World Economy

Venezuela's Maduro turns to military in struggle to retain power

Venezuelan military growing in strength?
Venezuelan military growing in strength?

As his country's economy implodes around him, Venezuelan strongman Nicolas Maduro has resorted to what may be a last-ditch effort to stay in power.

On Tuesday, the autocratic president appointed Defense Minister Padrino Lopez to a newly created role that could best be described as co-president. In making the move, Maduro also increased the power and autonomy of the military over civilians. Maduro has claimed that the political maneuver strengthens Venezuela in the midst of a U.S.-backed "economic war" being waged against the country; however, analysts told CNBC that Maduro is shoring up armed support as the forces arrayed against him gain power.

"I think this is a sign that Maduro recognizes his weakness, but is also a sign that he wants to demonstrate that he will go to all lengths to survive," said Matthew Taylor, a senior fellow for Latin America Studies for the Council on Foreign Relations.

Michael Shifter, president of the Inter-American Dialogue, shared similar sentiments: "Maduro needed to do this because there were too many fronts that were unstable. ... It's an arrangement he needed to bolster the government."

Venezuela's oil-dependent economy capsized with the fall in crude prices, leaving whole swathes of the country's 31 million people without enough food or other necessities. Inflation is expected to hit almost 720 percent this year, and gross domestic product is seen falling by 8 percent, according to the International Monetary Fund.

Maduro's predecessor, Hugo Chavez, left the nation in a vulnerable economic position by nationalizing energy assets while oil prices were high and spending proceeds on widespread social programs. Oil's global drop in 2014 left the government far short of its revenue needs and with only an anemic private sector to generate taxes or jobs.

Venezuelan soldiers participate in a parade to celebrate the 195th anniversary of the Battle of Carabobo in Caracas, June 24, 2016.
Marco Bello | Reuters

To combat the instability resulting from severe food and medicine shortages, Maduro ordered five of the nation's largest ports to be regulated by the military. The approach is unlikely to address Venezuela's underlying problems, experts told CNBC.

"This is not a problem that has a military solution," suggested Ricardo Hausmann, director of Harvard's Center for International Development.

Giving extra power to the military is "the opposite of what is needed," said Hausmann, who added that Venezuela's government needs to abandon the "totalitarianism approach to the economy."

That seems unlikely for now. Maduro blames external forces for the crisis, characterizing the exodus of American companies like Kimberly-Clark and Citibank as economic attacks coming as the result of constraints implemented by his regime and Chavez.  

"Foreign businesses are finding it near impossible to conduct business in Venezuela. The banking system already has to contend with rapid inflation, liquidity shortages and binding capital controls; add to that mix an increasingly unstable political backdrop, and it makes it very difficult to see any real advantages to pursuing new business opportunities in the country," said Michael Henderson, lead economist for Verisk Maplecroft.

Hausmann described the current Venezuelan market as one that is "operating on a system that is incompatible with the world." While Venezuelan bond holders have earned 27 percent in the last year — Venezuela has, surprisingly to some, not defaulted on its debts — "these are the only winners ... in a system that's decided to default on everyone except bond holders." 

It's a system where "one monthly minimum wage can buy you 33,000 liters of gasoline, but only 18 pounds of beef," said Hausmann. 

'Things are going to have to get worse'

Taylor says change requires legitimate negotiations between the political opposition — which controls an increasingly marginalized legislative branch — and Maduro's party. Unfortunately, such talks would require the emergence of a softer stance within Maduro's regime, Taylor said, and there's been little if any indication of such an approach from Caracas.

The upside, however, could be big. Hausmann said he believes that Venezuela has the opportunity to experience the most expansive economic adjustment in history. "An alternative regime would [need to] restructure the debt, unify the exchange rate, free prices and ask for international assistance" in order to increase economic activity and "overall income levels," he said.

Negotiations and economic reform require significant amounts of time, however, and time may be something the people of Venezuela as well as Maduro don't have.

"Things are going to have to get worse before dissatisfaction emerges to such an extent that it becomes impossible for Maduro to continue," said Taylor. The biggest unknown, he added, is "how far Maduro is willing to go to preserve himself."