Latin America Risk Report - 9 January 2020
Answering reader questions about Venezuela, Iran and regional protests
Welcome to the Latin America Risk Report - 9 January 2020.
I’m doing the newsletter a bit differently today by answering reader questions that I’ve received in the past week.
What is your view of Iranian capability/intent to conduct an attack in Latin America?
What goes into Hxagon’s analysis about whether Maduro will lose power in 2020?
What does a "Latin American Spring" look like?
Plus the typical corruption corner and reading list/links
Other newsletters I sent this week:
Also, on the question of Venezuela sanctions, I will be holding a Q&A on the Substack platform tomorrow morning starting at 9AM EST. I’ll answer as many questions as I can. Questions are welcome from both professionals who deal with Venezuela in their day jobs as well as high school students debating the issue this month. Everyone receiving this email right now will get an email in your inboxes with the link when the comment thread opens tomorrow morning. If you want to participate and get the free weekly newsletter, drop your email in at https://boz.substack.com.
1. What is your view of Iranian capability / intent to conduct an attack in Latin America?
The chance that the Iranian government or its proxies (such as Hezbollah) conduct an attack in Latin America that causes significant casualties or property damage is very low. I’d place the probability in the next year well under 10%, though I'm monitoring the escalating tensions between Iran and the US and may increase it if needed.
Why low?
1) There is no public evidence of Iran having significant capabilities or intent to conduct an attack in Latin America since its last known attack in 1994.
2) Even if Iran does conduct some sort of attack in LatAm, they are likely to very specifically target their attempts, not hit random targets of opportunity. Their goal is to send a message and cause damage to the US and Trump, not terrorism for the sake of terrorism.
3) Iran doesn’t want to anger Latin American countries.
The evidence of Iran and its various proxies having a presence and doing bad things in LatAm is real. Iran has increased its diplomacy and economic ties in Latin America over the past two decades. Hezbollah has illicit trafficking and money laundering operations, particularly in the tri-border area and Venezuela. Some of Hezbollah’s operations have included weapons trafficking efforts that suggest they have access to firearms and explosives, even if they are passing them along to other criminal groups for profit.
Still, in spite of all of Iran’s activities, that sort of presence doesn't signal a plan for terrorism. Given their use of the region for fundraising, they have some incentives to avoid a violent attack that would draw attention to their other financial operations. In terms of threats in the hemisphere, I place terrorism by Hezbollah much lower than violent crime or terrorism by local LatAm-based actors.
2. What goes into Hxagon’s analysis about whether Maduro will lose power in 2020?
This question refers to my November 2019 analysis on Maduro’s stability. Apparently my newsletter on this subject has become a point of contention.
Building a model for if and when an authoritarian regime will fall is more difficult and more subjective than a basic "who will win the election?" model (take polls, calculate error, throw a few economic or incumbent advantage points in, and run monte carlo simulations). The methodology for a regime change model contains a lot more questionable assumptions. It's also hard to test. I've been running a "Will Maduro fall?" question since around 2014, updating it every few months, though my methodology has changed over time as my understanding of the regime changes.
For this Venezuela analysis, my focus is on:
Public opinion in Venezuela
Cohesiveness of the regime
Cohesiveness of Maduro's opposition
Occurrence of protests
Resource constraints
I try to measure each of those as accurately as I can, but there is a fair bit of guesswork involved as well. Nobody has perfect insights into how cohesive the regime is or how many resources they have left.
Prior to 2019, my model had never been over 50%. In December 2018, it was running around 30% probability that Maduro would leave office in the following 12 months. I'm not someone who always predicted that Maduro would fall (or Chavez before him). The situation really changed in January 2019 for four reasons.
The opposition found new leadership in Juan Guaido.
The international community became disputed over who was president of Venezuela.
The numbers and scale of protests were increasing.
The US imposed sanctions on PDVSA.
Meanwhile, around that same time, somewhat related to sanctions, Venezuela's oil exports were falling quickly and the amount of cash producing barrels was very low (many barrels are sent to China or Russia in exchange for debt payments, cash that Venezuela received years before and now must pay back).
The main reason my analysis continues to have such a high probability of Maduro falling is the resource constraint question. Maduro needs enough resources to pay off those around him and to feed the country at least a minimal amount of food. My methodology changed over 2019 to more strongly focus on resource constraints as a factor that can singularly alter the outcome in Venezuela (and if you're looking for flaws in my methodology, the fact I've shifted the methodology on this is one place to attack).
Maduro's resource constraints come from two factors:
His own mismanagement of the economy.
Sanctions, specifically the US-imposed sectoral sanctions on oil, gold and debt (the individual sanctions imposed by the US, EU, Canada and others don't really impact the regime's financial situation; there is a policy debate over whether and how they impact regime cohesiveness.)
It isn't easy to sort out what percentage of Venezuela's economic decline comes from each. Pre-2017, nearly all the resource constraints were due to Maduro's own ineptitude. The sanctions against Venezuelan debt were the first to really hit the regime's finances. They were further hit in January 2019 when the US sanctioned PDVSA.
From a stability analysis perspective, this should lead you to the following questions:
How much money does Maduro have left?
How much can he bring in per month via gold and oil?
How much money does he need to spend per month?
The Venezuelan regime is not particularly transparent about its financial situation. It is complicated by two more factors:
The economic situation has changed in recent months due to the dollarization of the economy and the increasing amount of remittances.
Russia has helped Maduro evade sanctions and access resources. The Trump administration has not sanctioned Russia or Rosneft to stop them from helping Maduro.
In fact, I believe those two factors are the only reasons Maduro survived 2019 without running out of resources.
The other way I've tried to run this analysis is to look at what the various options for transition are. I have a list of 13 ways for Maduro to lose power, but the four most likely to occur this year are: military coup, internal Chavista power struggle, negotiated exit, and protest event. All four can be driven in some way by the lack of resources.
In short, there is a methodology but there is also a lot of guesswork. I have good information and a strong track record on geopolitical predictions and Latin America political analysis. I'm also very aware of where the uncertainties in this analysis are. I know my analysis on this situation is in the minority, with many other political risk firms claiming Maduro will remain in power this year. There are a lot of competing factors in this including some individuals and governments who are strongly invested in Maduro remaining in power and others who want to see him gone.
This isn't a stable system to model. It moves as people and governments try to influence it.
For those who want to dive deeper into geopolitical predictions in general, the three books I often recommend are Thinking Fast and Slow by Daniel Kahneman, The Signal and The Noise by Nate Silver, and Superforecasting: The Art and Science of Prediction by Philip Tetlock. I'll also add that I do work as one of the Superforecasters with Good Judgment Inc, a status I received by competing on their Good Judgment Open platform back in 2016 (though I'll note they are not involved in my work on this question nor do they endorse it). If you want to try your hand at geopolitical predictions, head over to Good Judgment Open and make some predictions of your own. You can compete on a Venezuela question right here and track your prediction.
3. What does a "Latin American Spring" look like?
Question from a reader: What exactly would a "Latin American Revolution" look like? Would it reduce inequality? Would it be counterproductive? Would it be extremely violent? If there was a catalyst to light the fire, how would it materialize across the region?
This question relates to my analysis that the protest wave will likely expand in 2020.
The idea of a regional revolution is a bit of a hazy concept, but here's my best attempt to answer it. A Latin American Revolution or a "Latin American Spring," as I would define it would involve a large number of simultaneous protests that caused at least three changes of government outside of the typical electoral cycle. The region ended 2019 in a protest wave, but we have yet to see whether the protest wave will cause that sort of "LatAm Spring" moment. So far, only Bolivia has seen an unscheduled change of power (it’s a coup, even if it happened during an election cycle Morales was trying to steal).
The important thing to understand is that even if a LatAm Spring happened as a regional event, each individual country would experience it differently. Some countries might become more democratic, some countries might become more populist or authoritarian. Some leaders would engage in reforms to win over the population; others would increase repression. Even as protests correlate with each other across the region, the outcomes wouldn't necessarily correlate with each other.
In this, Arab Spring is a good parallel. Tunisia got democracy, Jordan got some minor social reforms, Egypt got a coup and a new authoritarian, Syria got a civil war.
To the extent the protests around Latin America correlate, the region already sees mixed outcomes. Bolivia pushed out its president and is holding new elections. Chile is changing its constitution. Maduro continues violent repression in Venezuela, with thousands executed by security forces. Framing the protests, unrest and anti-incumbent moment is an analytical leap that may or may not be accurate. We’ll learn more in the coming months if it’s justified. It’s definitely wrong to expect that the outcomes would be the same in each country across the region.
Corruption Corner
Venezuela, Turkey - The same private plane company used to transport Carlos Ghosen to Turkey and then on to Lebanon was used by the Maduro regime to transport gold to Turkey as part of sanctions evasion in Venezuela. Bloomberg has an excellent report that includes a video tracking the plane.
El Salvador - Salvadoran authorities detained former Congressman Roberto Silva Pereira after he was deported from the United States. Silva Pereira is charged with running a scheme involving bribes for government contracts and money laundering. However, as El Faro reports, Silva Pereira is allegedly one of the intellectual authors behind the killing of the Parlacen diplomats in 2007.
Mexico - Genaro Garcia Luna is attempting to strike a plea agreement with prosecutors to avoid a trial. Garcia Luna is accused of taking millions of bribes from the Sinaloa Cartel to facilitate cocaine trafficking while he was one of the top security officials in the Calderon administration.
Reading List
Miami Herald - Ten years after Haiti’s earthquake: A decade of aftershocks and unkept promises
BBC Mundo - Cómo América Latina puede salir de la “década perdida” y recuperar el crecimiento económico
Brookings: Detoxifying Colombia’s drug policy
Reuters - Hit by sanctions, Venezuela lost a third of its oil exports last year - data
Washington Post - The power struggle in Venezuela has created a dangerous governance vacuum
WOLA - Working Paper: International Peacemaking in Venezuela’s Intractable Conflict
McClatchy - State Department says Giuliani was freelancing in Venezuela
Washington Post - Climate change is playing havoc with Mexico’s monarch butterfly migration
DPA/Reuters - Smoke from Australia fires reaches South America
Thanks for reading
As you can see, the questions readers ask can shape the direction of the newsletter. Please feel free to reach out and ask questions or send comments. I can’t promise to answer them, but I do try. And if you want to support this newsletter and receive additional analysis every week, please consider subscribing.