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Things are about to get worse in Venezuela

If food and medicine shortages, 14,000% annual inflation and protests wherein citizens throw their own feces at the country’s leaders wasn’t bad enough, things are likely to get worse in Venezuela after Sunday’s election.

President Nicolas Maduro has no real threat in the election, analysts say, as any legitimate challengers have either fled the country, been arrested or been banned from running. While some polls do show opposition party candidate Henri Falcon leading Maduro – who has around a 20% approval rating – few believe security forces overseeing the vote will allow a free and fair election.

Turnout is also likely to be incredibly low, not only because few believe their votes matter, but also because of a climate of fear. Asdrubal R. Oliveros, an economist and director of macroeconomic research firm Ecoanalitica, notes that opinion polls show a significant percentage of the population thinks their vote is not secret and that more than half believe that their social welfare benefits could be cut if Maduro’s government loses or if they are found to have voted against him.

A motorcycle passes graffiti painted on a fence in Caracas, Venezuela May 12, 2018. Graffiti reads: “Do not vote, please I beg you”. Picture taken on May 12, 2018. REUTERS/Carlos Jasso
A motorcycle passes graffiti painted on a fence in Caracas, Venezuela May 12, 2018. Graffiti reads: “Do not vote, please I beg you”. Picture taken on May 12, 2018. REUTERS/Carlos Jasso

“The truth is that it is irrelevant if it’s paranoia or not,” Oliveros said during a panel discussion at the Council of the America’s center in New York. “The fact that people believe it is what is relevant. The social control mechanism is relevant.”

After Maduro’s very likely victory, the crime, inflation and mass exodus of people that has seen more than 1 million Venezuelans flee their country over the past two years are likely to accelerate as Maduro uses the vote to legitimize himself.

The problems have little to do with socialism

David Smolansky, a former mayor in Venezuela who fled to the U.S. after he was targeted for arrest by Maduro, says perhaps the worst part of his country’s decline has been the growth of organized crime and the underground economy.

“I’m enormously concerned about the black economy, the criminal economy,” he said during the panel. “If he survives a few more months … there’s no ceiling to drug trafficking. There’s no top in the [illegal] trafficking of fuel … That’s the problem of Maduro’s regime, the absolute lack of protection of the Venezuelan people.”

Additionally, the country’s income is grinding to nothing. Sanctions imposed by the United States and other countries have prevented Venezuela from issuing new debt to international creditors and its oil exports are drying up quickly. Venezuela is pumping just a fraction of its crude capacity and as the crisis deepens it is pumping less oil, not more.

The country recently had to buy nearly $440 million worth of foreign crude to ship to Cuba on friendly credit terms and much of it at a loss, Reuters reported.

Venezuela has the world’s largest oil reserves, but mass firings at state-run oil company PDVSA, the withdrawal and expulsion of outside private companies like Chevron and debilitation of its aging equipment have dramatically slowed oil production.

‘There’s going to be a collapse’

Luisa Palacios, managing director for Latin America at Medley Global Advisors, is expecting the country’s production to fall to historic lows. Oil production could drop to 1.1 million barrels per day within a year, she said, having already fallen to a 33-year low. Production is down 500,000 barrels of oil per day from its pace in January, falling from 2.3 million bpd in January 2016, according to the U.S. Energy Information Administration.

“There’s going to be a collapse,” Palacios said. “What we’ll see after May 20 is more people leaving. You’re not going to have enough people to process oil, to work refineries, to keep it going. It’s not just a problem of cash flow … it’s all types of assets collapsing.”

The recent collapse of Venezuela’s oil production, charted by the U.S. Energy Information Association.
The recent collapse of Venezuela’s oil production, charted by the U.S. Energy Information Association.

If the country can’t produce oil, even a surge in prices back over $100 dollars a barrel is likely to have little impact on its economic predicament.

The United States and other countries also could impose further sanctions on the country after the election, as President Donald Trump did after Maduro put in place the so-called Constituent Assembly last year. The Constituent Assembly was filled with Maduro loyalists and superseded the National Assembly, which had been controlled by elected opposition parties.

“We will see more actions from the international community, I’m certain,” Smolanksy, the former mayor, said. “There’s not going to be any grey area.”

From authoritarianism to totalitarianism

He expects to see more sanctions from the U.S., European Union and the coalition of South American states who have opposed Maduro’s regime known as the Group of Lima, which could restrict transportation, freeze assets of top officials and cease diplomatic relations.

That’s likely to mean more pain, at least in the short term and possibly in the long term. Palacios believes that if Maduro can make it through the next 12 months he is likely to hold power into the foreseeable future.

Along with the sanctions and disintegrating oil production, the country also will face its toughest tests in international credit markets as billions of dollars of payments to international creditors will come due this year.

“On May 20 [Maduro] will go from authoritarianism to totalitarianism,” Smolansky said. “The collapse of Venezuela is similar to a country at war, but we’re not in a war.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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