Russia Put All of Its Eggs in Chavezĺs Basket
Published: March 13, 2013 (Issue # 1750)
Theádeath ofáVenezuelan President Hugo Chavez has forced Russian leaders toáworry about theáfate ofábillions ofádollars inácontracts it holds there, primarily ináthe oil andáweapons sectors.
Moscowĺs trade andáeconomic relations with Caracas were typical ofáthose it has established with similar, autocratic regimes elsewhere; that is, they hinged almost completely onárelations with one person atáthe top. Theáproblem, ofácourse, is that relations are highly vulnerable when theáleader is deposed or dies.
During Chavezĺs reign, he nationalized hundreds ofáprivate companies, including foreign firms. He kicked U.S. oil companies out ofáVenezuela overnight after he concluded that Washington was plotting against him. He expelled them without any compensation andáin violation ofácontractual obligations. But Chavez was above theálaw.
Chavez was personally behind all theámajor projects with Russia ináenergy, transportation, weapons purchases andábanking. Foráexample, military andátechnical cooperation with Russia toárearm theáVenezuelan army took off ináfull force iná2005-06 after theáU.S. refused toásupply theácountryĺs military with spare parts. Moscow signed military andátechnical contracts with Caracas totaling $11 billion, ofáwhich $4 billion is financed with Russian credit. As ofátoday, $6 billion inácontracts has been fulfilled.
Now that Chavez is gone, theáone factor that has always worked against RussiaáŚ its lack ofátechnological innovationáŚ will play anáeven larger role ináVenezuela turning toáChina instead ofáRussia forámilitary andátechnical cooperation. Whatĺs more, with deepening economic difficulties andáa resultant currency shortage, Venezuela might have trouble paying off its large debt toáRussia.
Russian oil companies should expect even more serious problems. State-owned Rosneft has already signed aácontract with theáVenezuelan state-owned PDVSA oil company toádevelop theáCarabobo-2 heavy oil field ináthe Orinoco River basin as part ofáa joint venture ináwhich Rosneft holds aá40 percent stake. Rosneft is also part ofáa consortium with LUKoil, TNK-BP andáGazprom Neft that is working onáthe Khunin-6 project, also ináthe Orinoco River basin. Those companies were required toápay theáVenezuelan government $1 billion each just foráthe right toájoin theáprojects, andáaccording toávarious estimates, their additional combined investment over many years will reach $40 billion.
It seems that there is more politics than profit behind these projects forátwo reasons. First, it is strange foráRussian oil companies toáinvest tens ofábillions ofádollars ináa country with anáunpredictable future, especially when similar projects atáhome are terribly underfunded. Second, it has always been extremely difficult toáwork ináVenezuela, andáall theámore so now that Chavez, Moscowĺs loyal friend andáally, has died. Chavez did not leave theácountry ináthe best condition. He doubled theásize ofáthe bureaucracy, which brought corruption andáinefficiency toásuch high levels that theácountry is onáthe brink ofácollapse. Theácountryĺs infrastructure is ináruins, andáforeign companies might be forced one way or another toáfinance expensive infrastructure programs fromátheir profits.
Notably, Rosneft head Igor Sechin, who attended Chavezĺs funeral last week, spoke with actingá President Nicolas Maduro regarding theádelicate issue ofáthat countryĺs unfulfilled contractual obligations toáother Russian companies, including RusHydro. Russia might not have enough political andáeconomic leverage toáinfluence theábehavior ofáthe new Venezuelan leadership, whichever happens toáemerge. Ofácourse, Moscow prefers Chavezĺs hand-picked successor, Maduro, who is favored toáwin theáelection. But under theápressure ofámounting economic problems, Maduro might take aámore balanced andápragmatic approach, including subduing anti-U.S. rhetoric andáturning toáthe U.S. andáChina foráinvestment andálarge contracts.
Russian-Venezuelan relations could be complicated even further if opposition leader Henrique Capriles Radonski wins theápresidential election onáApril 14. Even if Maduro wins, relations with Moscow will probably deteriorate all the same. Russian-Venezuelan relations are fundamentally fragile. Compare them toáthe long andáwell-developed relationship between Cuba andáVenezuela. Cuba has sent about 40,000 workers toáVenezuela, including more than 5,000 specialists inásports, health care andáeducation, andáhas acted as theáinitiator andáco-participant inámany important social projects. Simply expelling such aápartner like Cuba would be difficult, even if aáright-wing leader were toácome toápower, because that relationship is deeply woven intoáthe fabric ofáVenezuelaĺs economic andápolitical life. But since theácollapse ofáthe Soviet Union, Russia has showed little enthusiasm forálarge-scale programs designed toábuild aábroad base ináother countries.
Notably, China has taken this broad approach toward building relations with developing states like Venezuela, andáas aáresult, Beijing enjoys aásteadily growing economic presence ináthose countries, even when ruling regimes change. Inácontrast, Moscow continues toáfocus its bilateral relations onátop leaders andátheir small inner circles ináthese countries. This might be fine as long as they remain inápower, but as soon as they are gone, Russia risks losing political capital andábillions ofádollars inácontracts.
Georgy Bovt is aápolitical analyst.