I've Seen This Movie

 We’re headed “Down The Rabbit Hole” in a minute but first a word on what Nicolas is up to today.There have been stories all over the place about Maduro signaling he would like to make a deal with Joe Biden.Maybe that’s because his friends in Tehran have told him what lousy negotiators these guys are (Biden/Obama et al). I checked with a source in Venezuela and they told me there is a lot of talk about Maduro possibly being ready to step down.Well, I’m not buying it. I’ve seen this movie before.

 Norway has once again presented itself as a mediator between Chavismo and the opposition in the what seems a never ending quest to find a resolution to the crisis in Venezuela.If negotiations do take place this would be the fourth (or is it the fifth?) iteration of an attempt to reach an agreement.Each time is an instant replay of the previous attempt.The Buenos Aires Times did a pretty good “in a nutshell” piece recently.

 Maduro begins with the usual bombast against imperialism,colonialism,and a general demonizing of the US and says in an overly gracious manner that in spite of all this he still wants to talk…for the good of the Venezuelan people.He signals his willingness to negotiate with a few seemingly magnanimous shows of good faith.

 He had the Citgo executives transferred from prison to house arrest. Uhhh… aren’t those the guys that all flew to Caracas under the guise of en emergency meeting only to be thrown in jail where they have remained for a few years now?

 He appointed two members of the opposition to the board of the CNE (the electoral council) to signal a willingness to reform.You may remember his last election was rife with fraud and pretty much all his legitimate opposition was disqualified almost before the election began or so it was ruled by the CNE and upheld by the TSJ ( Venezuela’s Supreme Court..don’t get me started..). Uhh…correct me if I’m wrong but on a CNE board that is a simple majority rule set up with the Chavistas still retaining three seats he hasn’t really given up anything? And are the two dissenting members really courageous enough to go against Chavismo?

 He has also said he’s allowing the World Food Program into Venezuela…for the children.Uhhh…weren’t they ready to come in in 2014?

 He has also put in place a few laws with guarantees for foreign investors however… doing business in Venezuela these days is incredibly complex. One CEO recently said that before Chavismo it was a four step process to export from Venezuela. It is now 90 steps and involves dozens of ministries. It’s worth noting that before Chavez came to power there were only 11 ministries in total. Uhh… does anybody trust that they will be protected from the whims of these dozens of ministers? Oh, and most of the sectors that need help,which is all of ’em, have had businesses expropriated by Chavismo and had legal protection at the time.

 If past is prologue, Maduro has proven time and time again that when he is in a crunch for money( pretty much all the time now) he will sacrifice his own people or any enterprise that’s convenient and send proceeds in one form or another to Cuba to extend the life of his regime.He gave us a peek at his negotiating stance this week. “If you want to negotiate THESE ARE MY CONDITIONS!” Enough already!! Now let’s go Down The Rabbit Hole….

 ….In the first couple of years of his tenure Chavez allowed PDVSA to continue to operate more or less autonomously and although he was getting the expropriation train rolling in various sectors he hadn’t yet cranked it into high gear and PDVSA was still prospering as was the government.As we saw in the discussion of the hospitals, there was plenty of revenue to address many of the inequities in a balanced and sustainable manner.In 2002 all that ended and in his third year in power Chavez went off the rails.In 2002 PDVSA workers,as well as others in Venezuela, went on strike. Chavez used this as an opportunity to fire a lot of people. Estimates range from 13,000 to 19,000 but regardless,with a workforce of 40,000, it was a huge number of employees. Then  came the really big news.Chavez boisterously announced “PDVSA will be red!” (the color of Chavismo). In no uncertain terms the priority was first and foremost party loyalty which translates to loyalty to Chavez.Business acumen and expertise would be secondary.

 The fired employees left Venezuela for greener pastures in the US,Canada,and around the world,a harbinger of things to come,not just in PDVSA but in all sectors of the Venezuelan economy. The good news was there was a wealth of talent at PDVSA and the upper management was still primarily in the hands of experienced professionals.The bad news was that Chavez got on an expropriations binge in all areas of the economy and PDVSA would be no exception. Over the Chavez years Ecuador,also a socialist country, expropriated just over a hundred companies. In roughly the same time frame Chavez expropriated over 1,200.

 Important strategic partnerships with large multi-national companies like Exxon Mobil and Conoco Phillips went by the wayside.The lawsuits from these expropriations would go on for years and continue to this day.This was another opportunity for Chavez to fill the ranks with party (Chavez) loyalists and over the years he triple the payroll from 40,000 to over 120,000. Normally that might put a strain on cash flow but as this was happening oil prices went on an historic run reaching all time highs and remaining elevated for years.

 It is important to understand a couple of things about the oil business in general and Venezuela in particular. Oil is a rigorously capital intensive business.It costs a lot of money to keep those existing wells maintained and pumping. It costs even more to keep exploring for sites for new wells and getting them operational once the site is determined viable. Depending on a number of factors related to accessibility it can take five to ten years to get a new well online.In keeping with our good news/bad news presentation while it’s expensive and time consuming it’s also very lucrative especially in a rising oil price environment.

 To be continued…..

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