Chávez and China: Challenging U.S. Interests

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No. 3, August 2010

This is the first in a series of Latin American Outlooks documenting Venezuelan dictator Hugo Chávez's growing alliances with hostile regimes that challenge U.S. security and economic interests.

Under the cloak of Washington's indifference, Venezuelan dictator Hugo Chávez is making steady progress in cementing strategic relations with China, which is eager to eclipse U.S. presence in a key, mineral-rich South American economy. Russia is a source of weapons and foreign policy clout, Iran is abetting Chávez's shadowy nuclear program, and Cuba is managing a system of internal control and repression in Venezuela. Together with China's capital, in the form of loans and investments, this cadre of hostile powers has selfish motives and ruthless methods for keeping Chávez in power. China has funneled money and expertise into Venezuela's oil industry and taken an authoritative role in improving the country's manufacturing sector and finances. With so much to gain in trade and oil, China will strive to keep Chávez in power. The United States can no longer afford to practice wishful thinking but must recognize the threat growing in Venezuela.

Key points in this Outlook:

  • China's growing economic role in Venezuela is a direct result of Hugo Chávez's systematic drive to supplant U.S. influence and impose a socialist system on his country.
  • U.S. oil producers and manufacturers stand to lose their market share in Venezuela and may soon see new competitors with Chinese backing emerge there.
  • The United States must abandon its policy of inaction and recognize the foreign-backed threat growing under Chávez in Venezuela.

In the last six years, the People's Republic of China (PRC) has increased its presence in Venezuela's oil industry dramatically, filling a void as Chávez muscles out U.S. and even local expertise. More recently, China has also been providing financial support as Chávez grapples with fiscal chaos of his own making and looks to ramp up domestic spending on the eve of September's National Assembly elections.

U.S. diplomats are loath to speak out against Chávez's antidemocratic, anti-U.S. agenda; however, in July a State Department spokesperson broke this eerie silence to say that "we want to continue our mutually beneficial energy relationship" with Venezuela.[1] Washington's wishful thinking and passive policy are no match for Chávez's tireless campaign to convert Venezuela into a bulwark for U.S. enemies.

The History of Chinese-Venezuelan Relations

China's growing economic role in Venezuela is a direct result of Chávez's systematic drive to supplant U.S. influence and impose a socialist system in his country. A relatively unknown Chávez traveled to Beijing in October 1999 and revealed a knack for making international headlines by declaring, "I have been very Maoist all my life."[2] Behind the scenes, the neophyte Chávez was all business, showing a serious, strategic side to his Chinese hosts. In a private meeting with PRC premier Zhu Rongji, he won a commitment to form a joint working group of senior officials to draft a strategic vision for comprehensive economic and political relations between the two countries.[3]

Then-Chinese president Jiang Zemin visited Caracas in April 2001, and the two leaders signed a memorandum of understanding (MoU) forming a "high-level joint commission" to shape the budding relationship.[4] The commission met for the first time on the margins of Chávez's reciprocal state visit to Beijing in May 2001.

Washington's wishful thinking and passive policy are no match for Chávez's tireless campaign to convert Venezuela into a bulwark for U.S. enemies.

The joint commission is led by the head of China's National Commission for Development and Reform and Venezuela's minister of planning and development, Jorge Giordani.[5] The MoU gives the commission an ambitious, sweeping mandate to coordinate all aspects of the bilateral relationship, including economic, commercial, and technological ties.[6]

The commission has met at least once per year since 2001. Separate subcommittees bring together other cabinet-level officials to handle bilateral relations, economic and trade cooperation, cultural affairs, agriculture, energy and mines, social issues, and scientific, technological, and aerospace matters. Each subcommittee formulates and monitors dozens of projects within its area of competence and develops new initiatives. Chávez receives periodic, detailed briefings on the work of the commission, which he uses to drive his agenda forward and capture the attention of his Chinese counterpart.

China's Surging Influence

The role of this joint commission extends well beyond bureaucratic exchanges; it has helped propel and steer initiatives, policies, and deals that are producing real-world results. Bilateral trade between China and Venezuela is spiraling upward: a decade of Chávez's outreach has boosted two-way trade with the PRC from $85.5 million in 1999 to about $9 billion in 2008.[7] Due in part to Chávez's moves to strangle commerce with Colombia to punish it for its close relationship with the United States, China edged out Colombia in 2009 to become Venezuela's second-largest trade partner (behind the U.S. oil market).

The PRC's profile in the all-important energy sector has grown impressively under Chávez. Recent bids by Chinese companies in Venezuela's Orinoco Belt,[8] rich in heavy oil, "represent a significant leap forward in the quantity of Chinese investment in the country and the quantity of oil that the Chinese expect to extract," wrote R. Evan Ellis of the U.S. Army War College in a May 2010 report. A series of recent investments and loans totaling over $44 billion will expand China's consumption of Venezuelan oil imports from thirty-nine thousand barrels per day in 2005 to 1 million barrels per day by 2012.[9]

The PRC may be committed to Chávez's revolutionary project, and much of its technical advice is aimed at helping Chávez salvage his socialist agenda at home. But until China began to sign expansive new oil-exploration deals with Venezuela around 2005, it tread cautiously, careful not to align itself with Chávez's aggressive policies and risk provoking a reaction from the United States.[10] For the most part, communist China is all business when it comes to negotiating deals with its client in Caracas, securitizing its investments, and counseling its Venezuelan counterparts on how to put their fiscal and economic house in order.

Cash Cow

The Venezuelan government depends on oil revenues for about 50 percent of its total income.[11] A precipitous 52 percent drop in profits last year for Petroleos de Venezuela, S.A. (PDVSA), the state-owned oil company, has put the squeeze on Chávez's revolutionary slush fund just as crumbling infrastructure, energy shortages, food insecurity, and crime are taking a serious toll on his popularity.[12] Although Venezuela continues to discuss oil concessions with Western oil companies, only a few are prepared to sink billions of dollars of new capital in Venezuela in light of the regime's expanding attack on property rights. Given its ideological bond with Venezuela and voracious appetite for raw materials, how- ever, China is willing to deal with Chávez and is able to extract favorable terms, confident that it can muscle its way out of any investment dispute with Caracas.

China's payment last month of $4 billion to the cash-strapped Chávez is the latest tangible evidence of this mutually beneficial relationship.[13] This first payment is part of a deal in which China will lend about $20 billion to Venezuela in exchange for petroleum deliveries over the next ten years.[14] Venezuela is servicing this debt by shipping two hundred thousand barrels of oil per day to China.[15] The loan agreement, negotiated personally by Asdrúbal Chávez, vice president of PDVSA and trusted cousin of the dictator, is built around a fund to provide long-term financing for the "construction of infrastructure, exploitation of energy and mines, expansion of agriculture and industry as well as social development, with the objective of accelerating Venezuela's economic and social progress."[16]

The first disbursement is said to be for electricity generation, mining, and agricultural production. The injection of cash could not come at a better time for the Chávez regime, in the wake of blackouts and food shortages and leading up to national elections on September 26.

Energy

In the middle of the global financial crisis, China's economy grew by about 8 percent in 2009.[17] As most of the world's economies log sluggish recoveries, the PRC's energy needs will account for about one-third of the new demand for oil in non-OECD countries.[18] These factors make China crucial to Chávez's strategic objective of ending his country's dependence on oil exports to the United States.

The trend is clear. In 1998, U.S. purchases of Venezuelan crude oil amounted to about 1.74 million barrels per day; that number slipped to 1.42 million by 2002 and is now about 950,000 in 2010.[19] However, in order to wholly replace the U.S. market--home to refineries that can distill Venezuela's heavy crude oil into a marketable product--Chávez must expand his domestic capacity to refine the raw material as well as transport it to alternative markets where there are customized refineries.[20]

That is where China comes in. Starting from a minuscule role in Venezuela's oil market at the time of Chávez's election, the PRC is participating today--through "upstream" operations, massive capital investments, long-term purchase agreements, and strategic planning--in the exploration, exploitation, transportation, refining, and distribution of Venezuela's heavy crude oil.

Venezuelan energy and oil minister Rafael Ramírez[21] and PDVSA vice president Chávez paid a two-day visit to Beijing in February to nail down the terms of massive, long-term cooperation in the energy field.[22] Ramírez also chairs the Venezuelan side of a joint task force of energy and mining experts from both countries that is supervising nearly thirty ambitious projects--including the exploitation of new oil fields, production of petro-chemicals, and construction of refineries and tankers.

China's National Petroleum Corporation is driving a hard bargain for its participation in the exploration of the "Junin block 4" in the Orinoco Belt, but it is clearly eager to tap this new petroleum. This November, it is set to begin construction of a new $8 billion refinery in Guangdong Province that, when it becomes operational in 2013, will be capable of receiving oil produced at the Junin 4 site. This refinery is one of several that would boost China's capability to receive and process more than 1 million barrels per day of Venezuelan crude oil.[23] To open up this new supply chain, the PRC is bankrolling the urgent purchase of four to six oil tankers for the transport of Venezuelan exports, with the first of these 150-ton Suezmax ships set for delivery late in 2011.

China in Charge

The Caracas-Beijing relationship is more than transactional--it is institutional. Extending well beyond specific trade deals, loan agreements, or investments, the Chinese provide sweeping advice on energy, agriculture, and industrial policy. The Chinese are clearly bent on protecting their investments by providing technical expertise to Chávez's inexperienced managers on a host of issues, including Venezuela's troubled fiscal situation and petroleum policies.

While the expansive and detailed agenda is what one might expect between two nominally socialist states, Venezuelans would be startled by the submissive role their government has taken under Chinese tutelage. For example, in May 2010, a forty-member Chinese delegation headed by Liu Kegu, vice governor of the China Development Bank, conducted a two-week visit to Venezuela to inspect potential investment sites and issue specific demands to Chávez's team.[24]

Venezuelans would be startled by the submissive role their government has taken under Chinese tutelage.

The Chinese explained that one purpose of their visit was to establish a "joint planning" working group that would receive and implement recommendations from Beijing concerning a host of public policies and projects.[25] During the May visit, the Chinese also presumed to tell their counterparts that they intend to help Venezuela reshape its petroleum sector, starting by defining the role and interaction of the government, private sector, and investors; designating specific projects and the conditions needed to carry them out; and improving internal planning.

In one session during the visit, the Chinese central planners quizzed their Venezuelan hosts on details of the country's fiscal dilemma, challenging the basis for inflation numbers, reviewing social spending in education and health, scrutinizing export data, and tallying the country's woeful figures of new foreign investment. The Venezuelans--in the middle of negotiations to borrow $20 billion from the China Development Bank--had little choice but to invite the PRC's friendly advice.[26]

China dispatched team members to several Venezuelan states to appraise the troubled food and agriculture sectors. Food shortages, rotting food shipments, and unpopular expropriations of previously successful farms and grocery supply chains have shaken the Chávez regime. The Chinese delivered a scathing critique, citing the poor infrastructure and inadequate use of technology, ineffective management of farmland that the government had confiscated from private hands, and inefficient distribution of farming operations in relation to processing centers and markets. They even spelled out a multiyear plan aimed at making Venezuela a self-sufficient producer of grains by 2012 and an exporter of foodstuffs in ten to fifteen years.

The visiting PRC team also provided its Venezuelan pupils a crash course in restructuring their chaotic finances, recommending a short-term plan for boosting economic growth and bringing inflation under control. In the medium term, the Chinese advisers recommended, the Venezuelans must focus on strengthening key productive enterprises and addressing electricity shortages, as well as reducing inflation. As for the industrial sector, the Chinese dictated a plan for producing food and other consumer goods and for creating "industrial zones" for the manufacture of pipes and other heavy equipment related to oil production and transport.

Looking to the future, Chinese and Venezuelan teams have begun intense discussions on the possibility of building automobiles and buses, computers, cellular phones, and a host of other goods to make the South American country self-sustainable and able to export to foreign markets. U.S. and other manufacturers of consumer goods may not only be losing their market share in Venezuela's domestic market, they may also soon see new competitors spring up in Venezuela, bankrolled by one of the world's wealthiest financiers and most aggressive commercial powers. The figure shows that China's exports to Venezuela have grown over 30 percent per year from 2000 to 2009, while U.S. exports to Venezuela have grown only about 6 percent per year during the same period.

Has Chávez Met His Match while Washington Sleeps?

The sovereign-conscious Venezuelans must chafe at being placed under Chinese supervision--particularly regarding essential elements like energy, food, and finances. However, the Chávistas have little choice but to accept this interference from a cash-rich partner bent on securing its investments.

Chávez began this relationship with the PRC a decade ago with the intention of easing out U.S. firms and investors and ridding PDVSA of a cadre of technocrats who stood in the way of bringing the oil sector under his absolute control.[27] He could not have imagined then that he would one day be in such woeful economic shape that he would be forced to mortgage his nation's oil wealth and sell its sovereignty and future to the highest bidder. Worse for him, rather than having the United States over the proverbial barrel, the Chinese are taking full advantage of Chávez's relative weakness in dictating beneficial oil deals. Chávez has traded solicitous Western investors and free-market partners for the world's most ruthless central planners. In the imperious Chinese, Chávez may have met his match.

For too many years, U.S. policymakers have dismissed Chávez as a lightweight, arguing that all the United States has to do is stay out of the way of his wild punches and he will wear himself out. But with the help of world-class hostile powers, Chávez is punching above his weight class.

The latest rationale for inaction is that the domestic opposition is making gains at his expense and will claim a modicum of power in the September 26 National Assembly elections. Chávez, however, just like the rest of the authoritarian crowd he runs with, has sufficient internal control that he is not constrained by the ebb and flow of political support. He will merely marginalize the assembly if he loses significant support there, just as he did when he lost local and regional offices to the opposition in 2008.[28] Moreover, Chávez's global partners do not need him to be popular; they only require that he hold on to power by any means necessary.

U.S. diplomats who are standing around waiting for Chávez to punch himself out must be blind to the broad and deep relationships that his regime has forged with wealthy and wily governments--not only China, but also Cuba, Iran, and Russia--that pose a collective threat to our interests and will help keep Chávez in control. Even as these rival powers have dispatched high-level delegations to Caracas to strike fresh deals with Chávez, Washington continues to ignore, misapprehend, or minimize the threat taking shape under its nose. If U.S. diplomats ever step up to confront Chávez and his circle of friends, they should heed sage advice from Las Vegas: when you sit down at a high-stakes poker game and cannot spot the chump, it is you.

Roger F. Noriega ([email protected]), a senior State Department official from 2001 to 2005, is a visiting fellow at AEI and managing director of Vision Americas LLC, which represents foreign and domestic clients.

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Notes

1. Lissy De Abreu, "Chávez Cannot Afford to Cut Off U.S. Oil: Analysts," Agence France-Presse (AFP), July 26, 2010, available at http://news.yahoo.com/s/afp/20100726/bs_afp/ venezuelauscolombiaoilpolitics_20100726201815 (accessed August 9, 2010).

2. Robert G. Breene Jr., ed., "The Hemispheric Left (HL) in Venezuela," in Latin American Political Yearbook 2001 (Piscataway, NJ: Transaction Publishers, 2003), 371.

3. The author has consulted sources, whose reliability has been proved in the past, who provide privileged insight into Venezuelan foreign policymaking and the activities of Chávez's circle of trusted advisers; specific details are not included here to protect the identity of the author's sources.

4. The MoU, a sensitive document that has not been released by either the Chinese or Venezuelan governments, was reviewed by the author in August 2010.

5. Chávez recently named Jorge Giordani to one of six new vice-presidential positions, managing economic-financial affairs. See Jeremy Morgan, "Multiple Vice Presidents as Chávez Re-shuffles Venezuela Cabinet," Latin American Herald Tribune, August 3, 2010.

6. From MoU; see note 4.

7. "Venezuela Pares China Debt with $20 Billion Oil Accord," Bloomberg, August 4, 2010, available at www.bloomberg.com/news/print/2010-08-05/venezuela-cuts-20-billion-china-debt-with-200-000-barrel-shipments-of-oil.html#print (accessed August 5, 2010).

8. The "belt" of heavy oil along the Orinoco River basin in northeast Venezuela covers an area of 325 square kilometers with recoverable reserves of 8.7 billion barrels. See "China and Venezuela Sign Agreements on Junin-4 and a Long-Term Finance Loan," Your Oil and Gas News, April 20, 2010.

9. R. Evan Ellis, "Venezuela's Relationship with China: Implications for the Chávez Regime and the Region" (panel discussion, Center for Hemispheric Policy, University of Miami, Miami, FL, June 2, 2010).

10. "China Keeps Chávez Close, but Not Too Close," AFP, April 10, 2009, available at www.google.com/hostednews/afp/article/ALeqM5hg5SVWYSvmHPGiWVmINnJopw9iVQ (accessed August 9, 2010).

11. "Venezuela remains highly dependent on oil revenues, which account for roughly 90% of export earnings, about 50% of the federal budget revenues, and around 30% of GDP." See CIA World Factbook, "Venezuela," available at https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html (accessed August 5, 2010).

12. "Venezuelan Oil Firm's 2009 Profits Slump 52%," AFP, August 3, 2010, available at http://news.yahoo.com/s/afp/20100803/ bs_afp/venezuelacompanyoilearnings_20100803154048 (accessed August 9, 2010); and Frank Jack Daniel, "Chávez Uses Colombia Feud, Oil Threat before Vote," Reuters, July 27, 2010, available at http://af.reuters.com/article/energyOilNews/idAFN2622416720100727?pageNumber=2&virtualBrandChannel=0&sp=true (accessed August 5, 2010).

13. "Jaua Anuncia Financiamiento Chino por US$20 Mil Millones a Cambio de Petróleo" [Jaua Announces $20 Billion in Chinese Financing in Exchange for Petroleum], Noticias 24, July 29, 2010, available in Spanish at http://economia.noticias24.com/ noticia/29809/jaua-anuncia-financiamiento-chino-por-20-mil-millones-a-cambio-de-petroleo (accessed August 2, 2010).

14. China has agreed to pay US$10 billion and another 10 billion renminbi, the official PRC currency, which is roughly another US$10 billion. Chávez originally announced the agreement in April 2010. See Simon Romero, "Chávez Says China to Lend Venezuela $20 Billion," New York Times, April 18, 2010.

15. From MoU; see note 4.

16. From the "Agreement between the Government of the Bolivarian Republic of Venezuela and the Government of the People's Republic of China on Cooperation of Long-Term Financing," the text of which was obtained by the author. It is available at www.aei.org/files/2010/08/18/Agreement-Venezuela-China.pdf.

17. "China GDP Grows by 8.7 Percent in 2009," CNN.com, January 20, 2010, available at www.cnn.com/2010/BUSINESS/ 01/20/china.GDP.annual/index.html (accessed August 9, 2010).

18. "China consumed an estimated 7.8 million barrels per day (bbl/d) of oil in 2008, making it the second-largest oil consumer in the world behind the United States. During that same year, China produced an estimated 4.0 million bbl/d of total oil liquids, of which 96 percent was crude oil. China's net oil imports were approximately 3.9 million bbl/d in 2008, making it the third-largest net oil importer in the world behind the United States and Japan. EIA [Energy Information Administration] forecasts that China's oil consumption will continue to grow during 2009 and 2010, with oil demand reaching 8.2 million bbl/d in 2010. This anticipated growth of over 390,000 bbl/d between 2008 and 2010 represents 31 percent of projected world oil demand growth in the non-OECD countries for the 2-year period according to the July 2009 Short-Term Energy Outlook. By contrast, China's oil production is forecast to remain relatively flat at 4 million bbl/d in 2009. According to Oil & Gas Journal (OGJ), China had 16 billion barrels of proven oil reserves as of January 2009." See U.S. Department of Energy, Energy Information Administration, "China: Oil," available at www.eia.doe.gov/cabs/China/ Oil.html (accessed August 5, 2010).

19. Calculations based on data from U.S. Department of Energy, Energy Information Administration, "Petroleum Navigator," available at http://tonto.eia.doe.gov/dnav/pet/ hist/LeafHandler.ashx?n=PET&s=MTTIMUSVE1&f=M (accessed August 9, 2010).

20. "CITGO is a wholly-owned subsidiary of PdVSA that has some 14,000 branded retail outlets (both directly owned and affiliates) in the United States. CITGO operates three product refineries (Lake Charles, LA; Corpus Christi, TX; Lemont, IL), with a combined crude oil distillation capacity of 755,400 bbl/d." See U.S. Department of Energy, Energy Information Administration, "Venezuela: Oil," available at www.eia.doe.gov/cabs/venezuela/oil.html (accessed August 5, 2010).

21. Chávez recently named Rafael Ramírez to one of six new vice-presidential positions, managing "territorial development." See Jeremy Morgan, "Multiple Vice Presidents as Chávez Re-shuffles Venezuela Cabinet."

22. The visit was not made public, although sources consulted by the author explained the purpose of the trip by these senior officials.

23. R. Evan Ellis, "Venezuela's Relationship with China: Implications for the Chávez Regime and the Region."

24. A biography of Mr. Kegu can be found at China Vitae, "Liu Kegu," available at www.chinavitae.com/biography/Liu_Kegu (accessed August 3, 2010).

25. The author has consulted documents detailing the relationship, the origin of which cannot be revealed in order to protect the sources.

26. Ibid.

27. Chávez purged about eighteen thousand experienced PDVSA technical personnel in the wake of a 2002 strike.

28. Simon Romero, "Venezuela: Caracas Mayor on Hunger Strike," New York Times, July 6, 2009.

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