Venezuela: Can Trump’s Coercive Diplomacy Help?

By Michael McCarthy*

A large auditorium-style room filled with people watching a speaker at the front

U.S. President Trump addresses the United Nations General Assembly on September 19, 2017. / John Gillespie / Flickr / Creative Commons

U.S. President Trump’s new rhetorical attacks and financial sanctions against the Venezuelan government suggest a shift toward coercive diplomacy aimed at achieving regime change, but U.S. power faces significant limits in the conflict-ridden country.  At the UN General Assembly on Tuesday, Trump called President Maduro an authoritarian and said “this situation is completely unacceptable and we cannot stand by and watch.”  Washington’s approach emphasizes sticks – sanctions against President Maduro, senior advisors, and threatened action against the oil sector – over carrots, while also voicing support for the opening of new mediated face-to-face talks between Maduro and the opposition.  A contact group of six Latin American and four European countries is promoting the talks, with the backing of UN Secretary General and the Vatican, to help avoid the worst-case scenario of open conflict.  Previous efforts to coordinate a multilateral coalition that simultaneously keeps the pressure on the government while opening negotiation avenues have failed – and agreeing on a roadmap is even more complex in view of the installation of the Constituent Assembly that stripped the elected, opposition-controlled National Assembly of its powers.

  • Trump’s new Executive Order directs financial sanctions that come close to directly threatening Maduro’s vital supports. It bans Caracas from issuing new debt in the United States and prohibits U.S.-based CITGO – a wholly owned subsidiary of the Venezuelan state oil company – from repatriating dividends to Caracas.  These measures will impose austerity on Maduro (who claims he will still make upcoming debt payments) and future actions are likely to try and undermine the government’s economic foundations.
  • In addition to installing the Constituent Assembly, Maduro seems to be pursuing a new regime-survival strategy in which he plays the role of a non-vengeful victim. Maduro criticized Trump’s sanctions and called him “the new Hitler” after the UN speech on Tuesday, but he’s also offered donations to aid post-Harvey recovery efforts in Houston and invoked John Lennon in a call for “giving peace a chance” in a New York Times ad earlier this month.  To regain a degree of credibility, Maduro will probably consider making elections for Governors slated for October 15 look competitive, but whether he has the political capital with his base to make bigger political or economic moves is unclear.  He may look to establish a new institutional equilibrium of dual legislatures, though it would hinge on removing the threat of retaliation against the opposition via the Constituent Assembly’s so-called “Truth Commission.”  He may also try to address massive fiscal imbalances by reforming the multi-tiered exchange rate, though this would be difficult as the system’s subsidized dollars help underwrite regime loyalty.

While the United States, Europeans, and Latin Americans are operating in loose formation – with Washington ratcheting up pressure while everyone else scrambles for negotiations – China and Russia are sticking to their strategic game.  As Maduro’s main financial backers, they are betting talks can stabilize the situation bit by bit.  They may kick in some more financial assistance if and when Maduro restores some stability by holding peaceful regional elections, delivering on the dialogue, and making large upcoming debt payments.  But while there is some basis for the geopolitical schadenfreude of Beijing and Moscow making it harder for Washington in Caracas, there are also signs that both have buyer’s remorse.  While they prefer Maduro stay afloat, they seem unlikely to extend loans that help stabilize the economy unconditionally.

None of the piecemeal actions that Maduro is apparently contemplating can defuse the political and social crisis, but a combination of steps may be enough to convince China and Russia to stay in the game.  Despite Trump’s statement that he was “not going to rule out a military option” in Venezuela, the Administration apparently is open to a policy of coercive diplomacy that includes genuine support for talks.  Trump attacked his predecessor for “leading from behind,” but figuring out how to sequence sticks and carrots in coordination with Latin American and European countries may require just that.  The bottom line is that the chance of a breakthrough on the biggest issues – the Constitutional road map and conditions for electoral participation – remain low, although some movement by both parties toward the middle seems realistic.  Despite the actions of outside actors, the situation is likely to remain poised over a knife-edge – without the catharsis of either peace or regime change.

September 21, 2017

* Michael McCarthy is a Research Fellow with the Center for Latin American & Latino Studies.  He publishes Caracas Wire, a newsletter on Venezuela and South America.

Argentine Debt and the U.S. Dollar

By Leslie Elliott Armijo

Images Money / Flickr / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Multiple economic and political challenges have called into question the future status of the U.S. dollar as the world’s dominant reserve currency, but backlash from Argentina’s recent spat with the United States over defaulted bonds appears to be fueling interest in reforms that may have beneficial implications.  According to the IMF, some 61 percent of the world’s known foreign exchange reserves held by central banks around the world remain in low-yielding dollar-denominated assets, mainly U.S. Treasury bonds.  The United Nations Conference on Trade and Development (UNCTAD), China, and heavyweights in the Global South, including Brazil, are calling for international trade agreements that would give emerging economies “policy space” – allowing national governments to impose capital controls, fund exports, subsidize local industry, and keep financial services national.  Private U.S. banks, however, claim that continued U.S. dominance of world capital markets – a crucial pillar of continued reserve currency status – requires ever more open trade in financial services.  The BRICS complain about the U.S. government’s “exorbitant privilege” as the reserve currency country, with some of the sharpest complaints coming from joint statements by Brazil, Russia, India, China and South Africa. Chinese officials, though, worried about their own large dollar investments and ambivalent about the implications of renminbi internationalization, more than once have pulled the group toward a softer tone.

Argentina’s ongoing sovereign debt negotiations provide a different window onto the dollar’s reserve currency status.  Like most countries, Argentina has held a large chunk of its government’s savings in the U.S. and hired private U.S. financial institutions as its international bankers.  Today it is trying to extricate itself from U.S. markets and do its saving and financial intermediation elsewhere. Iran and Russia are doing the same, but Argentina has no foreign policy quarrel with the Obama Administration – and is not subject to U.S. financial sanctions over nuclear or military adventurism.  Buenos Aires is among those who chafe at U.S. power through the dollar, but it is primarily motivated by the U.S. Supreme Court’s decision in July to let stand a lower court judgment in favor of investors holding bonds from Argentina’s $82 billion sovereign debt default in December 2001.  Although 92 percent of the original bondholders accepted the Argentine government’s restructured (lower value) bonds in 2005 and 2010, New York Federal District Court Judge Thomas P. Griesa ruled that Argentina’s failure to settle with the holdouts means that any U.S. financial institutions, or their international affiliates, that intermediate funds enabling Argentina to stay current on payments to the majority will themselves be in contempt of court.  This has sent Argentina into “technical default.” Argentina is suing the U.S. in the International Court of Justice (whose jurisdiction the U.S. refuses to recognize) and in the court of global public opinion – pushing, for example, a recent proposal for global financial reform before the U.N. General Assembly. It has also welcomed an $11 billion currency swap agreement with China, and Chinese state banks have since pledged $6.8 billion in new infrastructure loans.  Some observers speculate that the very first loan of the New Development Bank, newly organized by the BRICS countries, could go to Argentina.

The Argentine bond case harms the perceived fairness and credibility of U.S. financial markets and, by extension, the strength of the U.S. dollar because the recent legal judgments seem capricious to many.  Senior figures at the IMF have long supported the routine inclusion in all international sovereign bond issues of a so-called “collective action clause,” which would make any restructuring accepted by two-thirds of bondholders binding on all.  The European Union already has ruled that sovereign bonds issued within the EU, including many for troubled Eastern or Southern European governments, must contain such clauses.  Moreover, the International Capital Markets Association, representing more than 400 of the world’s largest private investment institutions, has just issued a position paper endorsing obligatory collective action clauses, placing it on the same side of this issue as non-governmental organizations advocating financial architecture reform such as the New Rules for Global Finance and the Jubilee Debt Campaign.  This would give taxpayers in emerging economies – the ultimate backstop of the creditworthiness of their governments – the same bankruptcy rights as firms and households.  It is not in the interest of Latin American and other emerging economies for U.S. currency and financial dominance to end anytime soon – a tripolar reserve currency system based on the dollar, euro, and reniminbi does not yet appear able to sustain the worldwide growth and prosperity of recent decades and may in fact entail significant risks – but fairer rules for sovereign financing would benefit everyone.

* Leslie Elliott Armijo is a Visiting Scholar at Portland State University and a Research Fellow at CLALS.  She has just published The Financial Statecraft of Emerging Powers: Shield and Sword in Asia and Latin America (London: Palgrave, 2014).

September 23, 2014

The Politics of the Brazilian World Cup

By Luciano Melo

Embed from Getty Images

The 2014 World Cup, scheduled to begin in just 66 days, at this point poses greater risks for President Dilma and her administration than it does benefits.  When the Brazilian government presented its preliminary budget for the event in 2007 – around US$14 billion, or an estimated billion dollars for each 70,000-seat stadium – President Lula was perhaps the most popular president Brazil had ever had.  Despite the mensalão vote-buying scandal several years earlier, Lula was a “man of the people” with a strong personal magnetism.  Brazilians were seeing themselves as an emerging power with a dynamic economy.  Dilma, Lula’s chief of staff, was anointed his successor; she easily won the 2010 election; the Workers Party’s continuity in office seemed assured for the foreseeable future; and the World Cup would be a crowning jewel.

The scenario today looks far grimmer for Dilma.  Her support in the polls dropped from 43 to 36 percent just last month, underscoring her lack of charisma, and the largest Brazilian companies – Petrobras and Eletrobras – have lost half of their market value under her administration.  Cost overruns on World Cup projects have tripled and now exceed the annual budgets for both health and education ($35.6 and $28.8 billion, respectively).  Massive protests last year raised doubts about Dilma’s governance.  The armed forces are being deployed to maintain order in urban slums.  Brazil is now ranked 72nd in the Corruption Perception Index 2013 (a decline from 2012), and press reports indicate that nobody believes that World Cup construction companies have been chosen through a transparent process.  Economic analysts deem budget cuts and taxes increases inevitable – and austerity is in the cards no matter who wins the October 2014 elections.

World Cups and Olympic games are important for governments seeking to boost their image before international and domestic audiences.  If the Olympics in London 2012 aimed to sell England as a beacon of innovation, and the winter games in Sochi marketed Putin’s Russia as a powerful and modern state, the World Cup was Brazil’s opportunity to project itself internationally as a global player with a vibrant economy.  It was to show that high levels of violence and corruption are part of the old days.  Mismanagement and other problems so far suggest those objectives are beyond reach.  Domestically, if Brazil fails to win the cup, we will again see thousands (if not millions) of people protesting in the streets, and Dilma’s prospects of securing a second term will be complicated.  Should Brazil win, however, a soccer-induced surge of national pride may assist her re-election despite public concerns about the cost of the tournament and other economic woes.  But the reprieve probably would be short-lived.  The military move into the favelas is an ad-hoc measure, since organized crime has spread to surrounding urban areas and is likely to reemerge as strong as ever once the events are over.  The middle class and the private sector will continue to pressure the government to fix woefully inadequate public services and improve the business climate – even more challenging with austerity budgets.  The national soccer team could help Dilma win a second term, but the celebration is destined to have a short life. 

Brazilian and Mexican Press Criticize Russia but Remain Focused on the Home Front

By CLALS Staff

Embed from Getty Images

Latin America’s low-key reaction to events in Ukraine and Crimea suggests that opinion makers are distracted by domestic issues and perceive such far-off developments as having little bearing on the region.  The Brazilian press has noted the “pathetic and weak” leadership of the United States and Europe and said Russia was creating a “Soviet Union light” with nationalist rather than communist undertones.  Commentators have criticized Russia’s propagandistic narrative, in which criticism of Russian expansionism and interventionism is countered with examples of the American and European bloody history.  They have said Putin’s motives are a clear and explicit demonstration of power, where Crimea is a non-negotiable territory.  They have variously called Obama’s diplomatic responses “flaccid” and his speech about Putin’s motives an “unintelligible declaration.”    Prior to Putin’s military moves, President Dilma Rousseff asserted that the protests in Venezuela are different from those in Kiev, where an “institutional rupture” is taking place, and she has been relatively quiet since.  There have been minor considerations on how a European crisis affects the Brazilian economy, since Europe absorbed 20 percent of Brazil’s exports last year.

The Mexican press has loudly criticized Putin’s actions.   Commentators have described Russia as a “monstrous creature who combines state capitalism and a corrupt oligarchy.”  They have accused Putin of threatening world peace over strategic interests.  They note that Putin holds considerable leverage over Europe (via its supply of vital energy resources) and the United States (in negotiating over Syria and Iran), and they say that he appears likely to get his way in the Crimea.  Some have denounced Putin for attempting to turn the clock back to Russia’s imperialist days, and describe this tendency alongside the United States’ inability to shape events as signs that both are declining world powers.

Both Brazil and Mexico have a full plate of domestic issues monopolizing political attention.  In Brazil, the middle class and elites remain upset about corruption surrounding the ruling PT, and many Brazilians continue to seethe over the scale of public expenditures that have constructed soccer stadiums rather than solid institutions for providing education and health.   The cost of preparations for the World Cup, set to start in three months, as well as the fortunes of the Brazilian team in that crucial tournament, have great implications for the fate of the Dilma administration.  Insofar as international issues reach the national agenda, Dilma appears most concerned with domestic political developments in Venezuela, where UNASUR has offered to play a mediating role.  In Mexico, President Peña Nieto and the media appear seized with security issues – ranging from the spectacular arrests of drug traffickers to the troubling emergence of “self-defense” groups – and the president’s ambitious economic reform agenda.  The Cold War-style East-West maneuvering over Ukraine hasn’t registered deeply in either country or elsewhere in Latin America.

Iran in Latin America: An Exaggerated Threat

By Aaron Bell

Former Presidents Hugo Chavez and Mahmud Ahmadinejad / Photo credit: chavezcandanga / Foter.com / CC BY-NC-SA

Former Presidents Hugo Chavez and Mahmud Ahmadinejad / Photo credit: chavezcandanga / Foter.com / CC BY-NC-SA

During his campaign for the U.S. presidency, Republican Mitt Romney referred to Russia as the United States’ number one geopolitical foe, but in the Latin American context he and his fellow conservatives have focused much more on another perceived competitor – Iran. Alongside China and the EU, Russia has indeed taken greater interest in Latin America in the past decade, investing in energy, selling military hardware, and even offering an alternative to Washington’s counternarcotics programs. But Romney and major elements of his party have given more attention to the newer, more enigmatic go-to threat of Iran and its former president, Mahmoud Ahmadinejad. The 2012 Republican Party Platform warned that Venezuela had become “an Iranian outpost in the Western Hemisphere,” issuing visas to “thousands of Middle East terrorists” and providing a safe haven to “Hezbollah trainers, operatives, recruiters, and fundraisers.” This past spring, former Assistant Secretary of State Roger Noriega told a Congressional committee that Hezbollah was working alongside the Sinaloa Cartel to fund and organize terrorist activities. He claimed the organization had infiltrated the Venezuelan government so the Iranian government could launder money through Venezuelan banks to avoid international sanctions.

Relations between Iran and some members of ALBA expanded during Ahmadinejad’s presidency, during which he spent more time in Latin America than either Presidents Bush or Obama. He shared the stage with Hugo Chávez and Daniel Ortega in denouncing the United States and its policies toward both Iran and the ALBA nations, and he pledged to invest in Venezuela, Bolivia, and other countries. The warmth of that contact gave credibility to rumors that Iran has used elite Quds soldiers and Hezbollah agents to create a web of Latin American agents available for terrorist strikes in the United States.  As required by the Republican-sponsored “Countering Iran in the Western Hemisphere Act,” the State Department released a report this summer analyzing Iran’s regional activities. While it expressed concern over Iran’s political and economic links, it concluded that Tehran’s regional commitments had largely gone unfulfilled. Nonetheless, a handful of U.S. Congressmen and the media continue to warn of the looming Iranian threat along what conservative commentators call the “‘soft belly’ of the southern border.”

The Obama Administration has not dismissed entirely the negative impact that a country like Iran can have in Latin America, if nothing else by encouraging political leaders to sustain their anti-U.S. rhetoric campaigns. But the Administration has not subscribed to the right wing’s exaggerations about Iranian activity and indeed is seeking pragmatic agreements with Iran to resolve a series of concerns about its activities, particularly its nuclear program. A handful of members of Congress led by Rep. Ileana Ros-Lehtinen (R-FL), former Chairman of the House Foreign Affairs Committee, have accused the Obama administration of putting politics over national security by failing to challenge Venezuela and other Iranian allies, though the political advantage the president supposedly achieves with such a policy is unclear. Some xenophobic nationalists on cable TV believe the Iranian activities are part of Islamic imperialism, which poses a threat to Western civilization. Others see the threat as being embodied by Barack Hussein Obama, accusing the administration of hyping the Iranian issue as a pretext to justify the expansion of a U.S. military presence in South America. Today’s paranoia about Latin America is different from during the Cold War years, but only in the identity of the villain. Latin America’s role in the new narrative remains unchanged: it exists primarily as a base of operations for foreign enemies of the United States that must be monitored and pressured to ensure U.S. national security. While the rhetoric of ALBA leaders and their efforts to establish friendly relations with regimes like Iran fuel such paranoia, Washington would be wise to respond to actions rather than empty rhetoric. Fortunately, the Obama administration appears to be doing just that.

The Snowden Case: Provocations and Intimidation

By Fulton T. Armstrong

Edward Snowden / Photo credit: zennie62 / Foter / CC BY-ND

Edward Snowden / Photo credit: zennie62 / Foter / CC BY-ND

The rhetoric and diplomatic jostling surrounding the flight of American whistleblower (or, depending on perspective, criminal leaker) Edward Snowden have once again thrust to the fore Latin America and U.S. policy toward the region.  Some Latin American presidents have seemed to go out of their way to prick U.S. sensitivities, and Washington seems to have gone out of its way to stomp on Latin American sensitivities.  Both sides have been happy to live up to the caricatures of themselves held by the other, but both sides’ interests have been harmed in the process.

The drama started, of course, while Snowden was in hiding in Hong Kong, and it has dragged on as he’s resided in a transit lounge of the Moscow airport.  U.S. media, which in the past have published stories casting Cuba, Venezuela, Ecuador, and others as eager to poke the U.S. in the eye, ran pieces – shifting attention to Latin America – and away from China and Russia’s even bigger slap in Washington’s face in refusing to hand the leaker over.  Reporters believed their own rumors and piled into an Aeroflot plane bound for Cuba.  Washington rolled out the big guns, including Vice President Biden, to discourage the Latin Americans from offering Snowden any help – and seemed to have success.  Ecuador, which has protected Wikileaks boss Julian Assange from British, Swedish and U.S. pursuit, initially welcomed Snowden but, after a phone call from Washington, pointed out that an asylum petition could not be considered until he arrived in country.  The crisis between the U.S. and Latin America deepened, however, when several European countries – presumably responding to U.S. pressure and bad U.S. intelligence – closed their airspace to Bolivian President Morales, who someone, somewhere, suspected of flying Snowden out of Moscow on the president’s return home.  Latin American condemnation exploded.

Venezuelan President Maduro, stating that that he wanted “to protect this young man from the persecution unleashed by the world’s most powerful empire,” publicly offered Snowden asylum on Friday.  That move ended the slight progress Caracas and Washington had made toward rapprochement– evident since the OAS General Assembly in June – and bilateral relations will surely worsen.  But the Obama Administration’s relations with Latin America writ large don’t appear likely to fare much better.  Some leaders’ rhetoric may be over the top, but Washington’s language has been threatening, and its actions speak louder than its words.  An unidentified senior U.S. official told the New York Times that “there is not a country in the hemisphere whose government does not understand our position at this point,” adding that any aid for Mr. Snowden “would put relations in a very bad place for a long time to come.” Such statements leave one wondering whether we are approaching the point where this administration will cease proclaiming its commitment to a new era of US-Latin America relations characterized by partnership and respect among equals.  Transcripts of Mr. Biden’s calls will not be released, but rarely do countries reverse their positions publicly in the absence of either serious threats or generous inducements – and few clear-thinking Ecuadorans, tracking the Administration’s attitudes toward President Correa, see the latter as in the cards.  In pressuring its European allies to establish a no-fly zone to keep a head of state from returning home, Washington took an action that many Latin Americans – not without a grain of truth – believe it would never take against a region that it respected.  Repairing the damage of el asunto Snowden will be hard for both sides, but Washington has the bigger task ahead.

 

South America: Low Expectations for U.S. Election

Photo is in the public domain

Media in Colombia, Chile, and Peru are paying close attention to the U.S. presidential election, but only in Colombia do commentators seem to sense that November’s vote could have a direct impact on their country.  Colombian opinion-makers have not articulated specific concerns; their attention appears premised merely on the immensity of the relationship.  In Peru, commentators have noted concern about the positions advocated in the Republican primaries on a host of issues, such as immigration and the Cold War optic the GOP candidates espoused.  Chileans are following the horse race with curiosity but little mention of its potential implications.  In these countries, which are generally open to working with Washington, there is dissatisfaction with Obama but greater trepidation about a return to the foreign policies that characterized the Bush-Cheney era.  “Obama losing would not matter much,” wrote Antonio Caballero in Colombia’s Semana.  “But what would matter, a lot, is his Republican rival Mitt Romney winning.”  The columnist said it would be like re-electing Hoover after four years of Roosevelt.

Commentators fret that Romney’s swing right during the primaries proves he is unable to stand up to what they describe as conservative, white Tea Partiers on issues including gun control and taxes, but especially on immigration.  In Diario Correo, Peruvian Isaac Bigio wrote that Romney and Ryan would “launch an offensive against immigrants.”  On foreign policy, commentators see Obama’s record as mediocre.  In Colombia, the president gains points for passing the free trade agreement, but loses them for an overall lack of focus on the hemisphere.  But Romney’s rhetoric, punctuated by swipes at Russia and what he labeled a Chávez-Castro axis in the hemisphere, has created uneasy feelings.  “Romney advocates an aggressive discourse and hard hand in international relations,”writes Sergio Muñoz Bata of Bogota’s El Tiempo.  “If this sounds like a repetition of Bush’s policies, that is because those who dictate the foreign policy of the Republican candidate today are the same people who dictated Bush’s policies yesterday.”  Peruvian Santiago Pérez writes in Los Andes that Romney might “harden the U.S. position against ALBA…and try to intimidate (probably unsuccessfully) his unthreatening Bolivarian enemies.”  A return of the GOP could pose problems for the ongoing talks with the FARC and ELN, moderate Colombians fear.  Writing in Portafolio, Ricardo Ávila Pinto noted that Bogotá should be wary of “the U.S. reaction to any eventual success in the peace process with the FARC.”  Likewise, Chile’s Ernesto Ottone writes that Romney’s “uncultured simple-mindedness in foreign affairs responds to identity-based fanaticism with a warlike tone.”

A consistent theme is that the 2012 election lacks the hope of four years prior – hope for more effective U.S. partnership with the region, which Obama promised at the Summit of the Americas soon after his inauguration but has failed to deliver.  Many outlets reported former President Jimmy Carter’s comment that neither candidate was likely to pay much attention to the region.   While Colombian and Peruvian media reflect public concerns about immigration, the most prevalent fear is that a return to strident rhetoric would only heighten tensions between the U.S. and ALBA-aligned countries.  Colombia, Peru, and Chile don’t want to be stuck in the middle. There are no great expectations for improvement, but there is considerable worry about further decline.