It has been a month since the United States arrested Venezuela President Nicolás Maduro on the 3rd of last month. In the meantime, Venezuela's economy has broken a long silence and has begun to flash signs of growth again.
Venezuela's closed energy market is stirring again after the U.S. government partially eased crude oil sanctions. About $300 million (about 435 billion won) has flowed into the once-isolated foreign exchange market, putting it on the verge of slowly moving. Thanks to that, the exchange rate, which had been soaring without limit, has at least entered a lull. Experts said this is not a full-fledged recovery, but a stage where the economy has been given minimal breathing room.
The most immediate and visible change since the arrest has been detected in the external financial environment. About 10 days after Maduro's arrest, in mid-Jan., the U.S. government allowed U.S. corporations to purchase, transport and refine Venezuelan crude through a U.S. Treasury general license. In effect, it loosened a key link in the energy sanctions. At the same time, it approved using about $300 million of crude sale proceeds to pay public sector wages. With this step, Venezuela secured a partial channel for crude export proceeds to flow again.
Venezuela's National Assembly also moved quickly to overhaul the oil industry structure and related systems in step with the measure. Venezuela has long held one of the world's largest crude reserves, but inflows of investment were cut off for years due to sweeping nationalization of related institutions and contract uncertainty. The interim government significantly relaxed the oil industry regime, which had been centered on the state oil company PDVSA, to attract fresh, substantive investment.
Now foreign private corporations can independently conduct oil field exploration, drilling and crude production in Venezuela without a PDVSA joint venture. At the same time, it passed an amendment to reduce the burden of royalties (production taxes) paid to the government when producing crude. This reflects a significant portion of what the United States and the international energy industry have consistently called for. Experts said the move leaves room to negotiate the government's take by oil field and project, aiming to lower the threshold for attracting investment.
Consultancy Ecoanalítica, buoyed by these changes, projected that Venezuela's average daily crude output this year could increase by at least 200,000 barrels from before Maduro's arrest. That means the pace of lifting crude from fields will improve by that much. As crude output increases and more money circulates, the lending capacity of the impoverished banking sector is also likely to expand. Some economists said they could not rule out the possibility that Venezuela's economic growth rate will hit double digits this year, assuming a base effect and a rebound in the oil sector.
But the change in rules will not immediately draw in massive capital. Oil major corporations remain cautious, citing insufficient legal stability and protection of property rights. Over the past month, there have been no cases of oil majors such as ExxonMobil, Chevron or BP launching new field development or large-scale capital deployments in Venezuela. They said with one voice that the investment risk has not been fully resolved just because President Maduro disappeared. With the power transfer structure unclear and the military and security apparatus maintained as before, it is hard for investors or corporations to discount political risk.
In particular, institutional memory of long-running nationalizations, asset seizures and contract annulments in the past is cited as a decisive factor that makes investment hesitant even amid the changed environment. To meet crude production increase projections, clear legal protections such as dispute resolution mechanisms and contract stability must first take root.
That said, the sales side, which carries relatively less risk than investment, is showing some improvement. El País, the largest Spanish-language outlet, said, "The recent changes are appearing first on the side of refiners and traders buying Venezuelan crude rather than in upstream (exploration, drilling, production) investment," adding, "U.S. refiners and international crude trading companies have begun buying Venezuelan crude through U.S.-approved channels."
Financial markets are cautiously stretching. With foreign currency inflows increasing the circulation of the Venezuelan currency, the bolívar, there is talk in the banking sector that there could be more room to supply credit. Ecoanalítica projected that "the increase in bolívar circulation could gradually restore the banks' lending function." However, with the possibility that capital controls could resume or policy could shift abruptly, many hurdles remain before a full normalization of financial functions.
The temperature felt in people's livelihoods remains cold. In the first three weeks of Jan. after Maduro's arrest, Venezuela's inflation rate was 15%. The country has exited the hyperinflation phase that reached 9,585% to 130,070% in the past, but prices remain painfully high. In Caracas, the monthly income of low-wage workers is still $120 (about 174,000 won), far short of covering living costs. Although the period of turmoil after Maduro's arrest has passed, the current business reopening rate in Venezuela is only about 70%. Three out of ten places remain closed.
Experts broadly say institutional change must be proven before investment and livelihoods can follow, rather than a political event like a change of leadership. Local economist Francisco Rodríguez said in an interview with The Washington Post (WP), "With the influx of dollars, the exchange rate and prices are stabilizing temporarily, but there are no proper economic statistics and institutional uncertainty remains," adding, "It will take at least six to eight months before there is a real improvement in purchasing power."
Former lawmaker and economist Ángel Alvarado said, "The current change should be seen as a realignment phase after a collapse rather than the start of a recovery." He added, "Political and institutional continuity, the structure of oil revenue distribution, and whether corruption and vested interests are kept in check will be the key variables that determine future economic recovery."