Why Venezuela has a case in the UK High Court

President Maduro’s government has resorted to legal action to have the gold released

The British High Court recently rejected Venezuela’s attempt to access $1bn of its gold currently held at the Bank of England. The High Court refused this request as the UK ‘unequivocally’ recognised Juan Guaidó, the opposition leader, as the legitimate president of Venezuela, rather than the current regime of Maduro who was requesting the gold. The legal case ensued because it raised the question of who the British government recognised as the President of Venezuela. By deciding that Maduro was not the recognised president, this meant that he did not have the requisite authority to request the gold from the Bank of England.

A sovereign nation storing gold in another’s central bank is a common occurrence as gold is crucial to maintaining foreign exchange reserves and central bank management to ensure stability in the sovereign’s financial system. Venezuela argued that by accessing and consequently selling the gold, the proceeds of the sale would be used to combat the coronavirus pandemic. The opposition disagreed with this argument and claimed that proceeds of sale from the gold would finance torture and corrupt practices.

But how did a nation with the world’s largest oil reserves succumb to a position where it had no redress to finance a public health crisis other than its gold reserves? Here is a brief outline:

A RELIANCE ON OIL

Despite large oil reserves which make up 25% of OPEC’s total, an endemic economic stagnation has led to shortness of cash in the national accounts. Recent figures showed that oil made up 97% of export earnings. Therefore, Venezuela seemingly fell prey to the resource curse that has affected many other oil dependant nations. During the early boom years, the socialist government of Hugo Chavez spent oil revenues on extensive social welfare and infrastructure programmes rather than diversifying the economy. An analysis of socialism in Venezuela is beyond the scope of this article, however, it is generally agreed that Chavez’s socialist programmes resulted in an accumulation of debt which relied on servicing from oil revenues. During a downturn in oil prices, this was an arrangement which had ramifications for the economy. An absence in cash to fund further infrastructure programmes resulted in the government entering Oil-for-infrastructure deals with China. Such deals (pioneered by Angola) often involve a loan from China to fund infrastructure built by Chinese companies which are to be repaid in oil, these deals are more susceptible to high-interest rates which further exacerbated a debt crisis. There’s no doubt that the socialist model has been unsustainable without rising oil prices.

PRICE DROPS

Oil prices have been depressed since 2014 when the price of a barrel dropped to $30, dropping further in 2016 to a low of $28 a barrel. The drop in prices was driven by a slowdown in China’s economy, thereby affecting global demand. Furthermore, supply and demand were also at play as the rise of US shale oil from fracking lessened the need for the USA to import oil from countries such as Venezuela. America recently became the largest producer of oil which could have also impacted their decision to shun Venezuela's oil. Prices have struggled to recover to pre-2014 levels when the price of a barrel was above $100. The recent spate of coronavirus globally continues to affect demand for petrol consumption due to government intervention concerning transportation, particularly vehicles and airlines. It is therefore fundamental to Venezuela that oil prices rebound as the financial implications for low prices have been detrimental to its economic outlook.

DEBTS

The state-owned oil company PDVSA accumulated a significant amount of debt, estimated at over $25bn in external claims from bondholders. Years of mismanagement and corruption also contributed to a slowdown in oil production. Much of the blame from the international community and debt-holders have been directed at the current Maduro regime. Their socialist model has been a topic of extensive discussion and research with many stating that this has driven the economic slump. GDP has decreased by over 60% since 2013 and only 737,000 barrels of oil were pumped in April 2020, significantly less than the 3 million barrels that were pumped in early 2014.

The belief in government ineptitude has led to crippling economic sanctions being placed upon the nation by the USA. These sanctions have further contributed to the economic downturn. Venezuela’s oil exports to the USA represented 75% of the country’s export revenues and the importance to the economy, particularly in receiving dollar currency is incredibly vital to operating in the global financial markets to obtain imports. An absence of hard dollar currency means that Venezuela is unable to fund imports such as basic foods and medicine which has further contributed to a food crisis.

Venezuela currently has debt obligations estimated at over $150bn mainly against state-owned companies, multilateral agencies, bilateral creditors such as China and arbitration awards awarded against the state for expropriation. Remember those Oil-for infrastructure deals? Venezuela has already defaulted on one of these deals to China due to the decrease in oil production. The debt level is at astronomical levels, GDP figures have been on a double-digit decline since 2016 and hyperinflation is rampant.

FINAL COMMENTS

In the short term, Venezuela will have to continue restructuring its debts with debt holders and ensure that there is a process for the legitimate government to assume control. Similarly to other oil-rich nations, efficient political and governance systems will need to be structured so that oil wealth in the future does not continue to inflict a resource curse. Fighting corruption, diversifying the economy, encouraging a friendly business environment and vitiating arbitrary government decisions will go a long way towards curbing a re-occurrence of the current economic problems.

In relation to Venezuela, structural and systematic changes will need to be made to create a more inclusive growth environment in the future to ensure that this humanitarian crisis doesn’t lead to the people of Venezuela paying for decisions that are out of their control. Maduro lawyers have criticised the High court’s decision and are set to appeal the decision. There is no doubt that the case highlights the influence that foreign policy can play on judicial decisions. Time will tell whether a precedent will be set regarding foreign assets held in the Bank of England.

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