Assessing Venezuela's Economic and Strategic Position

Patrick Duddy, visiting senior lecturer at the Center for International Studies at Duke University, and Miguel Angel Santos, senior research fellow at the Center for International Development at Harvard University, join the Center for Strategic and International Studies' Carl Meacham to discuss recent developments in Venezuelan politics. The panelists discuss a range of issues, including the Venezuelan government's fiscal position, recent unrest in the country, and Venezuela's economic situation.

MEACHAM: Good afternoon, everybody. And welcome to today's meeting at the Council on Foreign Relations.

I want to remind you that today's meeting is on the record. I need to ask you to completely turn off—not just put on vibrate—but completely turn off all electronic devices to avoid interference with the sound system here. If you do need to use an electronic device today, please do so outside of the meeting room. There's an overflow room outside with a live feed of the meeting.

So, on to the event. And thank you so much. I think this is a great option from being outside in the blistering heat. We hope to make this a very unique and useful event.

We have two great panelists here with us today: Ambassador Patrick Duddy and Miguel Angel Santos. Ambassador Duddy is a visiting senior lecturer in Duke's Center for International Studies, and he's, as I mentioned, former U.S. ambassador to Venezuela.

Welcome.

And Miguel Santos is a senior research fellow at Harvard Center for International Development.

They are both accomplished experts and they have some great insights to share with us on today's topic.

So, welcome to you both.

Before I turn it over to them, I want to give you a little context for this conversation. Why is Venezuela so relevant today, and why now?

I'm sure you've heard, just over a week ago, there were pictures that came out of Secretary Kerry's senior counselor, Tom Shannon, who had a meeting with Diosdado Cabello, who is the president of Venezuela's National Assembly, as well as the Venezuelan foreign minister who was also at the meeting, Delcy Rodriguez. And they were at the meeting, they were at a meeting that was hosted by Michel Martelly, the president of Haiti.

Cabello is a close ally of President Maduro and arguably the second most powerful political figure in Venezuela. But he's also under investigation by federal authorities here in the U.S. for his role in large-scale drug trafficking.

Anyway, this meeting got a lot of speculation. I think some folks were interested in knowing what the purpose of the meeting was, given that the direction of U.S. foreign policy most recently, has been to, one, sanction members of the government who have been accused of committing human rights abuses and the United States government also had designated Venezuela to be a threat to national security. So, some folks wanted to get a better definition of what had happened, if Mr. Shannon had been ambushed or what was the purpose of this meeting.

There was a recent piece in The Washington Post yesterday that proposed that it was part of a U.S. strategy to help Venezuela reach a soft landing given its recent instability on the political and economic fronts. And there's a lot that can be made to support that argument.

But whatever the case, Venezuela is in a very tough spot right now. Economically, the country's in real trouble. Scarcity of basic goods is rampant. Falling oil prices over the past year first halted, then reversed Venezuela's economic growth. Black market activity for basic goods for foreign currency has sky rocketed. Chinese loans are the lone pillar propping up Venezuela's economy.

So, this situation has made the political situation even more tenuous. The opposition to President Maduro's government is vocal and active. It's getting increasing international attention.

Prominent opposition mayors, Leopoldo Lopez and Antonio Ledezma, are in prison, currently in the midst of a hunger strike aimed at securing their release. International organizations, human rights leaders and former heads of state have spoken out on their behalf, labeling them political prisoners and demanding their release. And this is a priority for the U.S. side too.

There is an international context as well. The Venezuelan economy is deteriorating and it decreasingly is able to meet its commitments to Petrocaribe, the foreign aid program through which it provides heavily discounted oil to countries mainly in Central America and in the Caribbean. Venezuela has also become a transnational narcotics, sort of, hub.

So people are looking at what's happening in Venezuela and there is a lot of fear. not just about the instability internally but what the implications of that instability means in the region.

So, all of this is coming up as the, or in the runup to, Venezuela's parliamentary elections, which were announced for December 6th of this year. Yesterday they were announced for December 6th of this year. So, the U.S. wants to see the OAS and U.S. and E.U. observers for the elections to make sure everything's done kosher.

So, in this context, we come to this meeting today with these two very, very informed presenters. What I would like to do is, I want to start from the domestic side and just get your impressions on what's happening within the country and then move into what that means internationally, the bilateral relationship, what it means regionally.

So, I would like to turn it over to you, Miguel, first to begin. Then Ambassador Duddy, and we'll take it from there.

SANTOS: OK. Well good, Carl.

Thank you all, folks, for coming down and for your interest in Venezuela. And I also thank CFR for the invitation.

I guess interest in Venezuela has gone up these days, and for some people, it's the right thing for the wrong reasons. But still, interest is good.

And I guess I'm just qualified to talk about the—verily about the internal economy, because, as most of you know, we've been driving without instruments already for a while. The last central bank figures on balance of payments and growth were published third quarter of 2014. so we are about a year running, driving without instruments. There are some numbers we can make.

So, what I make out of the economy and then I can also talk a bit of internal politics and I'll decline to the Ambassador the meaning of the meeting of Diosdado Cabello and Shannon. I hope you have better information than I, which is not putting the bar very high.

(LAUGHTER)

So, on the Venezuelan economy, we have a government that basically is getting 50 percent of the revenues it was getting last year. And so a key question is how has the government reacted to that? How it's reacting to that? Who's been affected? Which has been the preference so far?

And well, you know as well the government has defaulted already on everything that walks and moves, except for Wall Street. And there seems to be some sort of reluctant—reluctance to default on Wall Street.

So, the first thing that I guess I can say is that I believe the Venezuelan government will default the moment they really run out of resources.

I guess that doesn't mean zero. It means a sort of minimum level of the international resource, which, by the way, must be—mustn't be very far away from where we are now, at $16 billion, but I guess they may manage to cope with international payments throughout 2015, then '16 and '17. That's very, very long term for Venezuelan standards.

So, what the government has done is one of the worst and most inefficient economic adjustments you could make, which is restricting imports and cutting them down by a number we are not aware of. We just know that up to May, the dollars the government sold to the private sector have been cut down by 71 percent.

That's a huge adjustment, but since half of the imports are being made by the government itself, there is no statistics on the government. It's hard to say where the final figures on imports will stand up.

So, it's a huge cut in private imports. That means a large fall in consumption, rising lines.

And then, second thing the government decided to do is not to do this adjustment through prices, but through quantity. So they have created an exchange rate system who's totally wild.

So, whenever you find yourself thinking about the Venezuelan regime, I don't think that will happen, that will go wild, just remember these are guys that have an exchange rate at six and another at 400. So, to me, after that, anything can happen.

So they have chosen to have three official exchange rates, but the average, the full average of the official exchange rate, is actually lower than last year. So, from a fiscal standpoint, the sort of devaluation they tried to do with the schematics has been translated into a revaluation of the rate at which they sell dollars at the private sector, which is irrelevant for fiscal purposes.

And given that prices didn't go up for the exchange rate, what they decided is to cut down imports by quotas, so they have this Draconian process to import that have resulted in a lot of less dollars being allotted on the official exchange rate, so imports are coming down sharply.

So that's one thing.

Second thing, I know there are guys around that think that the Venezuelan government is sitting in a pile of money, waiting for who knows what to use it. But given that we lack statistics, what I can say is look at what the government is doing. And what the government has done this year is tapping into any possible source of foreign currency. no matter how small. And no matter, how a lack of strategy, like selling a refinery in the U.S. for $300 million.

We throw in a Venezuelan special drawing rights at the IMF, three months ago, about $380 million and now requesting $1.9 million in addition to that. Given that when you go to the IMF for an express help package, these packages typically come in multiples of your special drawing rights, the withdrawing of Venezuela's special drawing rights is not putting money from one pocket to the other, it's actually reducing the scope that we have with no or little conditionality to put up a help package for Venezuela.

So they have done that as well. They have badly discounted oil debts with the Dominican Republic, $1.9 billion. They are trying to do the same with Jamaica. Not sure they are going to be able to do that.

They swapped the gold that Chavez left abroad when he decided to repatriate the Venezuelan resource of gold to the central bank. It's been swapped in an operation that hasn't been completed, but it's $2.2 billion with a purchase agreement in four years. They have decreased international resource from $20 billion to $16 billion.

So, to me, more than the numbers and the nitty gritty of the details that we don't have, this is not the behavior of a government that is sitting in a pile of money. This is the behavior of someone that is just getting to the house and looking at the suit and see all the pockets and opening the drawers and getting whatever you can gather, just to service foreign debt.

Which is a big interrogation mark, question mark, why are they still servicing foreign debt, given that, from my perspective, they are already incurring in the cost of defaulting?  

When you default, two things happen: you don't get more money from the market. Well, a 25 percent yield, you heard actually, the market is shut down for Venezuela. Second thing, you get a very bad reputation. So they got the worst reputation and they already have the market shut.

So, but there is—there is a big question mark, as, yes, oil has come down a lot. It's down to, my number is 36 billion—38 billion a year at 50, 55. If we default, we get rid of 11.

So, it's still—they are wondering how defaulting on this 11, separating that into PDVSA and sovereigns, will have an impact on their oil operations, so they're extremely scared about that.

So that's, I guess, one of the reasons more than,, like, morality, it's actually a twisted morality, to starve your country to keep on paying debit at huge yields, but that's what they've done.

So, to me, that's the way they have chosen to adjust. When I do my numbers, I still have $6 billion, $7 billion. I have no idea where they're gonna come from 2015. And, we are already assuming—and this is important from a political point of view, and maybe I can pass that on to our next subject, is that this means imports down to a level we haven't seen since 2000.

So, this means that today's 2015 imports may be around $30 billion, $32 billion. Well, these are actually levels we haven't seen before the national strike of 2002, when Venezuela had an industrial apparatus, when we relied a lot less on imports then we rely today, when we—when our industrial apparatus depended a lot less on intermediate imported inputs to keep on working. So, we're going back to a figure we haven't seen in a good while on an economy that depends a lot more on imports.

So I guess that raises a big question mark. I guess they're really running out of cash, in my opinion. Of course, they can try to go out and sell PDVSA, but I don't think they have political sound (ph).

They can still sell the gold. We still have a $14 billion gold reserves in the central bank. The last time I was there, I was told they are indeed there. I understand people outside Venezuela, it's a legitimate concern, is the gold's still there. The folks at the central bank think it is still there. They still can run that down to a number somewhere in six or tens, and then at that point decide what to do.

So, that's my take on where is the economy now, how has the government adjusted, and what are the consequence of that adjustment.

MEACHAM: Patrick?

DUDDY: Thank you very much. It's a—it's a pleasure to be here, I would say again. The last time, though, I spoke in this building on Venezuela was a couple of years ago. At that point, President Chavez was still alive, though suffering from cancer.

Very briefly, for those of you who may not know, I was ambassador in theory from 2007 to 2010. On September 11th in 2008 I was expelled from Venezuela and declared persona non grata.

Rather to my surprise, some months later, after a change of government here in Washington and a hand shake at the Summit of the Americas meeting in Trinidad and Tobago, I was asked to return to Venezuela, which I did in 2008, and finished my tour there.

I've used the joke before, but I somehow was translated into the answer to a very peculiar form of Trivial Pursuit. As in "who is the only U.S. ambassador ever to be declared persona non grata and return to the same country in the same capacity attributed—accredited to the same government?" And it is oddly, a category of one.

(LAUGHTER)

Remember that if there's a—if you see, you know, the diplomatic version of Trivial Pursuit.

MEACHAM: On Jeopardy or something.

DUDDY: Or Jeopardy, that's right.

I thought I'd make just a couple of remarks. And I'm—Miguel, with your permission, I'm going to give you a couple of background bits on the economic picture before I move to a couple of other things.

It's important, I think, for the context, to understand the context in which Miguel's very useful analysis needs to be understood. First, Venezuela depends overwhelmingly on oil for its export earnings. They get about 96 percent of all export earnings from petroleum.

Venezuela used to be a net exporter in a number of other areas as well, including food. They are now importers in almost every category, up to and including oil, in the form of gasoline, as they often have been—in recent years have been forced to import light sweet to mix with the local, the bulk of the local product, which is heavy and sour.

Export earnings in Venezuela account for, we used to say about 40 percent of the national budget. These days, the working assumption is it is well over 50 percent of the national budget. And most of the nonpetroleum industries have been eviscerated. They have been either nationalized or expropriated.

And in no notable case of which I am aware are any of those industries now producing even at the same levels at which they were producing when they were taken over. There may be some exceptions to that, and, if so, I beg your indulgence on that point.

So, oil is critical. It, at a minimum, accounts for 50 percent of the government's budget. And oil has lost nearly 50 percent of its value, obviously, in the last year. This is what accounts for the figure that Miguel used as a dramatic drop in government income.

Now, because the other productive industries have also suffered dramatically in recent years, while at the same time the number of Venezuelans who depend economically on the government has gone up, the dilemma for the government is even more acute than the percentages might reveal.

And we see this in a number of ways. One, of course, is the street value of the currency. The official exchange rate is 6.3. The parallel, or black market rate, is, I think, as of yesterday, 434. Right? 434.

But mind you, this has happened in an environment in which inflation, last year, 60—more than 60 percent. The previous year more than 50 percent. This Monday there were reports in the Venezuelan press that Barclay's, possibly, or the Bank of America, I can't remember which, is estimating that inflation in Venezuela this year is now already over 100 percent.

Indeed, exports have gone down. But it has created a very curious dynamic. Why? Because people have more local script, but it is worth less every day.

On the other hand, because it is—their local currency is losing money so rapidly and it has really crashed, as any number of media reports have described in recent months, because it is losing value so rapidly there is a real push, there is a compulsion to spend it. But there's nothing to spend it on because imports have also been suppressed.

As a result, among other things, we're seeing lines of thousands of Venezuelans looking to buy basic staples. This is creating all kinds of internal pressures, and we can explore what some of those pressures are.

MEACHAM: That's great, that's great.

Let me just go right to some of these things that both of you said, because I do want to take it from the domestic pressures to the international and what that means, what the implications are for Venezuela's role in the region and in its dealings with the United States.

But, where's the economy likely to go? As you've expressed, mentioned, we know the statistics, we know that the fundamentals are in trouble.

But give us some clarity in so far as where you see this going. Particularly, and you hear this from a lot of folks, is Venezuela likely to default? That's something that a lot of people are interested in for different reasons.

So, if you could give us a little bit on that, go a little deeper on that, and then I want to ask you, Patrick, a little bit on how you see the domestic situation politically and how that plays a role in Venezuela's approach to its foreign affairs.

SANTOS: Well, it's hard to say where it is going beyond 2016, because the government in 2014 had a sort of golden chance to introduce the myth that goes around some investment bankers here in the U.S. of the practical Chavez (ph)—no, these guys are gonna get practical at some point. They are gonna unify the exchange rate. They are gonna open up the oil business for investment, and then Venezuela will flourish and then they will never leave.

So, that's the golden chance for the practical Chavez (ph). Well, it's 2014, so you got no elections. You had a president that started on a weak platform in April 2013, but managed through the end of the year, so it was more consolidated by the end of the year than at the beginning. No elections in sight. Ramirez is going around the world presenting a sort of an adjustment package unifying the exchange rate. It didn't happen.

So, I think—I go back to this, because I think this is important, that they didn't do this, seeing the storm coming, at a time where they didn't have elections and they had some sort of political capital. So I guess 2016 onwards depends a lot on the political capital they get out of the elections that are happening in December.

But, before any practical consideration, keep in mind we're talking to people that do not believe in prices, do not believe in markets, do not believe in the role of prices in assigning resources efficiently so that the economy can make the most out of their scarce resources, They don't believe in that.

So it's hard for me to think that the policy will change dramatically. If I will have to bet, as long as they're in power, there will be an exchange control. There will be an official exchange rate they will use to give bribes here and there to their own people that sustain them in power, and they will use that to asphyxiate those enterprises that do not help them or finance the opposition.

So that's a key mechanism. So beyond the fact that they don't believe in that, I don't see that the government has the capacity to implement a serious adjustment in the economy.

Probably they know more than what we know, in the sense that you know when you do an adjustment, a lot of the outcome of the adjustment depend on the credibility that you are able to communicate. So if you open the exchange rate, you let prices go, well, it all depends on does the market believe this is sustainable or not?

And this is a piece they will never gonna have. They're never gonna have credit from the market. They're never gonna have credit from the Venezuelan people. The Venezuelans are used to grabbing a bolivar and running away to exchange it for dollars or goods.

And, as the ambassador was saying, nowadays they can't do either. So they are forced to keep it so they get interest rates are between 7 and 10 with inflation running at 108 over the previous 12 months. This is a key financing mechanism for the deficit.

If the government were to stop printing money and getting revenues out of financial repression, all of a sudden they will have a 30 point of GDP deficit instead of a 21, as they have now.

So where is the economy heading? Given that I mentioned on my first intervention that they have actually appreciated the exchange rate, the fiscal deficit has grown in spite of the loss in real value of the wages...

(CROSSTALK)

MEACHAM: What do you think the fiscal deficit is right now? 20 percent?

SANTOS: 20 percent.

MEACHAM: That's what I thought.

SANTOS: More than half financed by printing money.

Now, the rate at which the money is growing, which surprisingly is still available on the central bank Web site, up to last week, has accelerated from 64 percent, 65 percent a year to 75 percent over the previous two weeks.

If they want to finance 12, 13 points of the deficit out of printing money, they need this rate to go to 100.  So we should see this rate that has accelerated from 64 to 65 accelerating, now 75, going up to 100. And that is what's fueling the expectations of inflation in Venezuela this year running at 150 percent, 170 percent.

Why, if the demand push is 100, because you also have a sharp decrease in supply. So the combination of increased demand via printing money through a decreasing supply, given that (inaudible) that are substantial for whatever is left of your industrial apparatus to start working, it's going to lead to an inflation well beyond 150 percent.

So that's where the economy—it's heading in the short term. Of course, we will not know this. Last time we knew the inflation rate it was December 2014, so it's been five months.

So the government is now in this attitude of yes, and what? I don't publish the inflation rate, so what? I had to appoint two of the electoral council members myself to the opposition and one a mutual agreement. I appoint 4:1, so what? So, it keeps on going, it keeps on going. So I don't see the economy going to a different point.

Default, it's a different matter, because I think they've managed to hoard cash to serve the debt this year. I mean, I wouldn't be surprised if they stop paying, but apparently they have managed to hoard the cash they need to pay $5.5 billion, $6 billion that are coming September, October.

Next year is a different matter. Oil prices go up, then they might keep on paying. I can't say anything about default. I can say that had we had a different administration, there wouldn't be any need to default at all. There would be plenty of good will in the market for a political transition, and then we could easily issue debt at a lower interest rate, still high for what we are, but lower from where we are today, and get rid of these humps that are coming in 2015, '16, and '17, which the bank has judged having a cumulative default probability of 97 percent.

So I don't know more than the people that is out there pricing the Venezuelan debt. I know with another government there wouldn't be any need of default, but with the current government it's a—it's a big question mark, and I think the market is acknowledging that. And if oil prices do not bounce back, it's going to be very hard to avoid default.

MEACHAM: Patrick, we have about five minutes. So I would like you to sort of talk a little about the political situation that you're seeing in Venezuela and how that situation—what place, what role, how does that influence Venezuela's foreign policy?

DUDDY: As a segue, let me say I'm convinced that the Venezuelan government is hoping against hope that oil goes up.

At a minimum, to return to Miguel's point, they're hoping against hope that oil goes up because there's not a lot to be encouraged about in any other sector. In no small measure, because of the increasingly acute and—and deteriorating economic situation, President Maduro's support, never strong, has been deteriorating almost since he was elected.

And I note in passing that most analysts would suggest that he began his own election campaign after Chavez's death with about a 10 or 12 point advantage. If you accept the official vote count at the end of that process, he won by about 1 or 2 percent, which—which—which some wags note, mean that he managed to lose 10,000 votes every day he campaigned. But in any event, arguably, finished that campaign with 50 percent; it's now widely believed that his support is at about 25 percent.

It is also widely believed, and I've seen two sets of polling data recently that would suggest that the Venezuelan public is now souring on the Bolivarian experiment and that most voters, possibly by a factor of as much as two-to-one, are indicating their intention if they vote to vote for an opposition candidate.

Are those numbers accurate? It's very difficult, I think, to say. But there is a certain unanimity in the polling results that I've seen that would suggest that the—that those who at a minimum define themselves as nongovernment, either opposition or independents, are overwhelmingly in favor of a change heading into the legislative elections in December.

The legislative elections are important for a number of reasons. The first, and perhaps most urgent, is because of the—the position of Diosdado Cabello, the gentleman with whom Ambassador Shannon talked in Haiti, depends on a government majority in the legislature.

And were the legislature to be taken—control of the legislature to be won by either, you know, one or a set of parties defining themselves as opposition, he would certainly lose his—the position of president of the legislature. This also opens up the possibility eventually of a recall, a referendum for a recall vote on the presidency, et cetera.

So, it's a very problematical moment. It's clear—it's clear that there are, for instance, serious problems with criminal violence in Venezuela. But what appears to be moving the electorate are the economic difficulties, at least at this point.

Now, the opposition has never been a single party. but rather a range, a spectrum of political groups, most organized more or less under the rubric of the democratic—the MUD, the democratic unity table.

Early on, there were a number of prominent leaders of that group, and there—there are still a number of them, but one of them, Leopoldo Lopez, has been imprisoned since, well, it's now 16 months. And he's been on a hunger strike, which his supporters are hoping he will end today, for the—for the last month.

His imprisonment has had a curious, I think, impact, both domestically and internationally. It has, it seems to me, served as a kind of warning domestically that the government has every intention of being tough with people they see as promoting instability or an overthrow of the—the Bolivarian revolution.

Internationally, it has had the effect of galvanizing support for the opposition and become emblematic of a deteriorating human rights situation.

Now, the date for the legislative elections was only announced yesterday, right? What I think some Venezuelan observers found almost as interesting and even more alarming than the—the government's decision to announce a date was that later that same day, President Maduro publicly stated, according to the Venezuelan media, that if the opposition were to win, he and his party would take the fight to the streets, right?

On the very day in which they announce the legislative elections, the president warns that there will be fighting in the streets if the party of government is not returned to power in the legislature.

I have yet to see international reaction to that declaration, but I suspect that will have people talking in many capitals, both within the Americas and in Europe.

I can stop there...

(CROSSTALK)

MEACHAM: That's a—and there's so many questions that can—we could continue asking both of you, because you've done it so well.

So, but now we're going to invite members of the audience and our national members to join the discussion. If you could please wait for a microphone to come to you, then stand, state your name and affiliation before asking your question.

Please keep it to questions and not statements to allow as many folks to be able to participate. And remember, the meeting is on the record.

So, we're going to start with this gentleman over here.

DUDDY: I have all afternoon, however...

(LAUGHTER)

... so if you want to make a statement, go ahead.

QUESTION: Thank you. Daniel Friefeld, Callaway Capital. China and what range of variance would China countenance in Venezuela, given its historical relationship with this government?

DUDDY: Well, I note that China has for the last at least five or six years been Venezuela's largest creditor, right, number one.

Number two, the arrangement for repayment of loans to China has largely been articulated in oil shipments, right? In other words, they—they ship product to amortize the debt, right?

Most recently, as the—the government's fiscal problems have become both more acute and more public, there—there has been—there have been reports that China is about to extend another line of credit for, I don't know, $3 billion to $5 billion.

I don't have a confirmation of that, but they clearly are—are deeply engaged there. What one doesn't know is how they will caveat loans going forward, particularly if there is the perception that the government is in trouble and—and could either in the event of a free, fair appropriately internationally observed set of elections lose power or, speaking only economically, default.

So, I—I think there's, you know, one might say that that's the—in Spanish, the (SPEAKING IN SPANISH). But it does seem—you know, they—they are critical players in—in large part because they've been bankrolling the government.

On the other hand, amortizing the debt that way means that Venezuela has already spent part of what they would ordinarily be earning by the oil they, you know, from the oil they pump.

So, it's not just that the prices have fallen. It's that a part of what they're selling isn't generating any new revenue. And a part of the rest of what they're selling is either being shipped directly to Cuba or being sold with concessionary financing to their Petrocaribe partners, which are about 18 small countries in the sub-region.

MEACHAM: Did you want to follow up?

SANTOS: Yeah, just a couple of pieces of information. While we were in the campaign in 2012, we were approached by someone without a name, with no confirmation, working for the Chinese in Venezuela. and they were very worried. I said, "Well, worried about what? About we winning?"

"No, no, we are worried about Chavez winning again," because they were extremely worried in the way Venezuela had been using the funds that they have available in the account of Chinese Development Bank. They have used those funds—those funds to get into arms contract with Russia, for instance, that the Chinese were very worried about.

And the Chinese wanted to know our position on—on China. And our position on China, and this is still today, is I want to sell oil to China? I do. I want to import things from China? I do. Do I want a credit at the Chinese Development Bank? Yes, I do.

But don't get those three in a combo, because there's no way we can value the welfare (ph) of the package, which is I think what's happening with the current Chinese fund.

I know the government went to China in January to offer China the whole Guyana complex, all Iram (ph) and Armenian operations. And they were surprised because the Chinese had a complete due diligence of every business in Guyana, all in red numbers, all with an inflated payroll and all forced to sell the proceeds of exports to the central bank at 6.3 bolivars per dollar. So they were very much aware.

So the Venezuelan government reacted, offering an enclave in Guyana to the Chinese. They were going to give you conditions so that operates within that small context in a different way. And the Chinese say no, whatever you're giving to us at this point in time, you have to make it open to others.

And I think that they are very much aware—we are all here talking about how weak the platform of the government, what is going to happen next year, are they going to default or not—I mean, there's no way the Chinese are not aware of this. So I think they are concerned.

My understanding is they have been willing to accept lowered shipments of oil that have come down from when we were in the campaign 600,000 a day to 400,000 last year, now down to 330,000 barrels per day. And this means lower amortization on the debt that is already outstanding, and that will create some cash for the government because you can go and sell those barrels elsewhere, but that's different from fresh money. That, I haven't seen coming into Venezuela from China this year.

But still, it's an open question. But I think so far, it hasn't happened.

MEACHAM: Up here in front?

QUESTION: Pedro Morelli (ph) from B&B Consulting (ph). Professor Duddy, one of the interesting—well, first, let me make a point. Leopoldo Lopez lifted his hunger strike about an hour ago.

DUDDY: He did? OK, thank you. I'm glad.

QUESTION: And so, that's very significant. I think he had really got to a point where it was probably going to do a great deal of damage to his health.

The article that Jackson Diehl wrote explaining Counselor Shannon's surprising meeting with Diosdado in Haiti made a point that I think it's important. And he said that it would seem that repression, or at least the people who are making decisions on hard things in Venezuela are the Cubans, and not even just the Cubans, but the Fidelistas. and that Venezuela might be the last stand of this group of people.

It's been reported that Ramiro Valdes, famous or infamous minister of interior, has been heading a lot of the repression and counterintelligence activities in Venezuela, and that Orlando Borrego, infamous also for a lot of the nationalizations in the early '60s, is really the person running the economy and going after the last remaining private company in Venezuela, which is Polar, which is really been surrounded through all kinds of activities.

And it would be surprising to see why they're doing this when we've got all these shortages and you're actually moving rapidly to eliminate the last standing private company.

The U.S. is rushing or moving at a fast pace to normalize relations with Cuba. Does it make any sense to allow Cuba to go back into a normal relationship if there's an indication that their involvement in Venezuela is part of the reason that it's creating chaos that also concerns the U.S.? Does—does this administration have any way or any willingness to link both issues in conversations?

DUDDY: To make sure that I've got the question...

(LAUGHTER)

MEACHAM: He means you're by yourself on this one.

(LAUGHTER)

DUDDY: I inferred that.

MEACHAM: All right.

(LAUGHTER)

DUDDY: I haven't seen, certainly, any public discussion that would suggest at this point that the U.S. is linking progress on the rapprochement with Cuba to Venezuela.

My impression of Tom's—Ambassador Shannon's—Shannon's trip to Haiti is that he had—and I think Jackson Diehl, and to some degree, Mary O'Grady, as well, although they took slightly different approaches to—in their analyses of the—the meeting, I—I think there's—there was a lot of merit there, and I think they largely understood what was going on.

And Shannon was interested in Leopoldo Lopez's well-being. And I—I think there was considerable worry here in Washington that his health would—was deteriorating. And it's hard to—I'm sure it was hard to imagine that there would be much sympathy for Leopoldo Lopez within the government.

My own sense is that he is one of the figures in the—in the opposition that the Chavistas have most feared over not just the last couple of years, but dating all the way back to the time when he was declared ineligible to run for mayor of larger Caracas. I mean, I think that was—he was one of the targets of—of the Chavez government at the time because there was a sense that he resonated with the larger Venezuelan public.

So the—the Obama administration was interested in his welfare and—and eventual freedom, along with the other political prisoners, as well as in pushing for insisting that as signatories to the Inter-American Democratic Charter, Venezuela had to hold its—its elections.

And given especially its recent history and the, you know, the declining political space there for the opposition, that to be plausible, the elections were going to have to be observed, not just "accompanied," to use a term in English that the—that the—the government uses. I think that's what he was doing down there.

There may have been conversations about other things, but I—I haven't seen anything linking the two subject areas.

And I would note, of course, that it—it's very important to understand the vastly differently character of the sanctions that were signed into law last year by the president, then announced in March and in the executive order. The United States is sanctioning a series of individuals for human rights abuses and/or significant acts of corruption, not the government in its entirety nor the Venezuelan people or economy, vice the embargo that we've had on Cuba.

So it seems to me in the first instance, we have to understand that we have two very different sets of circumstances. I haven't seen any evidence that we are—are—are linking the two. There—there may, and there has been some speculations that the Cubans might try to link the two.

And in terms of the U.S. interest going forward, those who support the—the administration's opening I think simply insist on two things, or possibly three. A, the embargo never achieved what it was hoped—what was hoped for it, and our Cuba policy had become an—an irritant in our relations with the rest of the hemisphere, captured perhaps most significantly in the region's effectively declaration to the United States at the Cartagena Summit of the Americas that there would not be another Summit of the Americas if Cuba couldn't be—couldn't be included.

So, the—the administration basically is—is saying, oh, the embargo didn't work, and now it is essentially poisoning the well for our relations with many of the other countries of the region.

And there are those who would argue that even a commercial opening will inevitably begin to undermine the essentially authoritarian character of the Cuban government.

So my sense is the administration thinks that they have—they have a good—a good case for moving forward and that engagement both there and with the rest of the region holds out a greater promise for improving the situation on the ground in Cuba than—than—than the policy that we had had heretofore for the last more than half century.

MEACHAM: OK, let me take a question from up front here.

QUESTION: Thanks. I realize a lot of—Steve Rodriguez (ph), I work in venture capital. I realize a lot of—a lot is typically made of the cost of production, right? Someone will say, oh, well, if oil falls below X amount of dollars, then they can't possibly, you know, continue on.

Having said that, with Venezuela, what does—in your estimation, what is their actual cost of production and what can they get by with in order to sustain, say, 12 or 18 months out?

Because I realize, especially in your estimate, you had said, well, it could be 2016, 2017. Have you done any kind of modeling that indicates what, you know, what will allow them to kind of tread water, you know, or even gain a little bit of air speed in terms of their economy, assuming that all other reforms, like, don't go anywhere? Thanks.

SANTOS: Well, I have no idea on the cost of a oil barrel. I mean, it's like, I have run simulations, but still, highly theoretical, I will say. But some people in the room have done those numbers, like...

DUDDY: Alexandra (ph), do you want to bring them on up?

SANTOS: I mean, the numbers are, I mean, around $50, $60, $70, still at $70 per barrel, servicing that, it's very uphill for Venezuela over the next two years.

So that's what I've seen. So, if I will—to reveal more, I would be speculating. It's all speculation cuts (ph). I mean, PDVSA is not publishing their financial reports. They are all muddled (ph) into this big PDVSA worldwide company with all sort of social transactions and costs involved that we cannot tell apart. So I don't think we could actually assert that.

But people that expect to do that, which is not my case, I've done the number and I trust them. The numbers are around $70 per barrel, you will still have trouble servicing that over the next two years.

DUDDY: Can I just add a couple of things? There are—there are a mix of things that you need to take into consideration.

First, there is the question of how much does it cost to get X volume out of the ground, right? Then, how much does it cost to refine it?

What we know is that the—the Bolivarian, you know, Republic has ignored or underfunded the—the sort of, you know, the—the infrastructure of the oil sector. There's less and less light sweet—sweet being produced now to the extent that they have recently begun buying light sweet to mix with the heavy and extra heavy crude that they're pumping out of the ground, right? So the—the costs have to be seen in a number of different contexts.

Beyond all of that, there have been reports over the last few years of a long series of—of problems in Venezuela's own refineries. Again, largely, according to some analysts, because they have failed to invest in those refineries as they ought to have over time.

And most recently, we've been seeing reports of efforts to sell refining capability abroad, the Chalmette, for instance, refinery, and other things, which will make the Venezuelan oil sector even more dependent on external factors.

Now, all of that being said, which is another and perhaps even more detailed way of saying it's hard to get your arms around those numbers, the really critical numbers I think for our purposes today have to do with what the budget hypothesizes will be the—the—the level at which oil is sold on spot markets and therefore the income that the government will receive from it.

Remember, they're probably getting, at a minimum, 50 percent of the government's budget from oil revenues. Prices are down 40 percent. So, what—what was in the budget? Are they—have they assumed income from oil at $60, $40, $80? Those are the critical numbers.

SANTOS: So, just one more note on that. You might see over the next year a small spike into Venezuelan oil production, which doesn't mean a spike in cash. The reason being I know the Venezuelan government has been reaching out to their partners, particularly in the Orinoco Belt, and asking them to pool Venezuelans' share of investments so that they can start pumping oil at a faster pace.

So the partners have said yes, that has good conditions that were put to us back when we were on the campaign. First, we commercialize the oil that correspond to us as partners, not you. Second, we bring our own service structure and we do our own procurement. We are not going through Bariven again, where you've been like hair cutting us through the year.

(CROSSTALK)

DUDDY: Tell about Bariven. Explain it.

SANTOS: Bariven, it's—it's an institution created by PDVSA where if you're going to buy any...

DUDDY: Which is the state oil company.

SANTOS: ... as a partner, anything from a pencil to a pipe, you need to go through Bariven as your sole stop.

So, of course, I mean, there you've been ripped out by the government. And so, one of the conditions the partners are putting, it's I do my own procurement, I bring my own service structure, and, on top of that, I deduct the principal and interest of your share of investment and on top of that, let's do a schedule to amortize the debt you already have with me today.

And my understanding is this deal has been made to zero cash for the next years for the Venezuelan government. That's what I'm saying.

I hope this happens, because it may mean the country is resuming some type of oil activity there that we are amortizing this accumulated huge debt that no one takes into account on their report, because it's not financial debt reported by the Bloomberg and Reuters. And I hope it happens, but it doesn't mean there will be corresponding cash inflow to Venezuela.

MEACHAM: All right, I think we have one more. And I'm just going to caution you here, I would like to remind you that this is on the record, the first thing.

The second thing is that I'm just going to have one short follow-up after this question. This question can—this event can obviously go on for much longer than this. But, let's go here with the question.

QUESTION: Claire Brumberg (ph), from Foley Hoag. I'm trying to get a sense of this discussion in the larger context.

There have been discussions and news about the dire economic circumstances and political instability of Venezuela for many years now. Is—is this discussion and what we've learned today, is this a continuing accumulation of the difficulty that we've seen economically and politically for Venezuela over the past many years? Or is Venezuela now in a fundamentally different place?

MEACHAM: And on that, because that is exactly—I think that's a great point—is there a breaking point here? With the political side and with the economic side? Is there—is there a scenario that we see that Venezuela, because of the situation going so badly, that there's something, as she mentions, that's fundamentally different right now compared to where we've been before and that something is about to happen?

DUDDY: And I'm—I'm sure that we can both give you a reaction. I noted for, you know, for my own purposes before I came today that to some degree, the—the eventual dissolution of—of Venezuela or the Bolivarian experiment has been something of a—a—a death foretold, right?

You're—you're exactly right. People have been saying for a long time now this—this appears to be unsustainable, right? And I think many of the policies are now proving, in fact, to have been even at the outset unsustainable.

But—but something has, in fact, changed. Now, when I was ambassador in Venezuela, I heard lots of complaints about how the—the government had manipulated various elections, and notwithstanding, you know, one group of observers or another, how they—they had managed to exaggerate their support within the people and—and that sort of thing.

I made it a point while I was there to talk to lots of pollsters. And one of the things that I observed was that in instance after instance, there was a vague approximation of the independently collected polling numbers with the election results, this is in the early days. President Chavez did resonate with a big part of the Venezuelan public.

Now, President Maduro has from the very beginning resonated a lot less, right, a lot less. And the polling would suggest, if not for the first time, but in a much more significant way, the support that had been there for President Chavez has eroded and eroded dramatically, right? This does put the Venezuelan government in a very different position.

Now, President Chavez was wont to insist that if he were not returned to office, he said this, I think, at one point, for instance, in early 2012, there would be fighting in the streets, right? And that—that was, to some degree, clearly intended to lay down a marker. His brother, actually, when he first got sick, publicly advised the party that they needed to be prepared to defend the revolution, if necessary, by force of arms.

All of that being said, the numbers then still consistently showed a core of support for Chavismo that—that was pretty substantial and substantially greater often than not only any one party in the opposition but even the—the aggregate of parties that define themselves as opposition and not—not just independents. I think that has changed.

Now, we remain—we remain, I think, uncertain of the degree to which all of the—the—the various factions within the opposition will show themselves to be capable of coalescing going into the fall.

And we also, it seems to me, and I'm—just one other point, heretofore, the region has been very disinclined to criticize the Bolivarian revolution, no matter what was happening domestically, right?

Now, early on this was in part because President Chavez's message to his own people and to the region resonated, right? Since President Maduro was elected, that has begun gradually to change.

Now, we have not seen Dilma Rousseff or others come out and decisively—and say definitively things have gone off the rail. But we have recently seen 26 former presidents from Latin America plus the former president of Spain call for the release of political prisoners, express public concern for the deterioration of—of human rights and the shrinking of—of the space for genuine democratic activity.

This—this is a real change, and we have begun to see statements floating up from other parts of the hemisphere, as well. So, is something different from, say, seven or eight years ago? I would say yes.

SANTOS: Ambassador, here's one question for you.

DUDDY: That's not fair.

(LAUGHTER)

MEACHAM: This is the final question.

(CROSSTALK)

SANTOS: Do you think—do you think this—this movement you've just described can force the Venezuelan government to accept international observations within the elections, as opposed to "accompaniment," which is the Carter Center, which is not precisely a staunch critic of the Venezuelan government, have said it's basically a facade?

MEACHAM: In 10 seconds.

(LAUGHTER)

DUDDY: Maybe.

(LAUGHTER)

MEACHAM: OK.

SANTOS: Took less than 10.

MEACHAM: Great. All right, well, I want to thank Miguel and Ambassador Duddy for this wonderful session.

I want to thank you for coming. Would you join me in a round of applause?

(APPLAUSE)

END