A report for Business Communication on

ECONOMIC CRISIS IN
VENEZUELA

Submitted to Prof. (Dr) Tulika Sharma on 23rd August 2019

Submitted by:
Sourav Varyani 19A1HP074
Adithya Madhav 19A1HP024
Akhil Rao 19A2HP401
Shivdath 19A2HP451
Gargi Tarafdar 19A3HP633

1|Page
 Sl No. Title PgNo.

1 Acknowledgment 3

2 Abstract 4

3 Geography 5

4 Oil discovery and 6

industry nationalisation
5 Noticeable segments in 7
politics
6 Causes of the crisis 9

7 Effects of the crisis 9

8 Current situation 10

9 Key Risks 10

10 Bibliography 11

11 Appendix 12

2|Page
 ACKNOWLEDGMENT:

We would like to gratefully acknowledge the contribution of all the people who took active part
and provided valuable support to us during this report. To begin with, we would like to offer our
sincere thanks to our Prof. (DR.) Tulika Sharma, for giving us the opportunity to do this project.
Without her guidance, support and valuable suggestions, the report would not have been
completed.

We would also like to extend our heartfelt gratitude to our Dean (Academics), Prof. (DR.)
Sriharsha Reddy. Last but not the least, we thank the almighty GOD for the abundant love,
mercy and strength that he has showered upon us for the completion of us report.

3|Page
 ABSTRACT

Venezuela is a federal presidential republic consisting of 23 states, the Capital District and
federal dependencies. The 1980s oil glut led to an external debt crisis and a long-running
economic crisis. Inflation peaked at 100% in 1996 and poverty rates rose to 66% in 1995 as (by
1998) per capita GDP fell to the same level as 1963, down a third from its 1978 peak.

In 2013, Hugo Chávez died and was succeeded by Nicolás Maduro. He continued the populist
policies of Chávez, but with disastrous results. The nation's economy collapsed because of their
excesses. The destabilized economy led to a crisis in Venezuela, resulting in hyperinflation, an
economic depression, shortages of basic goods and drastic increases in unemployment, poverty,
disease, child mortality, malnutrition and crime. These factors have precipitated the Venezuelan
migrant crisis where more than three million people have fled the country.

In 2003 the government of Hugo Chávez implemented currency controls after capital flight led
to a devaluation of the currency. This led to the development of a parallel market of dollars in the
subsequent years. The fallout of the 2008 global financial crisis saw a renewed economic
downturn. Despite controversial data shared by the Venezuelan government showing that the
country had halved malnutrition following one of the UN's Millennium Development Goals,
shortages of staple goods began to occur in Venezuela and malnutrition began to increase. In
early 2013, Venezuela devalued its currency due to growing shortages in the country. The
shortages included, and still include, necessities such as toilet paper, milk, and flour. Fears rose
so high due to the toilet paper shortage that the government occupied a toilet paper factory and
continued further plans to nationalize other industrial aspects like food distribution. Venezuela's
bond ratings have also decreased multiple times in 2013 due to decisions by the president
Nicolás Maduro. One of his decisions was to force stores and their warehouses to sell all their
products, which led to even more shortages in the future. In 2016, consumer prices in Venezuela
increased 800% and the economy declined by 18.6%, entering an economic depression.

4|Page
 GEOGRAPHY:
Venezuela is a country in South America and is one among the many parts that make the whole
of Caribbean South America, covering the borders of the Caribbean Sea and the North Atlantic
Ocean, and separating Colombia and Guyana. It is located on major sea and air routes forming a
link between North and South America. Situated at the northernmost end of South America,
Venezuela covers a total area of 916,445 km2 (353,841 sq. mi) and has a total land area of
882,050 km2 (340,560 sq. mi). It is the 32nd largest country in the world, about twice the size of
California. Venezuela is roughly shaped like an inverted triangle; the country has a 2,800 km
(1,700 mi) long coastline. Amongst all the other Exclusive Economic Zone of the world, it is the
55th largest with an area of 471,507 km2 (182,050 sq. mi).

The Orinoco Belt is an enclave in the southern strip of the eastern Orinoco River Basin in
Venezuela which lies on top of the world's largest blanket of petroleum. The local name given
for this in Spanish is Faja Petrolífera del Orinoco (which means Orinoco Petroleum Belt). The
Orinoco Belt is situated at Guárico and to the south of Anzoátegui, Monagas, and Delta Amacuro
states, which is following the river line. With an area of about 55,314 square kilometres, it
spreads over about 600 kilometres from east to west and about 70. kilometres from north to
south.

5|Page
 OIL DISCOVERY AND INDUSTRY NATIONLISATION:

The presence of oil was known in Venezuela even before the discovery of the Americas in 1492.
The Spanish and English played a great role in exploring the region’s resources to find all the
crude oil deposits from 1499 to the late 1800s. Later in 1878, the first oil company “Compania
Nacional Petrolia del Tachira” was founded followed by Caribbean Petroleum Company and
Royal Dutch-Shell Oil Company. This was the beginning of the modern economic history of
Venezuela.

World War I was the trigger introducing Venezuela into the world oil market. After 1919, the
investment and the exportation of Venezuelan oil increased tremendously. By 1922, Venezuela
became an important supplier of oil in the world, and biggest reserves of oil were discovered in
the Lake of Maracaibo. During World War II Venezuela was the most secure provider of oil to
the United States.

In 1908 General Juan Vicente Gomez took power as President and opened the gate to foreign oil
investors. In 1909, The Venezuelan Oilfield Exploration Company was founded and had a lease
of approximate of 27 million hectares.

In September 1960, The Organization of the Petroleum Exporting Countries (OPEC) was created
to co-ordinate and unify petroleum policies among member countries to secure fair and stable
prices for petroleum producers. 1960 was the beginning of the nationalization of the oil industry.
On January 1st, 1976, President Carlos Andres Perez founded Petroleos de Venezuela S.A.
(PDVSA) (Oils of Venezuela), a state-owned oil and natural gas company.

During its first year, PDVSA produced 2.3 million barrels per day of oil and the investments
were multiplied by four. In the 1980s, it was considered as a reliable oil supplier, and was
consolidated as one of the most important oil companies around the world. In the middle 1980s,
it began to buy refineries in Europe, United States and the Caribbean. 1996 brought an
investment of more than 2 billion dollars and increased the oil production by 260,000 barrels per
day. Moreover, PDVSA exports 93% of its total hydrocarbon production. Approximately 54 %
of these hydrocarbon exports go to the U.S. and Canada.

6|Page
 NOTICEABLE SEGMENTS IN THE COUNTRY’S
HISTORY:
1958: Venezuela Elects President Betancourt
After the overthrow of brutal, corrupt Venezuelan dictator Marcos Pérez Jiménez, the nation’s
three political parties agree to the Punto Fijo Pact to accept the results of popular elections, and
opposition leader Rómulo Betancourt—widely regarded as the father of Venezuelan democracy
—is elected president. But, as anthropologist Iselin Åsedotter Strønen has written, the power-
sharing agreement also helps establish a system in which each of the parties is guaranteed a slice
of government ministries, jobs and contracts, and keeps oil revenues in the hands of the
government.
1973: OPEC Embargo Brings Billions
The OPEC embargo against the U.S. and other countries causes the price of oil to quadruple, and
Venezuela becomes the beneficiary. As billions more flow into the state treasury, its per-capita
GDP soars throughout the rest of the decade. Two years later, Venezuelan President Carlos
Andrés Pérez signs a law nationalizing, creating a state-owned oil company called owned
Petroleos de Venezuela, S.A. (PDVSA), and compelling foreign companies to give it a 60
percent ownership share in oil projects.

1989: IMF Bailout

After oil prices plummet due to a glut in the late 1980s, President Perez’s government struggles
under the weight of $33 billion in foreign debt. Ultimately, Venezuela is forced to accept
an International Monetary Fund bailout and impose strict measures that result in sharp rises in
the prices of consumer goods and fares for public transportation. Protesters take to the streets for
demonstrations that turn violent, leading to a nationwide curfew and suspension of civil liberties.

1998: Hugo Chávez Elected

Firebrand populist leader Hugo Chávez, a former lieutenant colonel in the Venezuelan military
who six years earlier led a failed coup attempt, is elected president, upending a political
establishment that had controlled the nation for decades. Over the next decade and a half, Chavez
embarks on a massive social spending binge to fund his socialist schemes. Though Chavez
wanted to expand the Venezuelan economy by diversifying it, his costly strategy only augmented
the dependence upon exported oil. At the same time, though, Chavez neglects to spend money
maintaining oil facilities, and production declines.

2013: Maduro Challenged by Opposition Leader

After Hugo Chávez dies of cancer, he is replaced by his hand-picked successor Nicolás Maduro.
He soon begins consolidating his power, using authority given him by the National Assembly
to rule by decree. But he isn’t able to halt the decline in oil prices that pull down the Venezuelan
economy with it. As Venezuela’s situation worsens, the Maduro regime arrests opposition
political leaders and shuts down news websites and detains journalists, leading to criticism from
the U.N. and the Inter-American Commission on Human Rights. In 2017, Venezuela’s Supreme

7|Page
 Court, filled with Maduro loyalists, take away the powers of the National Assembly, increasing
Maduro’s control. The following year, he is re-elected overwhelmingly in an election that a
coalition of other western hemisphere nations says “lacked legitimacy.”

(Left to right - Nicolás Maduro and Juan Guaidó)

In January, opposition leader Guaidó, head of the National Assembly, invokes the Venezuelan
constitution to declare himself interim president, setting up a power struggle that is still yet to be
resolved.

The 2014 Protests

In 2014, a series of protests began in Venezuela due to the country's high levels of urban
violence, inflation, and shortages of basic goods due to economic policies such as strict price
controls. Mass protesting began in February leading to arrests and killings of student protesters
stimulated their expansion to neighboring cities and the involvement of opposition leaders. It
resulted in nearly 4,000 arrests and 43 deaths, including both supporters and opponents of the
government.

The 2017 Protests

Protests began in January 2017 after the arrest of multiple opposition leaders and the cancellation
of dialogue between the opposition and Nicolás Maduro's government. Post which the
government has dissolved the opposition-led National Assembly.

The 2019 Presidential Crisis

A crisis concerning who is the legitimate President of Venezuela has been underway since 10
January 2019, with the nation and the world divided in support for Nicolás Maduro or Juan
Guaidó

8|Page
 CAUSES OF THE CRISIS:
It is President Maduro and his predecessor Chávez who are the target of much of the current
anger.
 The major factor that affected Venezuela’ economy was that; the Maduro and Chávez
governments used oil revenues to fund their socialist programs but failed to reinvest in the oil
industry to keep the revenue flowing.
 The Maduro government did not consider their currency’s value in the international market and
improperly adjusted its value.
 On 5th February 2003, President Chávez imposed currency controls that gave him power to
control the exchange rate, limiting Venezuelans' access to foreign currencies. As a result a
currency black market developed since Venezuelan merchants relied on the import of goods that
required payments with reliable foreign currencies
 In 2013, Chávez looped three zeros off the Bolívar currency followed by another chopping of
five zeros by Maduro, like Zimbabwe.
 President Hugo Chávez' policies relied heavily on oil revenues to fund large quantities of imports
and production under his rule dropped because of his price control policies and poorly managed
expropriations. His successor, Nicolás Maduro, continued most of Chávez' policies until they
became unsustainable when oil profits began declining in 2014.
 A socialist policy, Price Control, targeted to help the poor has backfired badly. Since the
businesses producing these items no longer found it profitable to make them.
 The National Assembly was largely rendered powerless by the creation of the National
Constituent Assembly in 2017, which is exclusively made up of government loyalists. It resulted
in a loss of democracy.

EFFECTS OF THE CRISIS:

 A rise in poverty, crime rate, emigration, infectious and preventable diseases, death rate,
detention, unemployment
 The annual inflation rate reached 1,300,000% in the 12 months to November 2018, according to
a study by the National Assembly.
 Political corruption
 Due to the shortage of food and medicine people have been left hungry. More than a million
have tried to flee the country.
 Many companies have been shut down resulting in mass unemployment.
 Forming policies stopping general population from leaving the country and barring, imprisoning
prospective political candidates to stop them from contesting in elections. Such actions violate
human rights.
 While most countries in the world are not convinced with cryptocurrency, Venezuela had
released an official cryptocurrency named Petro.

CURRENT SITUATION:
 Venezuela's economic and political crisis will stretch into a sixth year in 2019. Declining oil
production, hyperinflation and a poor business environment will keep
the economy in a deep recession.
 The administration of President Nicolás Maduro has result in further inflation through fiscal
policy and drive escalating unrest as it isolates the political
opposition. A range of economic reforms will not have much effect on the crisis, and in some
cases will make matters worse.

9|Page
  Hyperinflation and a general loss of confidence will depreciate Bolívar. Despite a recent
devaluation and re-denomination of the currency the parallel market value of the currency
remains weak.

 Political risk will remain extremely elevated due to severe shortages of essential goods and
failing public services.
 Since 10th January 2019, when Nicolás Maduro declared himself acting president. More than 50
countries have recognised him as the legitimate president, among them the US and many nations
in Latin America. While Russia and China among others have stood by President Maduro.
 Nicolás Maduro has also asked the military, a key player in the current situation, to join hands
with him promising them amnesty.
 The country defaulted in November 2017 and has since accumulated more than USD6.1bn in
arrears. Creditor action, namely the acceleration of principal payments and attempts to seize
Venezuela's external assets, including oil shipments might result in severe damage.

KEY RISKS:
 The chances of a military uprising against the President Maduro’s regime remain substantial,
given the collapse in living conditions in the country. A failed coup in May and assassination
attempt against Maduro in August underlines this threat.
 Maduro is increasingly likely to remain in power past 2019, relying on a combination of purges,
patronage, a fractured opposition. This would have a decidedly negative impact on the country's
economy, given the governing party’s track record of economic mismanagement.
 The US has imposed sanctions on the Venezuelan oil sector, potentially cutting Venezuela off
from its largest export market.
 Unless debt payments are made international reserves will further decline, while external support
from Russia and China appears to be already drying up.
 Amongst this economic turmoil the government can still improve the substantial economic
imbalances using the hydrocarbon (crude oil) reserves, which would, in turn, stabilise the
country's political crisis. But improper handled this could result in further devastated economy.
10 | P a g e
  Reuters predicts that it is highly unlikely for Venezuela to recover until 2022 with the current
policies and reforms

Bibliography:
Watson, K. (2018, August). The Bridge of Desperation. Retrieved from
https://www.bbc.co.uk/news/resources/idt-sh/Venezuela_bridge

Melimopoulos, E. (2017, July). Venezuela: What is a National Constituent Assembly. Retrieved

from https://www.aljazeera.com/indepth/features/2017/07/venezuela-maduro-constituent-
assembly-170729172525718.html

Rapier, R. (2019, January). Charting the Decline of Venezuela's Oil Industry. Retrieved from
https://www.forbes.com/sites/rrapier/2019/01/29/charting-the-decline-of-venezuelas-oil-
industry/#79a0b5044ecd

US imposes sweeping sanctions. (n.d). Retrieved from https://www.bbc.com/news/world-latin-

america-49248564

Young, R. (2018, August). Can Venezuela halt hyperinflation. Retrieved from

https://www.bbc.com/news/business-45258262

Kiger, P. (2019, May). How Venezuela fell from the richest country in South America into
Crisis. Retrieved from https://www.history.com/news/venezuela-chavez-maduro-crisis

TALWANI, M. (2002, September). Orinoco Belt. (n.d). Retrieved from

https://www.bakerinstitute.org/media/files/Research/8bb18b4e/the-orinoco-heavy-oil-belt-in-
venezuela-or-heavy-oil-to-the-rescue.pdf

Venezuela Crisis. Retrieved from https://en.wikipedia.org/wiki/Crisis_in_Venezuela

Staff, Vox. (2019, January). Presidential crisis in Venezuela.

Retrieved from https://www.vox.com/world/2019/1/24/18196026/venezuela-president-protest-
maduro-guaido

Salvo, M. (2019, March). Bitcoins Venezuela. (n.d). Retrieved from

https://www.bbc.com/news/business-47553048

Gillespie , P. (2016, October). Venezuela - Worst Economy. (n.d). Retrieved from

https://money.cnn.com/2016/10/25/news/economy/venezuela-breaking-point/index.html

11 | P a g e
 Appendix:
Enacted Legislation P.L. 116-6 (H.J.Res. 31). Consolidated Appropriations Act, 2019.
Introduced January 22, 2019. House passed (231-180) January 24; Senate passed, amended, by
voice vote January 25. Conference report (H.Rept. 116-9) filed February 13, 2019. House
approved conference (300- 128) February 14; Senate approved conference (83-16) February 14.
Signed into law February 15, 2019. The measure provides $17.5 million for democracy and rule
of law programs for civil society groups in Venezuela. H.Rept. 116-9 requires a strategy of how
U.S. agencies are supporting communities that are sheltering Venezuelans throughout Latin
America and the Caribbean.

Select Legislative Initiatives

The Venezuela TPS Act of 2019, H.R. 549 (Soto), would allow certain Venezuelan nationals
residing in the United States to qualify for Temporary Protected Status, which prevents their
removal from the United States and allows them to obtain employment and travel authorization.
Introduced January 15, 2019; amended and reported out of the House Judiciary Committee May
22, 2019.

The Humanitarian Assistance to the Venezuelan People Act of 2019, H.R. 854
(MurcarselPowell), would require a strategy within 180 days of its enactment from the
Department of State and USAID on the delivery of humanitarian assistance within Venezuela
and for Venezuelans throughout Latin America and the Caribbean and authorize up to $150
million in humanitarian assistance to be provided in FY2020 and in FY2021. Introduced January
29, 2019; amended and reported out of the House Foreign Affairs Committee March 14, 2019;
approved by the House, as amended, March 25, 2019.

The Venezuela Arms Restriction Act, H.R. 920 (Shalala), would restrict the transfer of
defence articles, defence services, and crime control articles to any element of the security forces
of Venezuela under the authority of a government of Venezuela that is not recognized as the
legitimate government of Venezuela by the government of the United States (i.e. the Maduro
government). Introduced January 30, 2019; reported out of the House Foreign Affairs Committee
March 14, 2019; approved by the House March 25, 2019.

The Department of State, Foreign Operations, and Related Programs Appropriations Act,
FY2020, H.R. 2839 (Lowey), would provide $17.5 million in democracy and human rights aid
to Venezuela. The report (H.Rept. 116-78) would direct Migration and Refugee Assistance and
International Disaster Assistance to addressing the Venezuela migration crisis. Introduced and
reported out of the Appropriations Committee May 20, 2019 (H.Rept. 116-78).

The Venezuela Temporary Protected Status Act of 2019, S. 636 (Menendez), would
designate Venezuela under Section 244 of the Immigration and Nationality Act to permit
nationals of Venezuela to be eligible for Temporary Protected Status under such section.
Introduced February 28, 2019; referred to the Judiciary Committee.

12 | P a g e