By Marin Katusa, Chief Energy Investment Strategist
Hugo Chàvez is undoubtedly one of the most polarizing politicians in the world today. The man who has led Venezuela for 14 years is vehemently anti-American, a proud voice for Venezuela’s poor, a patriot and a poet, and a firm believer that national resources belong to the nation and no one or nothing else.
That final Chàvez mainstay – that resources are best and most appropriately managed by the people for the people – has positioned Venezuela at the head of a group of Central and South American nations that are trying resource nationalization on for size as they struggle to make the most out of their oil and gas bounties. Venezuela is a global oil heavyweight – its 211-billion-barrel reserve is one of the top three national oil reserves worldwide – so Chàvez’s moves to nationalize his country’s massive oil machine gave neighboring countries the confidence to follow suit.
Sometimes national control over oil and gas resources can work well. Saudi Arabia, Brazil, and Kuwait are all prime examples of well-functioning, state-controlled oil sectors. However, resource nationalization is a tricky business, and more often than not the process goes awry.
Venezuela is no exception. Chàvez’s efforts to kick foreign firms out of Venezuela and use oil and gas revenues to fund social programs worked pretty well initially, but despite rising oil prices that early success has slipped away. In recent years Chàvez has demanded too much from the oil and gas sector, expecting ever-increasing revenues despite his reluctance to fund infrastructure and exploration programs. The result has been declining production, an exodus of technical expertise, and a pariah reputation in the international oil and gas industry.
Now, with a presidential election looming and Chàvez struggling with a cancer that it’s rumored will take his life within months, the path forward for the country that has been a firebrand for South American resource nationalization is far from clear.
Venezuela’s Love-Hate Relationship with Resource Nationalization
Venezuela nationalized its oil industry in 1976, at a time when many countries in the southern hemisphere were asserting sovereignty over their natural resources. The transformation of Petróleos de Venezuela SA (PDVSA) into a state-owned company was hailed as a national victory. However, it did not take long for trouble to begin.
In the 1990s global oil prices plunged and Venezuela, having based its budget on a certain level of oil income, found itself in deep economic trouble. PDVSA had 900 to 1,300 billion barrels of oil on its reserve books, but the company didn’t have the money or the technological know-how to tap into these reserves, most of which sat trapped in the geologically challenging Orinoco Belt. Seeing few other options, the country opened its oil sector to foreign investors: PDVSA started seeking out international partners willing to provide expertise and funding in exchange for a share of the profits. Big Oil arrived and started spending billions of dollars to unlock the heavy oil of the Orinoco.
Then Mr. Chàvez won the 1998 presidential election on a populist ticket that promised to use the country’s vast oil wealth to benefit the poor. Venezuela’s experiment with foreign involvement in its oil sector slowly came to a halt. Despite initially adopting “orthodox” economic policies, Chàvez soon started making good on his promise to his people – he gradually closed the door on international investment, raised rents, and changed fiscal agreements to retain ever more oil revenue for Venezuela. Imagine this: at one point the government take on oil contracts was more than 100% – foreign producers would have had to pay Chàvez for the privilege of producing oil in his country.
Chàvez brought a new form of politics to Venezuela. He identified with his supporters because he was one of them, having grown up poor, and he used language they understood, caring not that the elites saw such language as one of many signs that he was a buffoon with limited education and experience. His style stuck and the people grew to love him.
As he gained in popularity and confidence, Chàvez grew bolder in his moves to control Venezuelan oil in its entirety. In 2002 a group of PDVSA executives kick-started a general strike aimed at ousting Chàvez that lasted for a month and cut oil production to about 30% of normal levels; in response Chàvez fired nearly half of the company’s employees – 18,000 people in all – erasing large swaths of technical know-how in one fell swoop but sending a clear message that he would not tolerate dissent against his control over Venezuela’s oil.
By 2007 Chàvez had gained enough confidence to essentially complete his oil renationalization campaign – he expropriated oil assets in the Orinoco by issuing a decree that PDVSA hold at least 60% ownership in all international partnerships. What little was left of Big Oil pretty much packed up and left Venezuela. National oil production immediately fell by 25%.
You could say that was the beginning of the end, or the end of what had been a great beginning. That great beginning was undoubtedly aided by rising global oil prices: when Chàvez came to power, oil prices were sitting near $12 per barrel. By 2006 prices were averaging almost $60 a barrel, Venezuela’s coffers were overflowing, and the Venezuelan president felt unstoppable.
Those rising prices created such a sense of success around Chàvez’s experiment with renationalizing Venezuela’s oil and gas sector that Chàvez was able to convince his compatriot leaders in South America to follow in his footsteps. And it worked – Bolivia and Ecuador renationalized their oil sectors, and the concept of resource nationalization took hold in Argentina. As his geopolitical influence grew, Chàvez also devoted attention to the oil-needy nations in his neighborhood, implementing an oil-transfer program to energy-needy Central American and Caribbean countries. With his oil sector seemingly able to provide for so many, resource nationalization took on new life across South America, and Chavez was the movement’s proudest spokesman.
But here the word “seemingly” is key. As oil prices rose, PDVSA profits also rose, and it seemed that nationalization had been a boon to Venezuelan oil. But the increased profitability stemmed only from rising prices; the company itself was being strangled by a lack of investment – Chàvez spent all of PDVSA’s profits on his domestic fuel subsidies and social programs – and its dearth of technical expertise.
In short, a sector can only provide profits if it is also supplied with investment; and that is where Chàvez went wrong. Like so many other socialist leaders who nationalized resource sectors with great fanfare only to see the sectors wither away because of insufficient TLC, Chàvez failed to put money back into PDVSA.
Now the country’s once-proud oil and gas sector is in disarray. Infrastructure is old and insufficient, and production volumes are declining instead of climbing. In 2005 the company launched a new six-year plan calling for investment of US$239 billion to boost oil production to 5.8 million bpd by 2012. Instead, output has fallen from 2.9 million barrels per day (bpd) to 2.5 million bpd. Things are even worse when you look at Chàvez’s tenure as a whole: from 1998 to today, production has fallen from 3.5 million bpd to 2.5 million bpd, a decline of almost 30%:
Not only has production declined, but PDVSA’s financials have also deteriorated dramatically, its debt increasing from US$2.7 billion in 2005 to some US$33 billion now. Yet PDVSA continues to borrow money at an incredible rate, in large part to fund those domestic oil subsidies that are so very popular among Chàvez supporters. These subsidies cost the company US$15 billion a year.
The view forward is unclear. PDVSA lacks the technical expertise to take advantage of the heavy oil in the Orinoco. With foreign investment – and therefore involvement – in the oil sector banned and PDVSA drowning in debt, the prospects for turning Venezuela’s fading oil sector around are pretty dim.
Unless, of course, the sector is opened up to outside investment… which could well happen if Chàvez ceases to be part of the picture.
Over the last 12 months Chàvez has made regular trips to Havana for cancer treatments. The only official information about these treatments is that two malignant tumours were removed from his pelvic region. The secrecy surrounding Chàvez’s cancer and the fact that Chàvez, who rarely goes a few days without speaking directly to his people, enters radio silence during his trips to Cuba have fueled rumors of his declining health. Several times already these have ballooned into claims that the Venezuelan president had died.
The latest twist in the Chàvez cancer drama came from venerated journalist Dan Rather, the former CBS anchor who now hosts and directs Dan Rather Reports, a weekly news television show on HDNet. In a report he labeled as “exclusive,” Rather revealed on May 30 that he had been told that Chàvez is suffering from metastatic rhabdomyosarcoma, a rare and aggressive cancer that has “entered the end stage.” Rather said the information came from a highly respected source who is close to Chàvez and in a position to know his medical condition and history. This source says the prognosis is dire and that Chàvez is not expected to live “more than a couple of months at most.”
This is not the first time rumors of Chàvez’s pending death have surfaced. However, with his treatment having dragged on for a year already, with his uncharacteristic disappearances to Cuba growing longer and more frequent, and with Rather’s reputation for accuracy lending credence to this new information, it is time to ponder Venezuela – and South America – without Hugo Chàvez.
Chàvez would be incredibly difficult to replace. His rags-to-riches story line, bold governing style, and idiosyncratic mannerisms have earned adoration from the Venezuelan population, especially the poor and working class masses who constitute his prime electoral base. He also enjoys broad support from Venezuela’s military members.
This is a president who announces executive orders between readings of poetry, regularly draws families around their televisions to listen to his lengthy and often fiery speeches, and sings Venezuelan folk songs on a weekly show called Hello President. There are few people in the world who could match his charisma and earn such allegiance from a national population. That is why, even though others from Chàvez’s inner circle bear similar political views, most observers think any Chàvez successor would have a very difficult time maintaining the Chavista movement.
So when Chàvez dies, what might become of Venezuela? In the immediate aftermath, Vice President Elías Jaua would take power, according to the Constitution. In fact, Chàvez recently formed a nine-member State Council headed by Jaua to assist him with executive duties, a move many interpreted as a preparation for his impending demise.
In the longer term, Venezuelan political observers see five potential successors within Chàvez’s Socialist Party. All hold similar views, but none enjoy anything close to Chàvez’s recognition and support. The Party would have to hope that Chàvez’s reputation can carry one of these candidates to the presidency, but such a succession is far from assured.
If Chàvez dies before the October presidential election, opposition candidate Henrique Capriles would suddenly see his odds of winning jump dramatically. Polls show Capriles currently lagging behind Chàvez by roughly 5%, but the same polls found that Capriles would win the race by double-digit margins if he were to face a Chàvez successor instead of facing Hugo himself… unless, of course, the Socialists rig the election. Given that Chàvez has proven that a high regard for democracy is not a required characteristic for someone holding the Venezuelan presidency, this is not unlikely.
Capriles is a veteran politician, having previously served as governor of the state of Miranda despite being just 39 years old. He is a center-left politician who has cleverly focused on issues close to the day-to-day lives of Venezuelans: crime, corruption, declining services, inflation, and jobs. Capriles’ petroleum policies are less clear, but his rare comments on the matter indicate he would keep PDVSA as a national entity while allowing the company to engage in investment partnerships with foreign firms, much like the Brazilian national oil firm Petrobras.
If Chàvez is healthy enough to run, he will almost certainly win the election in October. If he is not, we see two possible paths. The first is that Capriles finds himself president of Venezuela, and South America loses its resource nationalization ringleader. However, a desire to change how Venezuela’s oil sector operates is very different from the actual ability to do so. The biggest obstacle to change: those domestic oil subsidies. If Capriles wants to revitalize PDVSA – indeed, if he simply wants to give PDVSA a chance at economic survival – he would have to significantly reduce the domestic oil subsidies, and likely also reduce social spending to free up some oil revenues for reinvestment into the country’s oil fields. And that would cause riots. We have seen it before, most recently in Nigeria: populations that are accustomed to having access to cheap oil are highly unwilling to let go of that benefit and will riot, often violently and for extended periods, at the mere suggestion that gas prices need to increase.
Oil-related riots in one of the world’s top-ten oil-producing nations would undoubtedly push global oil prices higher.
The other potential path for a post-Chàvez Venezuela is that his successor within the Socialist Party wins the presidency, legitimately or with the aid of electoral fraud. This Chàvez clone would then be stuck trying to fill Hugo’s shoes, a near-impossible task in which he would only have a chance at success by promising even more in the way of social spending. These expensive programs would put even greater strain on Venezuela’s budget, which is funded in large part by revenues from PDVSA. There would continue to be no money available to finance PDVSA’s spending needs, and production would continue to decline.
Guess what? This scenario – of continued production decline in a major world supplier – would also push global oil prices higher. The bottom line is that Chàvez has created a lose-lose scenario for Venezuelan oil. The country has become reliant on a one-way flow of money and cheap oil from PDVSA to society, but after a decade of neglect PDVSA is withering away and the flows are drying up. Even if Chàvez dies and a left-leaning leader like Capriles comes to power, Venezuela will have to convulse through many ugly years before a functional relationship can be reestablished between its oil riches and its social demands. In the meantime, Venezuelans and the world will have to do with only limited access to Venezuelan oil.
So, for those of us positioned to gain from a long-term rising oil price, it’s heads we win, tails we win.
Oil Prices to Ease Further This Year (Reuters)
The CEO of Royal Dutch Shell expects oil prices to continue easing through the rest of the year, as demand reacts to a slowing global economy and international tensions ease. Peter Voser’s statement came just as Brent crude dropped to a 16-month low – below US$96 per barrel – on the heels of further weak economic news from the US and China. In addition, concerns over the state of the European economy have taken the spotlight away from the lingering tensions between Iran and Western powers, which just three months ago helped to push Brent above US$128 a barrel.
Global demand for natural gas will rise by 2.7% annually for the next five years, a faster growth rate than previously expected. China and the United States are driving the additional demand by switching from coal to gas to generate electricity. In China alone consumption is expected to double to 273 billion cubic meters in 2017 from 130 billion cubic meters today, representing an average growth rate of 13% per year.
King Coal Still Reigns Despite Drop in Prices (Vancouver Sun)
Canadian coal companies are not slowing down exploration nor development programs despite a drop in prices in China, their main export market. Companies are generally viewing depressed prices as a transient problem and see demand from Asia remaining strong in the medium term, especially for British Columbia’s high-quality metallurgical coal.
South Sudan’s $4-Billion Question Answered: Oil Revenue Stolen by Corrupt Officials (The Globe and Mail)
It has been a mystery for years: how does South Sudan remain so poor and hungry when it receives billions of dollars in oil revenues every year? The answer is now clear: South Sudan’s president says corrupt officials have stolen $4 billion in oil revenues since 2005. He is asking those officials to return the stolen funds. Any returned funds would be especially useful at the moment, because a dispute with Sudan has shut in South Sudan’s oil production and thereby eliminated about 98% of the government’s official revenue.
Oil Rush in the Arctic Gambles with Nature and Diplomacy (The Guardian)
A small group of international scientists, politicians, and business leaders are gathered in the Ny-Alesund research station on the Norwegian island of Svalbard to discuss the path to a global low-carbon economy. Meanwhile, just outside the station an oil rush looms – one that threatens to spark territorial disputes and saber-rattling as a host of nations compete to claim rights to the Arctic seabed.
Germany Plans Massive Wind Power Grid (The Globe and Mail)
Germany’s utilities have tabled plans to build four high-voltage electricity lines to link wind turbines off the north coast with manufacturing centers in the south. The plan is a boost for Angela Merkel, who has been criticized for announcing an accelerated nuclear-power phase-out a year ago without producing an alternative plan. The lines are expected to cost around €20 billion
- Venezuela expands China oil-for-loan deal to $8 billion (chinadailymail.com)
- Report: Chavez’s Cancer Has Metastasized (hispanicallyspeakingnews.com)
By Brian Winter SAO PAULO | Thu Jan 12, 2012 9:20am EST
(Reuters) – Here’s an economic riddle of sorts: Which economy grew faster over the last seven years? A) President Hugo Chavez‘s Venezuela, famous for its forced nationalizations and “21st century socialism,” or B) Chile, long renowned as a capitalist paradise for investors.
It might surprise some outsiders to learn that the answer is actually A. In recent years, commodities prices have dictated growth in Latin America more than any other factor, meaning that countries could trample on businesses but still grow briskly as long as they exported plenty of raw materials such as oil and iron ore to China and elsewhere.
Venezuela, the region’s No. 1 oil exporter, has averaged about 4.6 percent economic growth since 2005, compared to 4 percent in Chile, the world’s leader in copper. An even clearer example of commodities’ almighty reign was Argentina, which averaged 7 percent growth during the same period as record soy and other farm exports helped offset the government’s hostile stance toward energy companies and some other investors.
Now, it looks as if the trend is shifting. In Latin America, 2012 seems set to be the year in which business climate clearly reestablishes its supremacy as the main driver of growth.
The countries expected to grow the fastest in 2012 are also generally the ones that are perceived by the World Bank and others as treating investors the best. That means Chile, Peru and Colombia should lead the pack, while Venezuela and even Brazil will lag a step behind – just as they did last year.
Graphic on region’s economies: r.reuters.com/bed95s
What has changed? The global economy.
Demand for many commodities is expected to slacken in 2012 due to economic problems in buyer markets such as China and Europe. That means it will be up to Latin American countries to generate more of their own growth – and the ones that fare best will be those who have made their labor laws more flexible, cut red tape, and taken other steps to stimulate business.
“There’s no question we’re seeing a change,” said David Rees, Latin America economist for Capital Economics in London. “The external drivers of growth are drying up and these countries will have to look to other sources like investment in order to keep up the pace.”
A DOGFIGHT FOR FIRST PLACE AMONG INVESTORS
One way to measure the trend is by looking at the World Bank’s annual “Doing Business” study, which ranks the business climate in 183 countries around the world based on how well they protect investors; the ease of starting a business; the simplicity of paying taxes; and other factors.
The cluster of Latin American countries that rank a clear step above their other regional peers in the survey are Chile (39), Peru (41) and Colombia (42).
All three of those economies are forecast to grow 4.5 percent or more this year, according to the International Monetary Fund‘s latest forecasts, made in October. Countries that rank lower in the Doing Business survey, such as Guatemala (97), Brazil (126) and Venezuela (177) are all forecast to grow in the 3.5 percent range or lower.
The divergent trend is even more pronounced in more recent 2012 forecasts by Wall Street firms such as Morgan Stanley.
The region’s other two big economies also appear to be headed in opposite directions.
Growth in Argentina (113) is expected by the IMF to be around 4.5 percent this year – but that’s just about half of last year’s pace. Meanwhile, Mexico’s (53) relatively open, low-tax economy should show resilience, with growth of 3.6 percent – well above its roughly 2 percent trend level since 2005.
Most of the countries at the top of the economic league table have vigorously implemented pro-business reforms in recent years, often with the explicit goal of improving their standing in the Doing Business rankings.
Peru, Chile and Colombia have been battling each other for supremacy within Latin America for years, said Luis Plata, a former Colombian trade minister. “We fought hard to be first,” he said in an interview. “It became a competition.”
“The rankings improve your standing with investors, but … the real reason to do it is to help you identify deep changes in the system, things that will help your economy grow better,” Plata said.
For this year’s “champion,” the dividends are clear. Chile saw foreign investment of $13.79 billion in 2011, a historic high that contributed to the country’s fastest economic growth in years. A top Chilean official told Reuters last month that the government expects a new record in foreign investment this year.
STALLED REFORMS IN BRAZIL
In countries closer to the bottom of the table, attitudes are notably different.
Argentine President Cristina Fernandez has shown few signs of softening an antagonistic stance toward some investors that in recent years has seen her government nationalize private pension funds and face widespread suspicions of manipulating basic economic data such as inflation.
Venezuela’s economy remained buoyant for years thanks largely to its status as South America’s biggest oil exporter, but Chavez’s frequent confrontations with business have hollowed out much of the private sector and left the economy dependent on state spending.
In Brazil, Latin America’s largest economy, the picture is slightly more complex. While successive governments have catered to private enterprise to a much greater extent than Argentina and Venezuela, Brazil has also failed to push any major pro-business reforms through Congress in a decade.
As a result, investors have become frustrated with the country’s high costs and red tape. Brazil dropped six spots in the latest Doing Business survey – more than any other big economy in Latin America – and ranks in the world’s bottom third in categories such as trading across borders, dealing with construction permits, and ease of paying taxes.
Partly as a result of the business climate, some economists believe that Brazil may be downshifting into a new era of 3 percent to 4 percent economic growth, which would be a letdown after the faster pace of previous years.
“Brazil hasn’t kept pace with some other (Latin American) countries on some of the really important long-term questions, and they may pay the price for that,” said Gray Newman, chief Latin America economist for Morgan Stanley.
“People focus on things like inflation, and that’s good, but what about – How long does it take to open a business? How easy is it to hire and fire?” Newman said. “The economies that are moving forward are the ones that have looked at those metrics, and have put them at the heart of government policy.”
(Editing by Todd Benson and Kieran Murray)
- Iranian president to tour Latin America (mb50.wordpress.com)
- Here’s What Lies Ahead For Latin America This Year (businessinsider.com)
- Ahmadinejad in Latin America: What’s Iran’s Agenda in the Western Hemisphere? (globalspin.blogs.time.com)
- Why Your Business Needs Latin America (greatfinds.icrossing.com)
- 2011 Tech Rewind: This year in Latin America (thenextweb.com)
- Iran’s president looks to Latin America as global sanctions grow (news.blogs.cnn.com)
- Is there a threat to the U.S. behind meetings of Latin American, Iranian leaders? – Alaska Dispatch (alaskadispatch.com)
The Iranian president, Mahmoud Ahmadinejad, is due to touch down in Venezuela on Sunday on the first leg of a Latin American tour aimed at lifting his regime out of international isolation and bolstering its sanctions-hit economy.
Ahmadinejad, who is facing growing economic discontent at home and pressure from the west over Iran’s disputed nuclear programme, will also visit Nicaragua, Cuba, Ecuador and possibly Guatemala in a search for new and improved economic partnerships to reduce the impact of sanctions. The five-day Latin America visit is scheduled to start in the Venezuelan capital, Caracas, with meetings with president Hugo Chávez, a long-time ally.
Ahmadinejad is then expected to travel to Managua for the swearing-in of the Nicaraguan president, Daniel Ortega, before travelling to Cuba and Ecuador. Reports suggest he may also visit Guatemala.
The president’s entourage is expected to include the energy minister, Majid Namjoo, who has said the tour is aimed at promoting commercial ties with Latin American countries. Analysts view Ahmadinejad’s excursion as a reaction to growing economic difficulties at home and political isolation abroad.
Michael Shifter, president of the Washington-based thinktank Inter-American Dialogue, said Iran had economic and geopolitical agendas in Latin America.
“Iran has real economic difficulties and is isolated, so the trip makes sense in that context,” he said. “Latin America, in contrast, is in pretty good economic shape and is increasingly active in global, diplomatic affairs.”
Maria Teresa Romero, professor of international studies at the Universidad Central de Venezuela, said the trip was also intended as a warning signal to Washington.
“That Iran’s president has chosen to visit the region – and only the more staunch political opponents to the US – at a moment when tensions between the US and Iran are escalating is a challenge, a threat, from the Iranian government to the US that sends a clear message: ‘We can go to your backyard when we want to,'” she said.
Iran is grappling with a range of domestic and international problems.Its currency, the rial, has plunged to a record low in recent weeks, causing mayhem at the Iranian stock market and prompting fears over the future effects of the sanctions on the economy.
High unemployment, political power struggles and fears of unrest before the parliamentary elections in March have made the domestic political atmosphere increasingly tense.
At an international level, Iran has resorted to sabre-rattling and threatening countries involved in a campaign to bring sanctions against its central bank and impose a ban on the import of its oil.
Iran raised the stakes, warningthe west it might close the strait of Hormuz, a strategically important passageway in the Gulf through which one fifth of the world’s oil is transported, should greater sanctions on its oil be imposed.
Latin America has become an increasing priority for Ahmadinejad since his election in 2005. New embassies have opened in six countries, while state-run Press TV has also been beefing up its presence in the region, with correspondents in Caracas and more recently Sao Paulo.
On the eve of Ahmadinejad’s visit, one Press TV report said: “The promotion of all-out co-operation with Latin American countries is among the top priorities of the Islamic republic’s foreign policy.”
But Shifter said Iran’s president should not hope for big advances during his tour. Ahmadinejad will not visit Brazil, the regional economic powerhouse, as he did during his previous visit in 2009 – an indication that relations have cooled since Dilma Rousseff took over as president.
“Iran should probably keep its expectations in check. If Iran’s goal is to extend its influence, Latin America does not offer a hospitable environment. It is telling that the larger, more significant countries are not part of Ahmadinejad’s itinerary. These countries may want greater independence from Washington, and may be flexing their muscles a bit on the global stage, but they are not keen to be aligned strategically with Tehran,” he said.
Romero said that in the case of Hugo Chávez, who faces a tricky presidential election in October, the visit could even backfire.
“This is an electoral year in both the US and Venezuela, and I would be surprised if the Republicans don’t use this kind of event to exert more pressure on the Obama administration. I think sanctions against Iran are likely to strengthen, but I also think they could be extended to Venezuela.”
- State Department: Ahmadinejad Trip to Latin America a Sign of Desperation (foxnews.com)
- US: Iran ‘flailing’ for friends in Latin America (seattletimes.nwsource.com)
- Iran Leader’s ‘Tour of Tyrants’ Raises Concerns – Military.com (m.military.com)
- Iran accused of diplomacy offensive in US backyard (smh.com.au)
- Iran Seeking To Expand Influence In Latin America (mysanantonio.com)
- Iranian president expected to visit Latin America – Los Angeles Times (latimesblogs.latimes.com)
Written by: FPRI December 22, 2011 By Vanessa Neumann
Press stories, as well as a television documentary, over the past two months have detailed the growing cooperation between South American drug traffickers and Middle Eastern terrorists, proving that the United States continues to ignore the mounting terrorist threat in its own “backyard” of Latin America at its own peril. A greater portion of financing for Middle Eastern terrorist groups, including Hezbollah and Al Qaeda, is coming from Latin America, while they are also setting up training camps and recruiting centers throughout our continent, endangering American lives and interests globally. Some Latin American countries that were traditional allies for the U.S. (including Venezuela) have now forged significant political and economic alliances with regimes whose interests are at odds with those of the U.S., particularly China, Russia and Iran. In fact Iran and Iran’s Lebanese asset, “the Party of God,” Hezbollah, have now become the main terror sponsors in the region and are increasingly funded by South American cocaine.
Venezuela and Iran are strong allies: Venezuelan President Hugo Chávez and Iranian President Mahmoud Ahmadinejad publicly call each other “brothers,” and last year signed 11 memoranda of understanding for, among other initiatives, joint oil and gas exploration, as well as the construction of tanker ships and petrochemical plants. Chávez’s assistance to the Islamic Republic in circumventing U.N. sanctions has got the attention of the new Republican leadership of the House Foreign Affairs Committee, resulting in the May 23rd, 2011 announcement by the US State Department that it was imposing sanctions on the Venezuelan government-owned oil company Petróleos de Venezuela (PDVSA) as a punishment for circumventing UN sanctions against Iran and assisting in the development of the Iran’s nuclear program.
Besides its sponsored terrorist groups, Iran also has a growing direct influence in Latin America, spurred by three principal motivations: 1) a quest for uranium, 2) a quest for gasoline, 3) a quest for a base of operations that is close to the US territory, in order to position itself to resist diplomatic and possible military pressure, possibly by setting up a missile base within striking distance of the mainland US, as the Soviets did in the Cuban Missile Crisis. FARC, Hezbollah and Al Qaeda all have training camps, recruiting bases and networks of mutual assistance in Venezuela as well as throughout the continent.
I have long argued that Latin America is an increasing source of funding for Middle Eastern terrorism and to overlook the political changes and security threats in the region with such geographic proximity to the US and its greatest source of immigrants is a huge strategic mistake. It was inevitable that South American cocaine traffickers and narcoterrorists would become of increasing importance to Hezbollah and other groups. While intelligence officials believe that Hezbollah used to receive as much as $200 million annually from its primary patron, Iran, and additional money from Syria, both these sources have largely dried up due to the onerous sanctions imposed on the former and the turmoil in the latter.
A recent New York Times front-page article (December 14, 2011) revealed the extensive and intricate connections between Hezbollah and South American cocaine trafficking. Far from being the passive beneficiaries of drug-trafficking expats and sympathizers, Hezbollah has high-level officials directly involved in the South American cocaine trade and its most violent cartels, including the Mexican gang Los Zetas. The “Party of God’s” increasing foothold in the cocaine trade is facilitated by an enormous Lebanese diaspora. As I wrote in my May 2011 e-note, in 2005, six million Muslims were estimated to inhabit Latin American cities. However, ungoverned areas, primarily in the Amazon regions of Suriname, Guyana, Venezuela, Colombia, Ecuador, Peru, Bolivia, and Brazil, present easily exploitable terrain over which to move people and material. The Free Trade Zones of Iquique, Chile; Maicao, Colombia; and Colón, Panama, can generate undetected financial and logistical support for terrorist groups. Colombia, Bolivia, and Peru offer cocaine as a lucrative source of income. In addition, Cuba and Venezuela have cooperative agreements with Syria, Libya, and Iran.
Some shocking revelations into the global interconnectedness of Latin American governments and Middle Eastern terrorist groups have come from Walid Makled, Venezuela’s latter-day Pablo Escobar, who was arrested on August 19, 2010 in Cúcuta, a town on the Venezuelan-Colombian border. A Venezuelan of Syrian descent known variously as “El Turco” (“The Turk”) or “El Arabe” (“The Arab”), he is allegedly responsible for smuggling 10 tons of cocaine a month into the US and Europe—a full 10 percent of the world’s supply and 60 percent of Europe’s supply. His massive infrastructure and distribution network make this entirely plausible, as well as entirely implausible the Venezuelan government did not know. Makled owned Venezuela’s biggest airline, Aeropostal, huge warehouses in Venezuela’s biggest port, Puerto Cabello, and bought enormous quantities of urea (used in cocaine processing) from a government-owned chemical company.
After his arrest and incarceration in the Colombian prison La Picota, Makled gave numerous interviews to various media outlets. When asked on camera by a Univisión television reporter whether he had any relation to the FARC, he answered: “That is what I would say to the American prosecutor.” Asked directly whether he knew of Hezbollah operations in Venezuela, he answered: “In Venezuela? Of course! That which I understand is that they work in Venezuela. [Hezbollah] make money and all of that money they send to the Middle East.” A prime example of the importance of the Lebanese diaspora in triangulating amongst South American cocaine and Middle Eastern terrorists, is Ayman Joumaa, a Sunni Muslim of the Medellín cartel with deep ties with Shiites in the Hezbollah strongholds of southern Lebanon. His indictment made public on Tuesday “charges him with coordinating shipments of Colombian cocaine to Los Zetas in Mexico for sale in the United States, and laundering the proceeds” (NY Times, Dec. 14, 2011).
The growing routes linking South American cocaine to Middle Eastern terrorists are primarily from Colombia through Venezuela. According to an April 2011 report by the United Nations Office on Drugs and Crime (UNODC) the Bolivarian Republic of Venezuela is the most prominent country of origin for direct cocaine shipments to Europe, with the cocaine coming mainly from Colombia, primarily the FARC and ELN terrorist groups. Shipments to Africa, mostly West Africa, gained in importance between 2004 and 2007, resulting in the emergence of a new key trans-shipment hub: centered on Guinea-Bissau and Guinea, stretching to Cape Verde, The Gambia and Senegal, thus complementing the already existing trafficking hub of the Bight of Benin, which spans from Ghana to Nigeria. As the cocaine is transported through Africa and into Europe, its safe passage is guaranteed (much as it was in Latin America) by terrorist groups—most prominently, Al Qaeda and Hezbollah. The cocaine can also travel from Latin America’s Tri‐Border Area (TBA)—bounded by Puerto Iguazu, Argentina; Ciudad del Este, Paraguay; and Foz do Iguaçu, Brazil—to West Africa (particularly Benin, Gambia and Guinea-Bissau, with its poor governance and vast archipelagos) and then north into Europe through Portugal and Spain or east via Syria and Lebanon.
Hezbollah’s traditional continental home has been the TBA, where a large, active Arab and Muslim community consisting of a Shi’a majority, a Sunni minority, and a small population of Christians who emigrated from Lebanon, Syria, Egypt and the Palestinian territories about 50 years ago. The TBA, South America’s busiest contraband and smuggling center, has long been an ideal breeding ground for terrorist groups, including Islamic Jihad, Hezbollah and Al Qaeda—the latter since 1995 when Osama bin Laden and Khalid Sheikh Mohammad first visited.
Hezbollah is still active in the TBA, according to Argentine officials. They maintain that with Iran’s assistance, Hezbollah carried out a car‐bomb attack on the main building of the Jewish Community Center (AMIA) in Buenos Aires on July 18, 1994, protesting the Israeli‐Jordanian peace agreement that year. Today, one of the masterminds of those attacks, the Iranian citizen and Shia Muslim teacher, Mohsen Rabbani, remains not only at large, but extremely active in recruiting young Brazilians, according to reports in Brazilian magazine Veja. This region, the third in the world for cash transactions (behind Hong Kong and Miami), continues to be an epicenter for the conversion and recruitment of a new generation of terrorists who then train in the Middle East and pursue their activities both there and in the Americas.
According to Lebanon’s drug enforcement chief, Col. Adel Mashmoushi, as cited in The New York Times, a main transportation route for terrorists, cash and drugs was aboard a flight commonly referred to as “Aeroterror,” about which I wrote in my May 2011 e-note for FPRI. According to my own secret sources within the Venezuelan government, the flight had the route Tehran-Damascus-Caracas-Madrid, where it would wait for 15 days, and flew under the direct orders of the Venezuelan Vice-President, according to the captain. The flight would leave Caracas seemingly empty (though now it appears it carried a cargo of cocaine) and returned full of Iranians, who boarded the flight in Damascus, where they arrived by bus from Tehran. The Iranian ambassador in Caracas would then distribute the new arrivals all over Venezuela.
I wrote in my May 2011 e-note that reports that Venezuela has provided Hezbollah operatives with Venezuelan national identity cards are so rife, they were raised in the July 27, 2010, Senate hearing for the recently nominated U.S. ambassador to Venezuela, Larry Palmer. When Palmer answered that he believed the reports, Chávez refused to accept him as ambassador in Venezuela. Thousands of foreign terrorists have in fact been given national identity cards that identify them as Venezuelan citizens and give them full access to the benefits of citizenship. In 2003, Gen. Marcos Ferreira, who had been in charge of Venezuela’s Department of Immigration and Foreigners (DIEX) until he decided to support the 2002 coup against Chávez, said that he had been personally asked by Ramón Rodríguez Chacín (who served as both deputy head of DISIP—Venezuela’s intelligence service, now renamed SEBIN—and Interior Minister under Chávez) to allow the illegal entry Colombians into Venezuela thirty-five times and that the DISIP itself regularly fast-tracked insurgents including Hezbollah and Al Qaeda. The newly-minted Venezuelan citizens during Ferreira’s tenure include 2,520 Colombians and 279 “Syrians.” And that was only during three of the past twelve years of an increasingly radicalized Chávez regime.
While Chávez has done more than anyone to strengthen these relationships with Middle Eastern terrorists, in an attempt to use what he calls “the International Rebellion” (including Hezbollah, Hamas and ETA) in order to negotiate with the US for power in Latin America, the coziness of the seemingly strange bedfellows dates back to the fall of the Soviet Union, when the USSR abandoned Cuba. At the Sao Paulo Forum of 1990, prominent Venezuelans and international terrorists were all in attendance, including: then-Venezuelan President Carlos Andrés Pérez (against whom Chávez attempted a coup in 1992); Alí Rodríguez, then-President of PDVSA (Petróleos de Venezuela, the government-owned oil company); Pablo Medina, a left-wing Venezuelan politician who initially supported Chávez, but has now moved to the opposition; as well as Fidel Castro, Moammar Qaddafi and leaders of the FARC, Tupamaros and Sendero Luminoso (Shining Path). The extent to which these alliances have deepened and become institutionalized is exemplified by the Continental Bolivarian Coordinator, the office that coordinates all the Latin American terrorists. According to a well-placed Venezuelan military source of mine, they are headquartered in the Venezuelan state of Barinas—the same state that is effectively a Chávez family fiefdom, with their sprawling family estate, La Chavera, and their total control of local politics. Their extreme anti-Semitism is not ideological, but simply out of convenience: to court and maintain Iranian support.
According to the Congressional Research Service, with enactment of the sixth FY2011 Continuing Resolution through March 18, 2011, (H.J.Res. 48/P.L. 112-6) Congress has approved a total of $1.283 trillion for military operations, base security, reconstruction, foreign aid, embassy costs, and veterans’ health care for the three operations initiated since the 9/11 attacks: Operation Enduring Freedom (OEF) Afghanistan and other counter terror operations; Operation Noble Eagle (ONE), providing enhanced security at military bases; and Operation Iraqi Freedom (OIF).
Yet for all this massive spending on fighting terrorists and insurgents in the Middle East, we are leaving ourselves vulnerable to them here, on a number of fronts. First and foremost, the United States is under territorial threat through its Mexican border. Hezbollah operatives have already been smuggled, along with drugs and weapons, in tunnels dug under the border with the US by Mexican drug cartels. Only a week after my October 5th interview by KT McFarland on Fox, where I specifically warned of a possibility of this resulting in a terrorist attack carried out inside the US with the complicity of South American drug traffickers, the global press revealed a plot by the elite Iranian Quds Force to utilize the Mexican gang Los Zetas to assassinate the Saudi ambassador to Washington in a bombing that would have murdered many Americans on their lunch hour.
Second, American assets in Latin America are under threat. Embassies, consulates, corporate headquarters, energy pipelines and American- or Jewish-sponsored community centers and American citizens have already been targeted by terrorist groups all over Latin America for decades: FARC in Colombia, Sendero Luminoso and Tupac Amaru in Peru and Hezbollah in Argentina. Al Qaeda is also rumored to have a strong presence in Brazil.
Third, while American soldiers give their lives trying to defeat terrorists and violent insurgents in the Middle East, these same groups are being supported and strengthened increasingly by Latin America, where they receive training, weapons and cash. This makes American military engagement far more costly by any metric: loss of life and financial cost.
Indeed over the last decade, Latin America is a region spiraling ever more out of American control. It is a region with which the United States has a growing asymmetry of power: it has more importance to the United States, while the United States is losing influence over Latin America, which remains the largest source of oil, drugs and immigrants, both documented and not. Latinos now account for 15 percent of the US population and nearly 50 percent of recent US population growth, as well as a growing portion of the electorate, as seen in the last presidential elections. The discovery of huge new oil reserves in Brazil and Argentina, that might even challenge Saudi Arabia, and the 2012 presidential elections in Venezuela, make Latin America of increasing strategic importance to the U.S., particularly as the future political landscape of the Middle East becomes ever more uncertain, in the wake of the Arab Spring and the political rise of the Muslim Brotherhood in previously secular Arab governments. The growth of transnational gangs and the resurgence of previously waning terrorist organizations pose complicated new challenges, as violence and murder cross the U.S. border, costing American lives and taking a huge toll on U.S. law enforcement. The United States needs to develop a smart policy to deal with these challenges.
So while the US is expending vast resources on the GWOT, the terrorists are being armed and reinforced by America’s southern neighbors, making the GWOT far more costly for the US and directly threatening American security. Even though Venezuelan President Hugo Chávez may be removed from the presidency either through an electoral loss in the October 7, 2012 presidential elections or through his battle with cancer, certain sectors of the Venezuelan government will continue to support international terrorism, whose activities, bases and training camps have now spread throughout this region. By understanding the dynamics of the increasingly entrenched narcoterrorist network, the U.S. can develop an effective policy to contend with these, whether or not President Chávez remains in power.
Vanessa Neumann is a Senior Fellow of the Foreign Policy Research Institute and is co-chair, with FPRI Trustee Devon Cross, of FPRI’s Manhattan Initiative.
- Obama Hits Iran-Venezuela Ties. Now What? (mb50.wordpress.com)
- If Venezuela joins the Mercosur economic bloc, will it follow the rules? (csmonitor.com)
- Amb. Marc Ginsberg: Tehran’s Tango: Iran’s Terror Beachhead South of the Border (huffingtonpost.com)
- The Mottled Relationship: Iran and Latin America (mb50.wordpress.com)
- US Alleges Zetas-Hezbollah Funding Link (mb50.wordpress.com)
- Bank ledgers reveal Hezbollah drug racket (mb50.wordpress.com)
- Government Says Hezbollah Profits From U.S. Cocaine Market Via Link to Mexican Cartel (propublica.org)
Posted By José R. Cárdenas
One certainly hopes that President Obama’s recent criticism of Iran-Venezuela relations indicates a new willingness on the part of his administration to confront the growing menace of the radical Islamist regime in the Western Hemisphere.
In comments submitted to the Venezuelan newspaper El Universal, the president said that Hugo Chávez‘s ties to Iran “have not served the interests of Venezuela or the Venezuelan people” and expressed concern about his anti-democratic behavior and his failure “to contribute to the security in the region.”
“Here in the Americas,” he said, “we take Iranian activities, including in Venezuela, very seriously and we will continue to monitor them closely.”
The president’s comments came on the heels of further explosive revelations on the extent of Iranian subversion of U.S. interests in the region. Earlier this month, the Spanish-language network Univision aired an investigative documentary,“The Iranian Threat” — the product of months of research — that included incriminating information on Venezuelan and Iranian diplomats in Mexico discussing waging cyberattacks on sensitive U.S. computer systems, including those of nuclear power plants.
Shortly thereafter, U.S. law enforcement officials revealed details of an investigation into a Lebanese bank in Canada that laid out Hezbollah’s sophisticated global money-laundering operations that includes direct involvement by senior officials in the lucrative South American drug trade. The revelations put the lie to the State Department’s long-repeated talking point that Hezbollah merely “raises funds” in Latin America for its operations in the Middle East.
Both reports drew sharp reactions from Capitol Hill, where a number of members have expressed deep dissatisfaction with the direction of the administration’s regional policy. Senator Bob Menéndez (D-NJ), Chairman of the Senate Foreign Relations Subcommittee on the Western Hemisphere, said he would hold hearings on Iran’s destructive role in the region when the Senate reconvenes in 2012.
House Foreign Affairs Chairman Ileana Ros-Lehtinen (R-FL) said she would request the State Department to conduct its own investigation “into Iran’s deeply troubling partnerships with regional dictators such as Chavez, Morales, Correa, Ortega and the Castro brothers.”
(It bears noting as well that in the Nov. 22 Republican presidential candidates’ National Security Debate, the threat posed by radical Islam operating in the Western Hemisphere was featured prominently as a national security issue that official Washington was neglecting.)
Thankfully, it appears the steady drumbeat of concern about Iran and their Hezbollah proxies’ strategic push into the Americas has finally caught the White House’s attention. To date, U.S. law enforcement agencies have had to confront this threat virtually alone. It is time the entire Executive Branch foreign policy apparatus joins in, including the slumbering State Department.
Most importantly, it is time for ramping up actions to back up the president’s words. This includes not only identifying more individuals, companies, and/or governments found to be aiding and abetting Iran and Hezbollah in their nefarious activities and bringing the full weight of sanctions against them, but also conducting a full-bore public diplomacy campaign for regional audiences on Iran’s intentions and activities in the region and the dangers for their societies therein.
- The Mottled Relationship: Iran and Latin America (mb50.wordpress.com)
- U.S. authorities probing alleged cyberattack plot by Venezuela & Iran..the old chestnut is back (seeker401.wordpress.com)
- Iran, Latin American Ties Grow (myfoxny.com)
Written by Geoffrey Ramsey
An independent analysis of U.S. government figures showed that the total amount of cocaine confiscated in one year was bigger than the U.S. estimate of global production — but the response from the White House was far from satisfying.
According to Narcoleaks, an Italian NGO which monitors anti-drug operations worldwide, the Obama administration’s estimates of global cocaine production are unrealistically low. In a strongly-worded press statement released last week, the group questioned the State Department’s assertion that the world production of the drug in 2009 amounted to 700 metric tons.
As the report points out, this clashes with a recent statement from the U.S. Coast Guard, which claimed that 771 metric tons of cocaine were sent to the U.S. in 2011. It also jars with the group’s estimate that 744-794 metric tons of cocaine will have been seized globally by the end of the year. Narcoleaks said that this discrepancy amounted to an “embarrassing contradiction,” and called on the Obama administration to clarify it.
The group also took on the recent claim by U.S. drug officials that Peru has outstripped Colombia as the world’s top producer of cocaine. According to Narcoleaks, this was disproved by the recent discovery of a cocaine lab in Colombia which police claimed could produce between 500 and 800 kilos of cocaine HCl per day. If this is accurate, the group pointed out, it would mean that the lab churned out between 182 and 292 metric tons of cocaine per year, accounting for almost the country’s entire cocaine output, according to a U.S. estimate which put it at 270 tons.
However, it is far more likely that the output of the lab was simply misquoted on the National Police’s website. Local press accounts quoted General Luis Alberto Perez, head of Colombia’s Anti-Narcotics Police, as giving that figure as the weekly production, not daily. Additionally, the amount of time that the cocaine lab had been operating is not known, so it is not necessarily possible to extrapolate an annual production rate. Considering its size, it seems unlikely that this lab would have been able to operate clandestinely for very long.
Still, Narcoleaks’ skepticism of the U.S. figures is not without cause. Just the Facts’ Adam Isacson also questioned the State Department’s estimate in March, noting that the estimate of 2009 world cocaine production is equal to the amount that the agency claims was seized in Colombia, Ecuador, Peru or the U.S., plus the estimate of cocaine which passed through Venezuela, leading to the unlikely conclusion that the world’s entire cocaine output was either seized, or was trafficked via Venezuela.
The White House Office of National Drug Control Policy (ONDCP) responded to Narcoleaks’ allegations on its blog, claiming that the organization’s analysis was “systematically flawed.” According to the ONDCP, seizures cannot be compared to global production estimates, because cocaine becomes increasingly diluted the further it travels along the supply chain. While this is true, it is unlikely to account for the entire gap, as Narcoleaks has pointed out.
The White House office also stressed that the administration’s estimates were “just that — estimates,” and should not be taken as hard facts. As the ONDCP argues: “our estimate of potential cocaine production of about 700 metric tons (of pure cocaine or about 850 metric tons of export quality cocaine) is actually the midpoint of a range — there may have been more or less actually produced.”
This caution is a reminder of the uncertainties inherent in tracking the flow of narcotics worldwide. Because of the shadowy nature of drug trafficking, it is simply not possible to come up with exact figures on production. Still, policymakers in the U.S. and around the globe make major political decisions based on these estimates. Even in countries that are relatively small players in the hemispheric drug trade, the drug-related declarations of the U.S. government carry a lot of weight. This was illustrated recently when the government of Guyana issued a triumphant press release celebrating its absence from a U.S. government list of major transit nations, despite other official claims the country exhibits “marginal commitment and capacity at all levels of government.”
A better response to Narcoleaks’ criticisms might be for the U.S. government to work with academics and specialists to try to tweak the estimates to account for the apparent inconsistency, and leave all political considerations out of it.
- FOLLOWING THE COCAINE TRAIL: How The White Powder Gets Into American Hands (businessinsider.com)
- Most cocaine produced in Colombia; upto 95.5% (peavyblack.com)
- Obama commutes sentence of crack cocaine dealer (thegrio.com)
- Why It’s No Longer Raining Cocaine in the Dominican Republic (time.com)