Chavez Legacy of Polarized Venezuela Endangers Transition

March 6 (Bloomberg) -- Bloomberg's Indira Lakshmanan profiles deceased Venezuelan President Hugo Chavez. She speaks on Bloomberg Television's "Bloomberg Surveillance."

Venezuela faces political infighting and the risk of unrest after the death of Hugo Chavez, whose personal brand of socialism left the region’s biggest oil exporter polarized and among the world’s most violent countries.

Chavez bolstered his popularity among Venezuela’s 9 million poor by subsidizing food and housing, expanding education and health care, and halving poverty. As government control of the economy spread, Chavez’s critics blamed the nationalization of more than 1,000 companies or their assets, currency controls and price caps for discouraging investment, creating food shortages and fueling inflation.

The former paratrooper’s departure yesterday after 14 years in office opens up a void, even after the cancer-stricken leader in December urged supporters to elect Vice President Nicolas Maduro to succeed him if he couldn’t fulfill a term that began Jan. 10.

“He dominated politics so thoroughly that it is impossible to forecast what comes next,” said Peter Hakim, former president of the Inter-American Dialogue in Washington. “He was the commanding political presence, virtually the only governing authority in the country.”

Since Chavez, who was 58, was first elected in 1998, he set himself at the center of all state decisions, big and small. On his weekly television program he might call for the nationalization of a company, announce a change in the currency, order troop movements or praise the virtues of home gardening. He could harangue ministers, discuss foreign policy and slap hands with union workers in monologues that lasted as long as eight hours.

Foreign Dignitaries

Chavez’s funeral will be held March 8, and foreign dignitaries, including Argentina’s Cristina Kirchner and Uruguay’s Jose Mujica, started arriving early Wednesday in Caracas to pay their respects.

Under the constitution, an election must be held within 30 days of the president’s death. Maduro will serve as interim president until then, Foreign Minister Elias Jaua said. Maduro has led Venezuela since Chavez missed his Jan. 10 inauguration.

Maduro called for national unity in a speech yesterday, saying “only together can we guarantee the future of the fatherland.”

Market Friendly

Since Chavez announced he had cancer in June 2011, investors have speculated that his departure could pave the way for the opposition to win power and introduce more market- friendly policies. Venezuela’s dollar bonds returned 46 percent last year, the best of any emerging market after the Ivory Coast, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to insure $10 million of Venezuelan debt against default for five years tumbled to $468,461 on March 5 from $1,082,996 on Oct. 6 before Chavez’s re-election and return to Cuba for cancer surgery, according to data compiled by Bloomberg.

While Maduro probably will assume a radical posture during the campaign, he may need to soften his criticism of private corporations after he wins, Eduardo Porcarelli, executive director of investment promotion council Conapri, said.

“Reactivating dialog with Venezuela’s private sector will be a necessity,” Porcarelli said. “Business development must be made viable in the country, and employment must be reactivated.”

Improved Relations

Other business leaders such as Ronald Pantin, chief executive of Bogota-based oil producer Pacific Rubiales Energy Corp. (PRE), expressed optimism that relations with Venezuela eventually will improve.

“Things will change,” Pantin, who was born in Venezuela, said in an interview before Chavez’s death. “Twelve years ago nobody invested in Colombia and now it’s a favorite.”

Maduro, a 50-year-old former bus driver and union leader who served as Chavez’s foreign minister for more than six years, will face an opposition weakened after regional elections in December in which they lost five of eight governorships.

Miranda state Governor Henrique Capriles Radonski, who lost his presidential bid to Chavez by more than 10 percentage points in October, may be the strongest candidate against Maduro after he held onto his seat in the regional vote. If elected president, Capriles would have to work with a national assembly dominated by Chavez’s PSUV party, a central bank devoid of autonomy, a judiciary filled with Chavez allies and a politicized military establishment.

Corruption, Interference

Venezuela’s justice system is beset by corruption and political interference, making it the least accountable in a ranking of 97 nations published Nov. 28 by the World Justice Project, a Washington-based group supported by jurists and businesses that seek to strengthen the rule of law.

“Venezuela’s institutions are broken,” Margarita Lopez Maya, who teaches history at the Central University of Venezuela, said in a telephone interview.

If Maduro prevails, he will struggle to keep opposing factions in Chavez’s own movement together, said David Smilde, a sociologist at the University of Georgia in Athens who has lived in Venezuela for 10 years and wrote a book about Chavez’s rule.

“It was Chavez, personally, who held the Chavista movement together and settled its internal disputes,” said the Inter- American Dialogue’s Hakim. “He was also the primary factor that unified a raucous opposition.”

The military will be a key player in any transition, Lopez said.

Failed Coup

Chavez kick-started his political career in 1992, when he led a group of officers in a failed attempt to overthrow the government of President Carlos Andres Perez. After his election in 1998, Chavez rewarded military colleagues by promoting them to senior government positions. Those officers are now pitted against a civilian faction of supporters drawn by his socialist discourse, said Gregory Weeks, a professor of Latin American studies at the University of North Carolina in Charlotte.

Maduro’s strongest challenge may come from Diosdado Cabello, the President of the National Assembly and a former lieutenant who fought alongside Chavez in the 1992 rebellion and whose influence within the military may enable him to take advantage of social unrest to claim power, Smilde said. While Chavez’s endorsement of Maduro was designed to offset the influence of Cabello, Maduro may struggle in the long-term, he said.

Neutralizing Cabello

“If there’s any kind of conflict, when the dust clears Cabello is going to be on top,” Smilde said. “Chavez went a long way toward neutralizing him and making Maduro his successor but he’s not out of the game.”

Nevertheless, the likelihood of a democratic transition was increased by Chavez’s anointment of Maduro and his insistence that there be elections if he couldn’t fulfill his term, said Francisco Rodriguez, senior Andean economist at Bank of America Corp. in New York.

“His decision was designed precisely to avoid Chavismo falling into a state of internal conflict and paralysis,” Rodriguez said. “Not only was he saying here’s my successor but he was also saying there’ll be elections soon if I’m not around.”

High prices for Venezuelan crude oil allowed Chavez to increase spending during the 2012 electoral campaign and helped the economy expand 5.6 percent last year. Venezuela’s oil exports averaged $103.46 a barrel in 2012, up from $101.60 in 2011 and a 43 percent increase from 2010, according to the Oil Ministry.

Spending Spree

The spending spree spurred a 32 percent devaluation of the currency in February to close a budget gap estimated by Moody’s Investors Service at about 11 percent of gross domestic product.

If Maduro wins, there’s a strong chance that Chavismo could tone down some of its economic policies, said Rodriguez.

“There are very strong incentives in the Venezuelan political system for a president like Maduro to seek a path of greater moderation in order to contend with the opposition by appealing to swing voters,” he said. “These swing voters were turned on by some aspects of Chavez’s policies but disliked others.”

A win for the opposition could be resisted with violence, said Michael Shifter, president of the Inter-American Dialogue in Washington. With the support of Cuba, Chavez placed loyalists in the highest ranks of the armed forces.

Violent Crime

Violent crime has been on the rise. Homicides rose 23 percent in 2012 to 16,030 from 13,080 in 2010, according to a report Maduro presented to the National Assembly Feb. 28. The Venezuelan Violence Observatory, a non-governmental organization, puts the number higher, estimating 21,692 people, or 59 people a day, were murdered in 2012. The murder rate of 73 per 100,000 inhabitants is the highest in South America. In the U.S., the murder rate was five per 100,000 in 2009.

Caracas has seen rioting in the past, most notably in 1989 during the so-called Caracazo when hundreds were killed after the armed forces opened fire during protests against then- President Carlos Andres Perez’s austerity measures.

Should the opposition gain power, Venezuela, which holds the world’s largest technically-recoverable crude reserves, may see an influx of foreign investment into the oil industry, said Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York. Investors, who struggle to repatriate dividends under Chavez’s currency controls, will be more cautious about committing to other sectors until it is clear the new government plans to dismantle those policies, he said.

Opposition Splinter

Chavez’s death could also lead to a splintering of the opposition, which for many years was only held together by its rejection of the country’s longest-ruling leader, Weeks said.

U.S. President Barack Obama said his government seeks a “constructive relationship with the Venezuelan government.” The U.S. will probably have better relations with Venezuela regardless of who leads the South American country, Assistant Secretary of State Roberta Jacobson said in a Dec. 11 interview.

Chavez’s death may hurt the economies of Cuba and other allied countries. The son of poor schoolteachers, Chavez often spoke of fulfilling his hero South American liberator Simon Bolivar’s dream of uniting the region.

Beneficiaries of programs such as Petrocaribe, which allows countries to acquire Venezuelan crude with long-term financing, may lose out, said Giovanna de Michele, a professor in international relations at the Universidad Central de Venezuela.

The Petrocaribe program, which allows its 18 member countries to take out 20-year loans with an interest rate of 1 percent to 2 percent, has sent oil shipments worth more than $14 billion since 2005, Oil Minister Rafael Ramirez said last year.

Fidel Castro

Chavez’s relationship with former Cuban President Fidel Castro, whom he described as a father figure, helped Cuba win a supply of cheap oil after the communist island lost its benefactor following the collapse of the Soviet Union. Venezuela delivers 97,000 barrels of oil a day to Cuba, which the government repays by sending doctors to work in community clinics in Venezuela.

Russia expects to continue benefiting from economic ties with Venezuela via billions of dollars in oil and weapons contracts, presidential spokesman Dmitry Peskov said today.

Regardless of whether Chavez’s party remains in power, the influence he exerted over Venezuela will continue through supporters in the judiciary, Congress and the armed forces. While the style of government would change if the opposition takes over, Chavez’s focus on social issues will live on, Weeks said.

“It took years for the opposition to realize that a lot of what Chavez did, Venezuelans liked,” he said. “The emphasis of the state’s role in the economy is something that will be long- lasting.”

To contact the reporters on this story: Charlie Devereux in London at cdevereux3@bloomberg.net; Corina Pons in Caracas at crpons@bloomberg.net; Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net.

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Photographer: Adriano Machado/LatinContent/Getty Images

Chavez bolstered his popularity among Venezuela’s 9 million poor by subsidizing food and housing, expanding education and health care, and halving poverty.

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Photographer: Adriano Machado/LatinContent/Getty Images

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