Head in the Sand

How long can Venezuela's president pretend not to see the economic ruin his policies have created?

LA VICTORIA, Venezuela — Old campaign posters for Venezuela's late president Hugo Chávez still flutter above the state-owned Mercal grocery store that Roberto Briceno runs in a working-class neighborhood in this industrial city of 150,000.

Briceno says he should post another sign: "Closed."

He hasn't opened the store, which sells cooking oil, powdered milk, chicken, and other basic foodstuffs at deeply subsidized prices, for more than 10 days.

"I have nothing to sell," he said in February. "I have been calling the Mercal warehouse everyday and they say they have nothing. I don't know what they expect us to eat."

Briceno isn't alone. Many storeowners throughout Venezuela are facing the same predicament, thanks to uncertainties about the country's new foreign-exchange policies.

In January 2014, Venezuela revamped its currency system -- one historically riddled with corruption and an overvalued bolivar that only stoked a raging black market. The official exchange rate is now 6.3 bolivars to the dollar for food, medicines, and goods that the government deems priorities. But the government has transferred other foreign-exchange transactions, like travel and remittances, to the Sicad exchange rate -- Venezuela's other rate in its currency-control system -- to 11.7 bolivars to the dollar. The black market rate is now 84 bolivars to the dollar.

The government has dramatically reduced access to dollars to protect its dwindling international reserves. Consequently, some retailers, like Briceno, don't have any inventories at all, while others are finding it difficult to import goods. Meanwhile, exasperated consumers grouse about the lack of products, while spending hours each day, trudging from store to store. And to make matters worse for storeowners, President Nicolas Maduro has made retailers lower prices or face expropriation -- a move he put in place in November 2013.

Maduro asserts that the country's new exchange system will go a long way to alleviate shortages of food, toilet paper, medicines, and other daily necessities. Critics, however, argue that by transferring many transactions to the Sicad rate in Venezuela's dual-rate system, this is nothing but disguised devaluation and it will only spur inflation.

Since Maduro's announcement in January, thousands of students have taken to the streets throughout the country to protest against the deteriorating economic situation and the government's economic policies. On Feb. 12, violent clashes between the president's supporters and opponents left three dead. Violent protests have continued.

The country's current foreign-exchange woes started in the 1980s, but were cemented when the late President Hugo Chávez took office in 1999. The system that he put into place laid the groundwork for what remains today. Facing a nationwide strike in 2002 and 2003 that led to capital flight, Chávez implemented rigid foreign-exchange controls to brake the outflow of dollars. The government limited access to dollars, and fixed the bolivar's exchange rate to the greenback. In doing so, Chávez played into a system beset by corruption and a burgeoning black market.

Maduro, who promised not to devalue the currency during the 2013 elections, has blamed the country's "parasitical bourgeoisie," who, he says, is waging an economic war against his government by withholding inventories and inflating prices to boost shortages and damage his presidency. To combat those actions, Maduro has tightened up access to dollars by creating the National Foreign Trade Center, a new agency that will supervise imports, and has decreed a new law that limits companies' profit margins to 30 percent. And in a show of good, old-fashioned Bolivarian populism, he also raised the country's minimum wage by 10 percent in January 2014.

"The question is do we give dollars to speculators, or do we bring in medicine," said Rafael Ramirez, the vice president for economic affairs, oil minister, and president of the state oil company, Petróleos de Venezuela SA. "Do we give dollars to travelers or do we bring in food?" The health and needs of Venezuelans, he said, take precedence over all else.

Many overseas suppliers, who are owed upward of $14 billion by Venezuelan companies, are reluctant to extend more credit. Given that Venezuela imports about 70 percent of the products it consumes, any curtailment is a serious threat to the country's wellbeing. Food shortages -- a chronic problem for the past two years -- are worsening.

"I have to go to central Caracas now to find food, as there is nothing, absolutely nothing, in my neighborhood,'' said Letitia Suarez, who lives in one of the slums surrounding the Venezuelan capital, in early February. "And when I go to Caracas it's a constant battle to find food. I spend hours standing in line, and fights always break out." Getting to the city center isn't an enjoyable trip: Her bus line is rampant with thieves. Crime has increased with the economic crisis, and the city now has the third highest murder rate in the world.

But it's not only local merchants and the public that are feeling the bite. Company officials have also said they may have no choice but to curtail operations until dollars become available.

Empresas Polar, the country's largest privately owned food processor, warned on Jan. 22 that it may have to reduce operations and production because a lack of foreign exchange has crimped its ability to import raw materials. The company announced that it owes $463 million to overseas suppliers, who refuse to send more goods until they are paid. "Our credit lines are exhausted, and they won't send us orders until we can cancel our debts."

Most international airlines -- such as American, Air Europa, and Air Canada -- have also stopped selling tickets to Venezuelans in local currency, arguing that they are owed millions of dollars by the government's foreign-exchange agency, which has accepted the airlines' bolivars but has not given them dollars in return. One airline -- Ecuador's Tame --suspended flights to Venezuela altogether.

The foreign exchange agency now owes the air industry up to $3.6 billion, according to the country's airline association. But even in the best possible scenario, the airlines won't be able to recoup the currency's true value; thus, they want to be paid in the bolivar exchange rate in place at the time of ticket sales. Airlines are hoping that they will force the government's hand by refusing to sell tickets for bolivars, but the government has so far balked, offering to repay airlines in jet fuel and bonds. The airlines, of course, want cash.  

Judging from his actions, it doesn't appear that Maduro sees the trouble this has caused. On Jan. 22, the president tweeted that the new system will help the government "defeat definitely and structurally the economic war," while increasing "the efficiency in administering these dollars."

The new measures -- which had been delayed for five months while the government sought to avoid unpopular actions before December's regional elections -- may make foreign-exchange regulations clearer and end some abuses of the system, but don't go far enough to fix the country's financial disaster, analysts say. The likely outcome will be higher inflation and more shortages, especially in areas -- such as automotive parts, retail clothing and shoes, and home appliances -- not considered a priority by the government.

"It is really too little to stabilize the forex market,'' said David Smilde, a senior fellow at the Washington Office on Latin America. "The bolivar is still seriously overvalued, and demand will still far outstrip supply. Furthermore, the Sicad mechanism is opaque and ripe for favoritism."

Following the announcement on Jan. 22, the black market rate soared more than 10 percent to 75 bolivars to the dollar, or more than 12 times the official exchange rate.

"The official exchange rate of 6.3 to the dollar is unsustainable," said Alejandro Grisanti, an economist at Barclay's in New York, adding that a fair exchange rate is closer to 13 bolivars to the dollar. "But so is the black market rate."

Concerns about Venezuela's economy led both Standard and Poor's, and Moody's Investors Service to downgrade Venezuela's debt in December 2013. Moody's warned that the country's unsustainable macroeconomic imbalances, as government policies, mean that "the risk of an economic and financial collapse has greatly increased."

Maduro, however, seems content to bury his head in the sand. So far, he's been summarily unwilling to reverse any of Chávez's economic policies. Maduro sent his finance minister, the pragmatic Nelson Merentes, back to the central bank in a cabinet reshuffle in February, strengthening the hand of Planning Minister Jorge Giordani, who many see as a Marxist.

"The hard-liners had their positions strengthened in the reshuffle," said César Aristimuño, an economist with Caracas-based Banca y Negocios. For Aristimuño, the government's chief challenge isn't the exchange rate, but the lack of hard currency. A drop in oil prices has reduced the amount of dollars that Venezuela receives for its oil. Such sales make up 95 percent of the dollars the government receives, and the average price of the Venezuelan market basket of oil products fell 3.4 percent in 2013 compared with 2012. The fear is that they will fall even further. The international oil companies that should be investing aren't, he said, adding that an increase in the price of crude would ease the government's stress.

But not everyone is carping about Maduro's policies. The president's decision to order stores to cut prices or face military expropriation late last year created opportunities for the wealthy, as they prepared for what they knew was the inevitable.  

Eduardo Morales and his family bought two refrigerators, one stove, five air conditioners, two plasma-screen televisions, and a handful of microwave ovens and assorted smaller appliances days after Maduro ordered stores to lower prices. This mad rush depleted inventories within a few short days.

"I'm sitting pretty," said Morales, a 42-year-old electrician. "You can't find these appliances anymore, and I have them. And who knows when they will reappear and at what price? They're like money in the bank. When I need money, I'll sell one."



Bosnia Burning

Is the war-traumatized, fractured, and corrupt Balkan state finally experiencing a political revolution?    

SARAJEVO — Nearly 20 years after the end of brutal ethnic conflicts surrounding the collapse of Yugoslavia, black smoke billowed across the Sarajevo skyline in early February, as hooded youths attacked administrative buildings and burned police cars. "The city smelled like it smelled in 1992," says Nidzara Ahmetasevic, a journalist and activist, the day after some of the most significant unrest in Bosnia since the country's war.

Unlike in the 1990s, however, people are not fighting one another. Instead, they're taking aim at their corrupt and ineffective government, which is rooted in the U.S.-brokered Dayton Accords of 1995. The agreement ended the Bosnian War and divided the country into two entities: Republika Srpska, dominated by Serbs, and the Federation, dominated by Bosniaks and Croats.

"In the end, Dayton has entrenched exactly that which it was meant to call bad. It has cemented in place an unaccountable political oligarchy," says Jasmin Mujanovic, a Balkans researcher at York University. "Much of the responsibility for this [situation] has to be on the shoulders of the European Union and international community."

Now, the question on everyone's mind is whether the protests can usher in much-needed, constructive change -- or whether things will slide quickly back to the status quo. The stakes are high. "It has been the same for 20 years now, politicians putting the money in their own pockets. I believe violence is the last resort, but now it is our only option," says schoolteacher Alisa Kavac, who brought her 8-year-old daughter along to the protests in Sarajevo. "It's impossible to raise children in this country."

The demonstrations began on Feb. 5 in the city of Tuzla after the closure of a number of formerly state-run factories due to botched privatization plans. After three days, the peaceful protests descended into street violence, when crowds were held back from entering the local courthouse. Some 600 protesters, including factory workers demanding 50 months of back pay and the return of pension and health insurance contributions, hurled rocks and eggs before setting government buildings on fire. Later that day, the crowd swelled to around 5,000. Police responded with tear gas and rubber bullets, arresting 23 people. Twenty-seven people were reportedly injured in the clashes.

Parallel demonstrations quickly appeared in more than 30 cities and towns across the country. Many were small-scale and relatively peaceful, but protesters in several major cities, including Mostar, Zenica, and Sarajevo, followed in the footsteps of Tuzla, clashing with police and vandalizing or burning administrative buildings. According local media sources, Sarajevo's Kosevo hospital said it treated more than 100 people on Feb. 7. Three police officers were described as seriously injured. Overall, several hundred people are thought to have been hurt, with more than 44 arrested since the outbreak of the unrest.

The protests precipitated a wave of politicians, mainly at the local level, quitting their posts, including entire administrations in Tuzla, Sarajevo, and Zenica. On Sunday, Bosnia's police coordination chief resigned amid claims of police brutality against detained activists, including minors. (Photos posted on Twitter reportedly show other law enforcement officials removing their riot gear and joining the protests.) Demonstrators are still demanding the wholesale resignation of Bosnia's government.

Ostensibly, the protests can be linked to widespread public discontent over Bosnia's rampant unemployment and beleaguered economy. Nationwide, joblessness stands at 44.5 percent; it is a staggering 60 percent in the 15-to-24-year-old age bracket. The average wage is around $545 per month -- one of the lowest in Europe.

But these economic woes are fueled by a much more deep-seated problem: a political system mired in corruption and nepotism. In the aftermath of the Bosnian War, dodgy backroom deals to dole out businesses nationalized during the socialist era -- including the Tuzla factories -- were some of the first examples of the long list of dubious tactics deployed by the political elite to line their own pockets. Often sold under favorable conditions to the cronies of politicians, the businesses had new bosses who were frequently either incompetent or outright crooked. The resulting combination of inefficient management, skimming, and the state turning a blind eye to it all drove several vitally important local industries to the point of collapse.

Alongside the Tuzla cases, the high-profile foundering of furniture producer Krivaja and the looming bankruptcy of aluminium producer Aluminij Mostar capture how poorly managed privatization is crippling the economy. "There are many examples of this kind of practice everywhere," says Darko Brkan, a Sarajevo-based political analyst. "For 15 years, the state has ignored these problems, thousands of people have lost their jobs, and, as we now clearly see, the consequences have been devastating."

But raiding the coffers of factories and other businesses through privatization schemes is just the tip of iceberg. According to Transparency International, Bosnia and Herzegovina is one of the most corrupt countries in Europe, ranking 72 out of 177 on the NGO's world index.

In a high-profile case of alleged corruption, in late April 2013, Zivko Budimir, the president of the Federation, was arrested on suspicion of involvement in organized crime, abuse of office, and accepting bribes for pardoning convicted criminals. But, after just one month in custody, Budimir was back in his post -- released due to an apparent lack of evidence against him.

Many blame these problems -- or at least their foundations -- on the Dayton Accords. By inscribing ethnic divisions into governing structures, the argument goes, Dayton has served to stifle political diversity, competition, and accountability. Voters perpetually cast their ballot along ethnic lines regardless of the results produced by their politicians. The complex and cumbersome administrative system established under Dayton has also provided a convenient mask for the ineffectiveness of corrupt and squabbling politicians.

Last year, political bickering over the assignment of ethnicity on official document cards left thousands of newborn babies without identification. Infighting among authorities also meant they missed July 2013 deadlines set by the European Union (E.U.) -- which Bosnia aspires to join -- to bring laws governing agricultural exports up to regional standards; farmers lost millions as a result. In addition, more than $60 million of much-needed E.U. funding was suspended in October after the Bosnian government failed to comply with a ruling by the European Court of Human Rights, regarding the country's prohibitions on minority groups (such as Roma and Jews) holding some political positions.

Faced with these problems, public discontent has been building for many years. Yet because civil society in war-traumatized Bosnia has recovered only slowly, it has taken a long time for frustration to tip over into action. "People are afraid of each other. So even though nearly everyone has agreed for a long time that the political establishment as a whole is hopelessly corrupt and profits from stove-piping conflict, when it comes time to actually organize a response to this, it has previously been timid," says Mujanovic.

Some optimistic analysts are dubbing the protests as a "Bosnian Spring," characterized by multiethnic opposition to the state. "This is not just a flash in the pan," says Mujanovic. "This is the Bosnian people waking up. We can see that the people have really had enough of this situation, of these politicians."

"Now people are fed up.... We don't want to think about ethnic differences any more," says Emir Hozdic, a civil rights activist in Sarajevo, standing outside the city's main government building that is now scarred by fire. "When people are hungry, they don't ask what your ethnic background is."

Yet the rallying cry of a multiethnic "Bosnian Spring" should be treated with a healthy dose of caution. There are many people with a vested interested in maintaining the status quo -- not least the politicians whose popular support relies on it. And perhaps no one is more invested than Milorad Dodik, the long-time leader of Republika Srpksa. "We are ready to prevent any attempts to import protests and violence from the Federation," he announced in a barbed statement that implicitly labeled the recent demonstrations as an unwanted Bosniak disruption in the country. Dodik, a Serb nationalist, also warned that anyone who attempted to protest in Republika Srpska would face "criminal prosecution."

Thus far, demonstrations outside the Federation have remained limited. On Sunday, in the town of Bijeljina in Republika Srpska, there were two rival protests held: one against the local government, the other in support of Serb authorities.

Exactly what will happen next is unclear. In the short term, the void left by the wave of resignations in local government will need to be addressed, but the vacancies won't be filled easily. "I don't think many people will be stepping forward to take these positions. Either there aren't realistic local options for alternative leaders, or people won't want to do the job in these circumstances," says Brkan, the political analyst in Sarajevo.

Protesters are demanding that the government hold elections scheduled for October early, a move now seemingly backed by two parties in the country's ruling coalition. But while this could certainly help diffuse tensions and fill abandoned seats, it would first require an amendment to the electoral laws in Bosnia's constitution, as there are currently no legal provisions for holding a snap vote.

Something needs to be done quickly, Brkan says, as a prolonged absence of local authorities in some areas "will likely spark more unrest."

The long-term future is even more uncertain. Many protesters are calling for an end to the Dayton regime, but how that can be achieved is unclear. Dayton affords each of the country's three major ethnic groups veto power on proposals to change the government -- and the groups don't agree on what a reformed political system would look like. For its part, the international community has tried both economic sanctions and cajoling to push the country toward political and economic progress. But nothing seems to work. "Even using these potent weapons, it has not been possible to force amendments to the constitution," says Matthew Parish, a former legal advisor to the international supervisor of Bosnia's Brcko District. (Such supervision was provided for in Dayton.) "And this is because, in the end, the animosity between the three groups in sufficiently strong, at least at a political level, to override both the international community's efforts and the good of the country."

In the last few days, the demonstrations have calmed down, but thousands of people continue to protest in cities across the Federation. Those still in the street are adamant that they have little choice but to be there. "If our politicians cannot do this for our country, then we must do it for ourselves," says 24-year-old Adin Muratovic, who has been active in the protests since they started in Sarajevo. "If we cannot change something now, then it seems we have no future at all here in Bosnia. It has been like this my whole life.... This can be our chance for something better."

With additional reporting by Mitra Nazar in Sarajevo.


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