Rebuilding Venezuela after Maduro will require the US to front some money

The Trump administration is pursuing the right policy of sanctions and diplomacy in support of Interim President Juan Guaidó of Venezuela. To its credit, the administration recognized the Guaidó government according to the Venezuelan Constitution and has led an international campaign to get other countries to do the same. With a big assist from Canada, as many as 65 countries have pledged support to Guaidó as the legitimate President of Venezuela.

The day the Maduro government falls may come soon. On the “day after,” Venezuela is going to be a ward of the international system — and likely will remain so for years to come. The U.S., along with key international partners, will need to provide the initial money needed to clean-up post-Maduro and rebuild Venezuela. The U.S. contribution — likely several billion dollars over and above all foreign assistance currently being spent — will require a supplemental bill approved by Congress.

In assessing the costs and a fair burden sharing with an interim Venezuelan government, Latin American partners, multilateral development banks, Canada, the European Union, and other allies, this coalition should be creative about drawing upon future oil and gold revenue and seized assets.

It is not realistic to depend on oil and gold in the ground, or on gold reserves held by Russia, or on seized assets to cover the costs of reconstruction.

{mosads}We know the bill will be large. Cost estimates for reconstruction range from $15 billion to $80 billion per year. The United States should take the lead in convening potential donors to get buy-in from partners. As CSIS has proposed in a separate report, the Trump administration needs to begin conversations with other donors and needs to start putting more details behind what the Guaidó government has put forward in Plan País and prepare for a serious assessment.

The Chavez and Maduro regimes destroyed the economy of Venezuela — they have driven out more than 3 million Venezuelans through forced migration, hosted the Colombian terrorist groups FARC and ELN, and they’ve allowed the Russians, Chinese, and Cubans to help run the regime. The illegitimate government cannot feed its own people.

A consortium of Venezuelan universities put out an annual Survey on Living Conditions (ENCOVI) and in 2017, 64 percent of respondents reported losing weight, and those who are losing weight said they lost more weight than the previous year. In addition, diseases are reappearing that haven’t been present in Venezuela for decades because the healthcare system is collapsing.

An interim government formed by Guaidó will face several crises that must be addressed quickly. First, there are billions of dollars owed to a variety of creditors that the government cannot pay. Second, the government of Venezuela will not have the cash to pay for basic social services such as paying teachers, police, or the military. Paying for the bill on reconstruction efforts in education, law enforcement, health, and others will run into the billions for several years. Part of that reconstruction will also include high costs of resettling the millions of Venezuelan refugees and displaced persons which will take time and will be costly. Third, significant reconstruction of power, roads, and other hard infrastructure is needed and has been neglected for two decades. Fourth, the food system both in terms of agriculture as well as access to food from abroad will have to be rebuilt. Agribusiness, once a major economic force in Venezuela has collapsed because of the socialist policies of the Chavez/Maduro governments.

Fifth, and critically, the oil sector will need to be significantly rebuilt at great cost borne largely by private sector players. Thousands of specialized petroleum engineers need to be brought back. Private energy companies will have to invest between $40 billion and $100 billion to rebuild. It is going to take at least several years (and could take as many as ten) for the oil sector to increase production from today’s 1.17 million barrels per day to the 1997 high of 3.2 million barrels per day.

For comparison, we saw total petroleum production and consumption in Iraq hit a low in 1991 at less than 302,000 barrels per day. Investment in rebuilding increased it to nearly 4.5 million barrels per day in 2016. In Iraq, the short term high in 2000 was 2.5 million barrels per day, and it took 10 years with a conflict in between to get back to the same level of production in 2011.

Venezuela has a significant amount of proven gold assets in the ground worth an estimated $100 billion. Much of the assets out of the ground are now held by Turkey and Russia; in January and February of 2018 alone, $140 million worth of gold was exchanged between Venezuela and one Turkish company. Venezuela under Maduro owes the Russians billions of dollars. It’s highly unlikely the Russians will give the gold back to a new government. It will also take years to restart and access the gold in the ground.

{mossecondads}Soft loans from multilaterals are needed as well as billions in grants — or loans that don’t have to be paid back for 20 years or more. Multilaterals can provide some loans on generous terms, similar to the World Bank’s International Development Association (IDA) loan for the poorest countries. Venezuela would not have qualified before for these subsidized loans, but perhaps could seek eligibility on a one-time basis because of their condition. Iraq received IDA support for a time, for example. In 2006, the World Bank approved $135 million in IDA credits for Iraq for an emergency road rehabilitation project that would promote trade and economic integration.

The Trump administration ought to consider submitting a supplemental budget to Congress for a comprehensive reconstruction program for Venezuela that would only go into effect if other countries also pledge funding and only if Venezuela also commits some of its natural assets over the long term to pay back some of these loans.

Venezuela is asset-rich but a cash-bankrupt country and could be so for at least the first five years after Maduro is forced out of office.

If we take a long view on the money that we will put forward, we should think of it as a national security and foreign policy investment. Panama is a good example of how to do this the right way. In 1990, the Bush administration forced out Manuel Noriega, but then spent $420 million in 1990 for reconstruction, and we can see the benefits today. Since 1990, Panama has imported over $50 billion worth of goods and services from the U.S. and has become one of the great development success stories of Latin America, ranking with Chile and Costa Rica. A functional Venezuela, ten years from now, will be a major trade partner, a willing partner to share security burdens, and a generous donor of assistance.

If reconstruction fails, it could lead to a failed state and the Venezuelan people having nostalgia for Maduro. Now is the time to begin a real conversation about the true costs, the need for burden sharing, and the need for the U.S. to front needed funds and pull together additional financial support from around the world. Several billion dollars from the U.S. over a 3-5-year period would be a small price to pay to defeat a failed socialist regime, stop the uncontrolled flow of Venezuelan migration in the hemisphere, remove a safe haven for the FARC and ELN, and ensure the Russians and Chinese do not get a military base in our hemisphere.

Daniel Runde is a senior vice president and William A. Schreyer chair in Global Analysis at the Center for Strategic and International Studies. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America, and the Middle East.