued to side with Maduro.

The situation in Venezuela is particularly complex for two reasons. First, the billions of dollars in bribes and illegal payments that have coursed through the Venezuelan government have completely corrupted the military leadership and also largely insulated them from the economic havoc occurring in the country.

Second, the presence of some 15,000 Cuban troops, an unspecified number of IRGCQF personnel, as well as the armed REMI militias, means that even if the senior military leadership were to abandon the Maduro government, it is likely that the regime would resort to violence to stay in power and that a de facto civil war will break out in Venezuela.

Alternatively, given the degree of corruption within the military and the extensive links between the Venezuelan military and the drug trade, along with organizations like Hezbollah and the IRGC, an amnesty for the military leadership could well serve to institutionalize both the corruption endemic in Venezuela today and the criminal activities that the military has participated in with Hezbollah and other proxy organizations.

In the long run, while it makes the replacement of the Maduro regime more difficult, uncertain and bloodier, what Venezuela and its people need for long-term stability is a clean house. They will not get that from granting a corrupt military leadership amnesty.

The end game of the Maduro regime has started, but it still has a way to go before it's over.

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