A possible change of government in Venezuela can complicate the situation for Russian companies working there, calling into question the implementation of joint contracts. Analysts do not see that Russia can have any significant influence on the situation and are divided in their opinions as to whether investment in such projects abroad is warranted.

The balance of power

The health of the Venezuelan leader Hugo Chavez, who won the presidential election in October, has significantly worsened once again, and he will have another surgery in Cuba. Chavez first announced the name of the person he considers worthy to occupy the presidency, should something happen to him. As such, the chosen successor is Vice President and Foreign Minister Nicolas Maduro.

Chavez has firmly established a position of friendship with Russia. Caracas in recent years has become one of the most important strategic partners of Moscow in the whole Latin American world. First of all, Russian companies are involved in the development of the Junin-6 field in the Orinoco oil belt, which already started commercial production, with a total forecast investment of USD20 billion. In addition, Russia and Venezuela are implementing joint housing construction projects. Of special note is the countries’ military-technical cooperation. As forecast by the Center for Analysis of World Arms Trade, Venezuela in 2012-2015 will be Russia’s second export market for arms, behind only India, with a purchasing volume of USD3.2 billion. Experts find it difficult to predict what will happen to Venezuela in the event of a change of power.

“In authoritarian countries, the loss of a leader usually means that developments are likely to go out of control if a meaningful opposition movement exists. If it does not, as in Libya, the country will plunge into chaos. In Venezuela, the opposition does exist, and it is quite competitive, as we have seen up to October’s presidential elections,” said the head of the Fund for National Energy Security (FNEB) Konstantin Simonov. In his view, a military coup is not likely to happen. The designation of a successor is not likely either, for a move like that requires the current leader to enjoy nearly unanimous popularity and the stability of the government system to exist. Neither condition is satisfied in Venezuela today. Therefore, the opposition can easily come to power.

Venezuelan generals have declared that they will maintain order in the country, but no one knows their real purpose, said deputy director of the Institute of Latin America of the Russian Academy of Sciences Vladimir Sudarev. “Maduro is even more leftist than Chavez in his convictions, and he preaches a new socialism for the XXI century. If he comes to power, there should not be radical change, though. However, the opposition and the supporters of Chavez are aggressive towards each other, and a compromise is unlikely,” – he said. “What is very likely is a power struggle between the supporters of the anti-American position of Chavez and their opponents,” according to the CEO of the National Energy Institute Sergei Pravosudov. “Our companies will enjoy all the vicissitudes of this struggle, the worst upshot of which may be a civil war,” he said.

The future of contracts

In this situation, the future of Russian companies doing business in Venezuela and of the Venezuelan contracts themselves is uncertain, experts say. “Talking about Chavez’s health is difficult, however, in countries like that everything is connected to the person in charge. Anything can happen to him – remember the same in Libya, where we actively tried to enter. Gaddafi was firmly in power for 40 years, and it was all over quickly,” said Simonov of FNEB. In this case, the game of Russian companies is very risky. It is likely that the new government will do to Russian investors just as Chavez in his time did to U.S. investors, driving them from the country without compensation. We would have to say goodbye to the bonuses that our companies have paid for the right to invest in Venezuela, he said. In his turn, Sudarev from the Institute of Latin America believes that Russian companies are unlikely to be thrown out from Venezuela. “No self-respecting government would do that, especially since Chavez did not sign the contracts himself, and it was the Venezuelan government that did it,” he said. According to him, the Russian arms supplied to Venezuela are good, and the Venezuelan army likes Russian weapons systems. With regards to the oil projects, progress is hindered by the Venezuelan bureaucracy. Russia’s Lukoil tried to develop the Junin-3 field, but gave up the license. “In Venezuela, everything is built on the principle of manual control – Chavez bangs his fist on the table, and the officials do as he says. Without him, it will certainly be more difficult for the Russian companies. Still, getting rid of the Russian investors can be done in a more graceful fashion, not by kicking them out, but by interfering with their work,” said the expert.

Still, a chance for Russia to retain its influence in Venezuela does exist, for it is no accident that Chavez came to power in the first place, according to Pravosudov. Still, according to analysts, the means to protect Russia’s investments are more modest than the means American companies would have in a similar situation. “In such cases, the Americans, with an extensive network of oil companies around the world, strive with all their force to defend the politician who made the agreement with them. Money and campaigns in the media readily come into play, and if all this does not work, American aircraft carriers show up off the coast of the recalcitrant country. Russia is unlikely to go to the same length. In practice, Russia can make a difference only in the case of the adoption of relevant resolutions within international organizations, threatening to exercise the veto power,” Pravosudov said.

What will happen to the investments?

Analysts diverge in their assessment of the feasibility of investing in Venezuela. Simonov of FNEB opposes such projects. “We have huge deposits, including those on the continental shelf and in Eastern Siberia, and we try to invest in a foreign country that is in direct competition with us,” he said.

The National Oil Consortium (NOC), which is developing the Junin-6 field, has no unity. Five companies have equal shares in the NOC, Rosneft, Lukoil, TNK-BP, Gazprom Neft, and Surgutneftegaz. The latter in November decided to withdraw from the project. Media reported that TNK-BP could leave the consortium too. On the other hand, Rosneft can increase its participation in the project by purchasing the share of Surgutneftegaz. Lukoil also expressed willingness to consider increasing its share in the NOC. “Political risks in large projects such as these are considerable because Russia essentially is entering into agreements with autocratic regimes,” said Simonov.

“At the same time, it would not be right to stay within the confines of one country. To grow, it is necessary to invest in other countries, where oil and gas are in abundance,” said Pravosudov. “Sometimes, these international projects are undertaken in countries where there is a developed democracy and no political risk – for example in the case of Rosneft’s agreement with Exxon to received shares in three projects in the U.S. and Canada,” Pravosudov said. However, oil countries are often ruled by authoritarian regimes, so the political risks are inevitable, and our oil companies have to put up with them.

Sudarev of the Institute of Latin America expressed the view that Russia’s benefits from its cooperation with Latin American countries are negligible. “In the case of Bolivia and Ecuador, let’s say, the benefits are only that we sell to them two or three airplanes. The greatest benefit we gain from cooperation with Argentina, where we are going to build nuclear power plants. But compared with the way it turned out for China and Iran, this is nothing much. Venezuela is the pillar of support for Iran in the region. In exchange for significant investment, Chavez extended extremely favorable conditions to them. Iran is building factories and plants there, as well as low-cost housing,” he said. “Meanwhile, these countries are literally packed with minerals – it is only necessary to invest and produce. But we do not have the money to do so at the moment,” the analyst concluded.