Creditors tend to be popular when they hand out the cash in times of need, but less so when the debtor realizes the terms of the deal are too onerous — or when it is pay back time. This dynamic is likely to be on display in Venezuela over the coming months and years, where a newly empowered opposition (now controlling parliament) is beginning to find out about the back room deals of a fiscally irresponsible and populist government that has come to increasingly depend on China (since borrowing money from the IMF would have contradicted the government’s anti-imperial rhetoric).
With a supermajority of two-thirds in parliament starting in January, the opposition is likely to undertake a broad review of the country’s national budget, force the government to publish reliable inflation data and stop all subsidized oil shipments to Cuba. Most importantly, from an international relations perspective, however, may be their insistence to review deals with Beijing, which include large-scale oil shipments to China at preferential rates. Considering that oil makes up 96% of Venezuela’s exports, reviewing these terms may be a necessary step towards reviving the economy, which was the world’s worst performing in 2015. Venezuela also has the highest inflation in the world, and its government debt is the most expensive to insure against default.
The situation is particularly critical because Venezuela’s oil payments to China have risen over the past years, even as Venezuela’s total output has been falling continuously for the past decade. Maduro signed yet another deal in Beijing in September, most likely at highly unfavorable terms, since no other country was willing to borrow money to Venezuela.
Neither Chavez nor Maduro have been transparent about the terms of Chinese loans, adopting a series of questionable legal maneuvers to sign accords without congressional approval. Notably, the deals have not been included in the yearly budget, making them highly vulnerable to corruption. Over the past years, China has lent almost $50 billion to Venezuela, most of what is being paid back with oil shipments, and none of which included any policy conditions. This allowed Caracas to engage in financially irresponsible behavior, making the China Development Bank and the Export-Import Bank of China at least partly responsible for the mess Venezuela finds itself in. Chinese policy makers already privately admit that they are worried about a potential default.
As more details emerge, including about possible privileges for Chinese companies in key sectors of the Venezuelan economy (such as telecommunications (Huawei), appliances (Haier), cars (Chery), and oil drilling (ICTV)), the public will slowly realize how influential China has become in Venezuela over the past years, and how unfavorable deals with Beijing are complicating Venezuela’s economic recovery. It is only a matter of time before leading policy makers will call of a fundamental renegotiation of the deals signed. Just like the IMF’s irresponsible behavior during past crises (such as Argentina) profoundly affected the institution’s reputation, Beijing’s role in Venezuela’s crisis will almost inevitably lead to the rise of anti-Chinese rhetoric in both the media and policy circles. After all, since China receives oil payments, it will be senior to other creditors (like bondholders), thus turning Venezuela into a risky place to borrow for years to come (because China collects its oil before Venezuela sells it elsewhere).
This will create a dilemma for decision-makers in Beijing. Long benefiting from anti-Americanism among the region’s left-leaning populists, China will increasingly be seen as a threat and an easy target for populist politicians seeking to place the blame on someone. There is no easy solution for China. It will either accept renegotiating the deals made with Venezuela, leading to billions of losses, or it will risk a growing wave of sinophobia which could easily spread to other countries in the region: Just like Venezuela, Argentina turned to China for massive help to sustain populist measures. There, too, sinophobia may soon be on the rise.
On a broader scale, it points to an interesting paradox: the emergence of multipolar order and the end of unipolarity (symbolized by the rise of China) will reduce anti-US sentiment around the world. There are now other powerful actors people can love to hate.
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PHOTO CREDIT : Prensa Presidencial
