REICH & PERDUE: Venezuelan socialism courts an invisible backhand.

Cuban newspaper Juventud Rebelde released a photo showing Venezuelan President Hugo Chavez (left) visiting Cuban President Raul Castro (right) and former President Fidel Castro in 2008. (Associated Press)

LATIN AMERICA

Robbery of American corporation reveals tottering economy
Por: Otto Reich and Jon Perdue
Wednesday, July 7, 2010

Absent a coherent U.S. foreign policy in Latin America, the best ally of democrats in the region has always been the inevitable economic backlash that socialist economic policies create. Other than the military coups and popular rebellions that have removed despots in the region, capital flight and economic chaos have most often augured the demise of the strongman caudillo.

Although it is customary among left-leaning activists to blame the CIA for Salvador Allende's removal from Chile's presidency in 1973, it was the economic bedlam brought about by Allende's nationalizations and economic mismanagement that set the stage for his ouster. This pattern has been repeated with predictable regularity in Latin America, as successive coup leaders have sown their own demise by economic suicide. But this lesson has not been internalized by Hugo Chavez and his fellow evangelists of 21st century socialism, who have staked their longevity in office on the ephemeral vote-buying capacity of redistributionist economics.

The latest illustration of Mr. Chavez's statecraft is the seizure of 11 oil rigs owned by U.S. driller Helmerich & Payne Inc. The U.S. company had shut down the rigs because PDVSA, the state-owned Venezuelan oil conglomerate, had failed to pay $43 million owed to it. This development should not be surprising. PDVSA saw a reduction in revenue from $120 billion in 2008 to $50 billion in 2009 and began to insist that its contractors accept a 40 percent cut in their bills. Rafael Ramirez, PDVSA's president, stated, "We will not pay contractors that have tried to speculate and don't care about our company."

The Financial Times reported in May of last year that Mr. Chavez had already confiscated at least 12 oil rigs, more than 30 oil terminals and about 300 boats from companies that had refused to give up 40 percent of their accounts receivable to the Chavez cause. After the seizure, Mr. Chavez told a crowd of supporters, "To God what is God's, and to Caesar what is Caesar's. Today we also say, to the people what is the people's."

It was this same populist, faux-religious rhetoric that Mr. Chavez used to put the state-owned oil company in charge of his misiones, the social programs for the poor that have diverted Venezuela's "golden goose" oil company from its mission and reduced oil production by 40 percent in the 10 years of Mr. Chavez's rule.

U.S. policy on Venezuela throughout the George W. Bush administration was to downplay Hugo Chavez's histrionics - a policy designed specifically to deny a budding despot the international attention he desired as an acknowledged enemy of "the Empire." But every policy has a trade-off. If the despot is not voted out before he can control the electoral process, the efficacy of this "benign neglect" fades as he consolidates power. Soon the neglect becomes an incentive for him continually to test the "threshold of concern" - the point at which diplomatic retaliation or sanctions are triggered.

Since 2005, Mr. Chavez has been hellbent on crossing that threshold by forming an alliance with Iran and, more important, undermining the sanctions designed to prevent or slow Iran's nuclearization. Both Mr. Chavez and Iranian President Mahmoud Ahmadinejad have used election fraud to perpetuate themselves in power, and both have waged economic warfare against the United States via oil-market manipulation.

But where Mr. Ahmadinejad can count on regional deterrents against retaliation, Venezuela is quite vulnerable to economic pressure. Moreover, if the U.S. decides to pressure Mr. Chavez now, it can indirectly affect the more immediate threat of Iran's nuclear program.

Mr. Ahmadinejad remains overly confident that he can withstand U.S. sanctions as long as Mr. Chavez keeps his promise to deliver 20,000 barrels of oil a day to Iran. If the U.S. quietly announced a policy of replacing the oil it purchases from "unstable" suppliers, the message would be felt unequivocally in Venezuela, which stands to lose much more than the U.S. in any standoff. The fact that oil is a fungible commodity that mostly is purchased by traders on the spot market makes the repercussions of any market manipulation much more deleterious to the producer. So the worst-case scenario for the U.S. could be a brief spike in gas prices. To mitigate this, the U.S. could announce that it will draw on supplies, if needed, from the Strategic Petroleum Reserve.

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