Country on the Rocks: Venezuela turns to mining industry to bolster dwindling capital reserves, floundering economy and Maduro’s grip on power

Maduro is courting the international mining industry to develop Venezuela’s resources, however miners have had a rocky past with the socialist regime and its ability to manage a new resource is doubtful.

Maduro is courting the international mining industry to develop Venezuela’s resources, however miners have had a rocky past with the socialist regime and its ability to manage a new resource is doubtful.

Over the summer, violence erupted across Venezuela as citizens persevered through the streets of Venezuela in anti-regime protests, while some participants have faced police brutality and mass arrests. While some fight to change the government, others in the nation also experience hunger, the resurgence of malaria and harsh conditions as they try to combat the nation’s plummeting currency and government run economy.

Many Venezuelans have denounced Maduro’s policies, which he has continued from his predecessor, Hugo Chávez.  These policies place Venezuela’s economic dependence on oil and the fate of the nation’s economy in the hands of oil prices. As a result of the fall of oil prices in 2014 the country’s economy has been in a downward spiral as the Bolívar, Venezuela’s official currency, continues to devalue. This places the current exchange rate at approximately 10,987 Bolívars per one US dollar, according to DolarToday.

As the economic crisis of the country intensifies, civilians protest against President Nicolas Maduro’s government for deteriorating democracy, a result of the election on July 30, leading to a new legislative assembly. Being granted new unconditional powers, the assembly is set to rewrite the Venezuelan constitution in favour of Maduro––sending the socialist regime into a dictatorship.  Supporters of the opposition have taken to the streets since earlier this year to boycott the government. The government has responded with harassment of its opposition.   

Since spring, more than 120 people have died due to protest-related circumstances. Last month, the United Nations announced they are concerned about human rights violations, as a study conducted by the UN detailed the rates of police brutality resulting in death, as reported by the Daily Mail. The study reveals that since April, 46 deaths have been associated with security forces and 27 deaths caused by pro-government armed groups––Maduro’s government has arrested 5,000 people, while 1,000 are reported to be still held in custody.

Oil revenues account for nearly all export earnings and almost half of the Venezuelan government’s revenue, as the nation’s economy is severely dependent on oil. Since the fall of oil prices in 2014, the economic crisis in Venezuela has intensified. In March 2013, the month of Hugo Chávez’s death, before Maduro took office, the cost of oil per barrel stood at $102.30, while the current market price is $47.89 per barrel.   

In the past couple of weeks according to OilPrice.com, the government failed to pay bond coupons worth a total of $586 million. But these payments have grace periods of 30 days, which Venezuela has made use of.  Venezuela is now pulling together the cash to pay the maturities due  Oct. 27, and  Thursday, Nov. 2.  According to Bloomberg, the state controlled company responsible for the bonds, PDVSA, says they have met their obligations but bondholders have yet to see the money in their accounts.

State-controlled oil firm PDVSA must first pay $985, and another $1.2 billion six days later. These nearly $2.2-billion payments do not have grace periods like the ones it has most recently skipped, and missing them would give bond investors the default gitters.

If this were to happen, the economy would fall into an even deeper crisis, and possibly shut down some oil production, which has declined in the past year anyway due to lack of investment.   Not only is oil production dropping, but Venezuela’s crude oil quality has also been deteriorating due to a shortage of funds at PDVSA to treat its heavy crude oil.

Mismanagement of the economy and the fall of oil prices––Venezuela’s highest source of revenue––have left the country in poverty. Venezuela has an abundance of resources, including petroleum, natural gas, iron ore, gold, bauxite, other minerals, hydropower and diamonds. However, as the country has and continues to focus its aim on economic growth via natural resource extraction, this is what has led to its current economic catastrophe. The term “resource curse” is a paradoxical circumstance where countries acquiring a bounty of non-renewable resources encounter stagnant growth and sometimes economic deflation.

The resource curse progresses as a country focuses of all its energies on one industry––in the case of Venezuela, its focus has been on petroleum; however, Maduro is making the shift to focus on mining and is therefore further entrenching his country’s resource curse. As a consequence of these economic choices, the country becomes exceedingly reliant on the financial value of commodities and the overall gross domestic product (GDP), while the GDP turns highly volatile, according to Investopedia.  

Additionally, government corruption often results when proper resource rights and an income distribution framework is not established in the society, resulting in unfair regulation of the industry. The resource curse most often occurs in emerging markets following a major natural resource discovery.  If the lesson of oil in Venezuela was any indicator, new mineral wealth would further condemn the country and its people to the resource curse and its horrible effects.   

The effects of the resource curse are evident in Venezuela, the average rate of living expenses is on the rise, making it impossible for many to afford basic needs, Venezuelans flock to illegal mines to earn a wage and support themselves. This places many in great threat to being exposed and contracting malaria, at large.

In search of a means to obtain access to food and basic necessities, many have turned to illegal mining, which is often controlled by gangs. Due to being unlicensed and unsupervised, many civilians who are mining for these gangs face death, as a result of many being infected with malaria, according to Mining. Unlicensed and unsupervised, gang-controlled mining has threatened civilians not only working in the mine, but all over the nation as malaria is spreading at significantly high rates. According to the BBC, Venezuela registered the topmost rates of malaria in the last 50 years–– 300 of every 100,000 civilians were reported to be contaminated with malaria in 2015. To a certain extent, the government has connected the spike in malaria to the increase of illegal mines in Venezuela.

Desperate citizens are not the only ones turning to mining to make ends meet.  The country is turning towards its other natural resources to bolster its economy and its regime, but its legacy of nationalization has stifled, delayed and stumbled its own efforts to develop its geological resources, leaving many to wonder whether the government has learned anything at all.

In August of 2016, President Maduro opened the Arco Minero, a spot in the Amazon accounting for 12 per cent of government-owned land in Venezuela, to allocate large-scale mining operations. Experts presume  the location, rich in natural resources, is worth approximately $10 billion.  The President said Canada, Europe, and Africa have all expressed interest.   However, foreign capital from democratic countries should question how secure their investments will be given the country’s socialist prerogatives and history of nationalization of its natural resources.

The decision to nationalize Venezuela’s gold industry was first announced in August 2011 by the late Hugo Chávez, former President of Venezuela, who wanted to nationalize Venezuela’s industry to have more state control over the economy.    This prompted the government takeover of the gold industry from the Russian-controlled company Rusoro, in addition to the movement of the country’s gold reserves from western banks into banks in countries that are allies of Venezuela, including Russia, China and Brazil.  

Before Chávez officially declared that the government of Venezuela was set to nationalize the gold mining industry on July 28, 2011, the government had already taken action to seize one foreign mining companies’ assets in the country prior to their official announcement. On October 26, 2009, personnel from the Venezuelan government arrived at the Brisas Project camp site owned by American mining firm Gold Reserve (TSX-V: GRZ), claiming ownership of the Brisas alluvial concession, seized company assets, removed company personnel and enforced physical possession of the property. Through an issuance of the Administrative Act dated Oct. 20, 2009, the Venezuelan government notified the company on November 4, 2009 of its decision to suspend Gold Reserve’s underlying hard rock concession, and did not send a formal notification to the company until June of 2010.

The nationalization of Venezuela’s gold industry struck another company, Rusoro Mining Ltd. (TSX-V: RML)  The company won its claim against the government in 2016 when an international arbitration tribunal had enforced Venezuela to pay Rusoro more than US$1.2 billion, after being detailed as illegally confiscating the company’s gold mines situated in Venezuela. Rusoro, which owned two mining operations in the country, tried to negotiate with Venezuela for compensation over the ordeal.

With no success in negotiating, the company filed a claim of US$1.9-billion against Venezuela at the World Bank’s International Centre for Settlement of Investment Disputes in 2012.  In conclusion Venezuela was ordered by the arbitration tribunal to make a payment to Rusoro for US$967.77 million as a result of the government expropriating the company in September 2011 with interest, according to the Financial Post. Venezuela must also pay US$1.2 billion to compensate Rusoro.  If it was not for the Canada – Venezuela, Bolivarian Republic of BIT bilateral trade agreement of 1996, Canadian mining companies would have little legal recourse in international courts.

In order for Venezuela to continue to pay off current debts, the country––currently under the rule of Chávez’s chosen succeeder, Nicolas Maduro––is printing money to pay off its debt, which has been devaluing the Bolívar, according to Forbes, leading to the drastically low exchange rate of 10,987 Bolívars per one US dollar.

As Venezuela continues to struggle to pay settlements and bond holders, enter multinational mining companies; the country has signed deals to further position the country into natural resource exploitation.   In August 2016, President Maduro announced that Venezuela had signed deals worth more than $5.5 billion with companies Barrick Gold Corp of Canada and Shandong Gold of China, according to Reuters.    The contracts are intended to calm the economic crisis of nations part of the Organization of Petroleum Exporting Countries (OPEC) that have faced riots and food shortages.  The medicine may be worse than the disease.  

As Venezuela sparks deals to exploit the country’s natural resources, the country lacks any semblance of appropriate levels of governance given their history of nationalization, the oil price collapse and the ensuing chaos.  

According to the Natural Resource Governance Institute, Venezuela has been ranked 74th for its administration of oil, gas and mining in the 2017 Resource Governance Index (RGI). The RGI details that the current political crisis in Venezuela is undoubtedly connected to the management of the oil sector, as the report mentions; the politicization of sector institutions and spending of a non-sustainable nature during boom times have made Venezuela ill-prepared for a drop in prices, leaving economic shock resulting in violence and repression in the nation.  Not only the economy of Venezuela is in crisis; as the country pushes for higher oil revenues and greater exploitation of natural resources, it is further assigning itself to volatility down the road.

While this may seem beneficial to the Maduro regime, he puts the environment and wellbeing of many civilians at risk, as just south of the Arco Minero, 70 per cent of the country’s fresh water is situated, according to Newsweek. This threatens many indigenous people who reside in the area, as many in opposition of the Maduro government’s plans worry that natural resource exploitation will threaten the water, polluting it and leaving it unsafe to consume.

With a horrible human rights track record, horrible resource governance, legacy of nationalisation of mines, country’s economy in freefall, mining companies have to ask themselves how in the world are they going to secure their investments?   

With reparation payments for nationalization of mines in the past,  plus bond payments coming due, it is clear that anybody with cash has Maduro by the horns and international law does still have power in the courts as evidenced by recent rulings.   However, if the past is any indicator, if the regime gets any confidence, there is precedent for nationalization or a reconsideration of terms.

For the time being Maduro has secured his cash but running an inefficient regime can get expensive, be sure that he will look to other ways and partners to fund his government; China is deploying significant amounts of capital in the region.  

As an investor, one would do well to stay away from Venezuela unless you have big guns, big funds, big business and a high tolerance and tact for dealing with corruption.   

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