Flush with record oil revenues, Venezuela's Hugo Chavez has now set about forging a new version of dollar diplomacy in Latin America – Bolivar Diplomacy, after the name of Venezuela's currency and Chavez's hero. The former army paratrooper and would-be latter-day liberator of South America is putting his Bolivar wealth to work buying up debt of distressed countries, offering subsidized oil to other nations and creating energy industry ventures that would presumably help develop PetroSur, the regional oil venture he aspires to launch.
Washington alleges that part of the oil bonanza is being channelled to anti-democratic groups that could destabilize certain South American countries. Venezuela's government flatly denies the charges and demands the US government present the proof that it claims to have.
Chavez is providing help to needy governments and, some analysts argue, he is stepping in where markets and multilateral institutions fear to tread. "When markets appear more closed for certain governments, recently Venezuela has been out there extending credit," says Gianfranco Bertozzi, chief of Andean emerging market strategy with Lehman Brothers in New York.
In recent months, Venezuela has bought $500 million in Argentine debt and is preparing a deal to purchase $200 million of Ecuador's debt. Informed sources say that further deals are in the works which may involve a kind of project financing valued at $1 billion each for Uruguay and Paraguay.
The deal with Argentina may be small in terms of Argentina's outstanding debt burden, and it did not offer below-market rates, but coming at a time when Argentina has difficulty accessing capital, it is significant.
For Ecuador's smaller economy, the $200 million debt purchase, if finalized, is hugely significant as it would go a long way towards meeting the country's financing needs for next year, analysts say.
Political signal
Deals like these, of course, have relevance beyond simple economics. "The political signal is very important: IMF, you can close your doors, Chavez Bank is open for business," says Alberto Ramos, Latin America analyst with Goldman Sachs in New York. By covering Argentina's financial needs for this year, "it helps Argentina take a tougher stance with the IMF," says Ramos.
Chavez's government debt financing for Latin America carries a special benefit for countries with reform fatigue: it spares them the conditionality demanded by the multilaterals of holding down spending to reduce their debt-to-GDP ratio and implementing other measures to achieve fiscal balance, says Bertozzi.
The Venezuelan deals may, however, carry some other kind of conditionality, and that is the subject of speculation. The Chavez government may, for example, ask beneficiary nations to cooperate in social areas by receiving Cuban doctors or teachers, Ramos suggests. Ecuador is expected to cooperate with Venezuela's oil monopoly, Pdvsa (Petroleos de Venezuela, SA) by sending its own crude to Venezuela for refining, says Bertozzi.
The possibilities for expanding these types of deals are, at the moment, vast. A new central bank law, passed in July, enriches the coffers of Chavez Bank by capping the central bank's international reserves at an optimal level (yet to be determined) and stipulates that the excess reserves will be transferred to the federal government.
In a one-time transfer, the central bank handed over $6 billion in August. Some of those funds may be used to bolster pro-government candidates in the December municipal elections, but a portion of the funds is expected to be channelled to Latin neighbours, experts say.
Oil deals
Venezuela's dollar diplomacy is also being put into practice through the strategic use of the country's energy reserves. In July, Venezuela and 13 oil-importing Caribbean nations signed an agreement creating PetroCaribe, and Venezuela pledged to offer long-term financing for oil purchases and to provide shipping at cost. In August, Venezuela and Mexico signed on to renew their San Jose Pact, launched in 1980, whereby each of the two oil producers supplies up to 160,000 barrels of crude per day on concessional terms to the six Central American nations plus Panama, Jamaica, Dominican Republic and Barbados.
"Chavez has an interest in promoting his foreign policy and Venezuela's message across Latin America and has been using Pdvsa as part of that dialogue," says Jed Bailey, director of Latin American research for Cambridge Energy Research Associates.
Pdvsa has been involved in partnership ventures for years with other national oil companies in the region. With Latin America's hunger for energy and the trend to develop regional integration projects, there is plenty of scope for alliance building.
While Chavez would appear to have an open field for buying friends and influence, he can also expect to run into some natural barriers to his expansionist dreams. At the July 27 election of the new president of the Inter-American Development Bank, the Venezuelan candidate, Jose Alejandro Rojas failed to rally enough support to field a bid and his candidacy was withdrawn before the vote.
At least some of Venezuela's neighbours are unlikely to be swayed by Chavez's overtures. "I think a lot of democratically elected leaders are trying to have the equivalent of a quid pro quo [whereby] they don't criticize Chavez, and in return maybe he won't make trouble in your country," says Susan Kaufman Purcell, director of the Centre for Hemispheric Policy at the University of Miami in Florida.
Then there are the market realities. Dollar diplomacy depends on dollars or Bolivares. "It doesn't make sense for Venezuela to continue to borrow on international markets and be lending to credits that are riskier than their own," says Ramos.
The oil prices that are fueling the Chavez influence-peddling spree may not hold up forever. And when they come down, the ability to spread good will may drop, too.