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Geopolitics: Dealing With a Growing Crisis in Venezuela

Geopolitics: Dealing With a Growing Crisis in Venezuela
Published on
16 June 2017

Following its factory being seized, General Motors recently decided to end its activities in Venezuela. This decision calls into question the sustainability of activities by other international corporations in the country. 

To learn more about the situation, we speak with Nathalie Belhoste, a researcher and professor at Grenoble Ecole de Management who is also an expert on geopolitics.

Venezuela is facing a major political and social crisis. What is your analysis of the situation?

The Venezuelan economy is undergoing a major recession for the third year in a row. Experts estimate that 25% of the population is unemployed (versus 7.4% in 2015). This figure could increase to 28% by 2018. In addition, the country is suffering from a lack of food and medicine, while inflation continues to increase at a phenomenal pace (720% in 2016, and the IMF expects it to reach 2000% in 2018).

What factors explain this situation?

This crisis is the result of many years of mismanagement in government and business. Several years ago, various parts of the Venezuelan economy were nationalized (in particular the petrol and energy sectors). In 2006, Hugo Chavez seized two oil wells operated by Total and Eni, forcing the companies to accept a 60% participation by the state. The goal was to take back control of the country's oil resources and enable a redistribution of oil-generated wealth. In 2013, under the leadership of President Maduro, the state also seized several stores in Daka's electronics activity because the company's prices were judged to be too high.

What have been the primary consequences for corporations?

In 2016, Procter and Gamble, Pepsi, Delta and Kimberly-Clark reduced and/or stopped their activities in the country. In 2015, General Motors had already stopped manufacturing cars in the country. Kimberly-Clark's factory was closed and then seized in July 2016 as it was deemed illegal by the government. In April 2017, the government seized General Motors' factory in Valencia. It employed 2,700 people. The seizure could mark the beginning of an exodus by other corporations. The country's worsening economic crisis is causing these international groups to question their position in Venezuela.

How can corporations respond to this situation?

There are legal options in Venezuela and the U.S., but they're expected to be inefficient. The response can also be diplomatic and political, although the margin for negotiation is rather slim. Last April, Venezuela accused the U.S. of trying to encourage a coup d'état because most of the international companies impacted by the crisis are American. However, the U.S. reaction to the crisis continues to be rather timid. In the meantime, Maduro's government is playing two sides of the coin.

It's become more liberal with anti-american rhetoric and yet, last December, Citgo, a subsidiary of the Venezuelan PDVSA, donated $500,000 dollars to Donald Trump's campaign. In concrete terms, the U.S. continues to be the country's primary economic partner and one of the few states that pays fully for its oil.

Given the situation, what kind of stance should foreign companies, and in particular French companies, adopt?

France is the country's third investor.

Venezuela currently welcomes more than 40 French companies, including L'Oréal, Sanofi, Air France, Total, Alstom, Lactalis and various SMEs. France is the country's third investor. Of course, it's perfectly understandable for companies to consider withdrawing from the country when their assets are threatened. However, they have to consider the consequences of a withdrawal in terms of employment and social stability. In the case of Venezuela, it's not only a question of social responsibility but also geopolitical responsibility.

A withdrawal amplifies internal conflicts. Major companies are key actors to encourage stability during this crisis. Movistar, a subsidiary of the Spanish group Telefonica, counts 11 million subscribers in Venezuela. Despite the fact Maduro's government has accused the group of encouraging opposition movements, the company is voicing appeasement and a return to normal relations with the current government.

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