Foreign Policy Blogs

Iran and Venezuela Try to Balance the Books

How do you cope when your main source of political good will depends on money and that money dries up?

Demand for oil just ain’t what it used to be. The shrinking of state revenues (regardless of the price of oil) is putting a cramp in the political and social largess of two countries — Venezuela and Iran — that depend on give-aways to keep their political base happy. They are chosing different approaches to dealing with it.

Iran, which relies on oil exports for about 80% of its foreign income, has decided to cut energy subsidies. (Gasoline prices can cost as low as $.38 a gallon.)

Officials say the step is needed to recoup some of the roughly $90 billion spent yearly on subsidies by OPEC’s second largest oil exporter. Subsidies currently consume about 30% of the government budget at a time when already high spending and the collapse of oil prices last year hammered Iran’s economy.” (AP 1-13-10)

President Ahmadinejad and company have stayed in power in part because its policies have curried favor with the poorer classes. Cutting fuel subsidies would hit the middle class hardest (according to the New York Times). The middle class and the elite already don’t like the ruling party, so it’s not a terrible short-term political loss.

But inflation is already above 25%. Fuel costs indirectly affect many daily expenses like food prices. In the end, President Ahmadinejad, who has said he will recycle the saved money to aid the poor, will have to circumvent the end of subsidies somehow.  And no matter what, cutting the subsidy will have an inflationary effect on the country as a whole. 

President Hugo Chavez of Venezuela meanwhile would rather keep the subsidies because they benefit the poor; for example, gasoline at less than 10 cents a gallon. In early January, he chose to devalue the bolivar.

The action, which Mr. Chávez had repeatedly ruled out in the past, came after Venezuela’s economy contracted by 2.9 percent in 2009. Hampered by disarray in the oil industry and nationalizations that have shattered business confidence, the economy is expected to remain sluggish this year even as other large Latin American economies show signs of vibrancy.  (NYT 1-8-10)

And The Economist writes

…there will be a multiple exchange-rate, just as there was in the 1980s. Priority imports such as food and medicines will be paid for at 2.60 bolívares to the dollar, with a rate of 4.30 for the rest. The government will also legalise—and intervene in—the “parallel” (or free) market, where the rate this week was over six to the dollar. Hitherto, just publicising the parallel rate was in theory punishable with a heavy fine.
Sceptics say Mr Chávez will use the cash on social programmes and on raising the minimum wage so as to shore up his public support ahead of a legislative election in September.

The country relies on oil for 90 percent of its export income. Devaluing the currency may help the PDVSA (the state oil company). But most countries do it to make themselves more competitive for investment. This is not President Chavez’s problem — for him, it is that the business community is leery of investing in a country which, no matter how much oil it has, keeps nationalizing things.

As soon as the devaluation was announced, there were (reportedly) widespread runs by consumers desperate to buy big ticket items before the devaltion. The inflation rate is already over 25%.

Neither country has made a great choice — both are politically playing for time — and they would be better served working hard to develop alternative industries.



Jodi Liss

Jodi Liss is a former consultant for the United Nations, the United Nations Development Programme, and UNICEF. She has worked on the “Lessons From Rwanda” outreach project and the Post-Conflict Economic Recovery report. She has written about natural resources for the World Policy Institute's blog and for Punch (Nigeria).