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Venezuela's Controversial Election Results Are Only the Start of Its Troubles

Getty/Luis Acosta

CARACAS, Venezuela — The late Venezuelan President Hugo Chávez always had superb political timing. 

His initial election in 1998 coincided with the lowest oil prices in decades, and he rode a steady rise in prices to a nearly impregnable, petrodollar-fueled reign of power. Although oil prices tumbled in the wake of the global financial crisis in 2008 and 2009, they reversed course in time for his October 2012 reelection.

But he may have saved his best timing for his exit, leaving lesser mortals and a divided country to squabble over how to sort out the legacy he bequeathed to Venezuela.

Chávez's hand-picked successor, Nicolás Maduro, was officially declared the winner of Sunday's snap presidential election by the Chavista-controlled CNE with a victory of just 50.66 percent to 49.17 percent for opposition candidate Henrique Capriles.

Maduro was favored to win on Sunday and then immediately face an economic crisis, the hangover from a 14-year spending binge and an economy on the brink of collapse. Since Chávez's reelection in October 2012, Venezuela's economy has precariously slipped from troubled to tumbling—all while oil prices have surged to $103 a barrel.

But Venezuela now also faces its Bush v. Gore moment, with Capriles demanding a recount of the vote in a late-night Sunday address to the nation. Maduro, in his victory speech, claimed that Capriles had called to offer a pact, but Capriles angrily denounced Maduro as a liar. Capriles started the campaign by taunting Maduro, "No one elected you, kid," and in his speech, he argued that if Maduro was illegitimate before, he's just as illegitimate now. He stopped short of outright declaring victory himself, but he stated that the election result didn't reflect the truth of the Venezuelan electorate, and he made it all but clear that he expected a promised audit to show that he, in fact, was the real victor on Sunday.

Venezuela will now confront a long and grueling battle in unprecedented territory—you have to go back to December 1968 to find a presidential result that was even closer in Venezuela, a result that ended with Venezuela's first-ever peaceful transfer of power following an election. If Maduro holds on to his victory, however, he'll be crippled by nagging doubts over the legitimacy of his presidency, and the close result, barely a month after Chávez's funeral, was a stinging defeat for Chavismo.

Meanwhile, the more acute economic problems continue, and may well accelerate, given that government policy for the past six months has been designed merely to get Maduro to the finish line of Sunday's election.

Venezuela remains one of the few countries that still sets an official currency, and it devalued the bolívar in February by nearly one-third of its value to 6.3 bolívares to the dollar. Only chumps pay that, though. Not even the government pays it anymore, in fact. In a move to get more dollars into the hands of Venezuelan importers, the government last month created a new auction system for dispersing dollars, and although it hasn't released the price, it's reported that the government paid a rate of between 10 to 15 bolívares per dollar, making it a sort of second unofficial devaluation.

There's a floating rate for dollars, and it's rumored to be up to three or four times the official rate. No one openly discusses it because that's technically illegal, but any number of Twitter accounts announce the going market rate—one favorite, until March, stated the price of "fresh avocados," and another stated the price of "green lettuce." The "green lettuce" people actually got into the scam of trading dollars themselves, until they disappeared in March, their racket exposed as a Ponzi scheme.

It also makes changing U.S. dollars—or euros or Canadian dollars—into local currency quite an adventure, and it's one of the reasons why a tropical paradise that boasts the highest waterfall in the world is one of the world's least friendly tourist destinations

But it's even more tragic for a country where day-to-day life has grown increasingly dependent upon imports for basic staples, even fresh produce and refined oil products. Keeping the official rate so high has been a way for the government to subsidize dollars—the cheapest dollars went to the insiders who won the auctions and who could sell the dollars on the black market for a quick profit. So as demand for imports rise, the dollar system has exacerbated shortages in supermarkets, which have become more commonplace.

In the short run, the devaluations have been great for the government in two regards. First, they get more bolívares in the treasury as the official rate slowly moves toward the market rate. But it also reduces the country's growing public debt—the International Monetary Fund estimates Venezuela's debt (including the debts of PDVSA, the state-owned oil company) at around 51 percent of GDP. In the run-up to last year's presidential election, Chávez ran a budget deficit of up to 17 percent of GDP, much of it financed by China. But China's now starting to balk at lending more to Venezuela, and it's widely believed that the devaluation followed China's decision to cut off Venezuela's credit.

But despite the immediate gains, devaluation looks like a painful long-run solution. The inflation rate, which was already high (22 percent last year), is expected to get even worse. During the campaign, both Maduro and Capriles promised to raise the minimum wage by 40 percent, which could raise prices even more, threatening to cause inflation to spiral out of control.

It's now up to Maduro to sort all of this out in the background of a legitimacy crisis. Economically speaking, there are several options that could help. Venezuela could claw back some of its oil revenues by reducing subsidies to Cuba and the rest of the Caribbean basin. He could reverse the trend of ad hoc expropriations under Chávez that left the public sector bloated with bureaucrats, the private sector fearful, and the non-oil industry atrophied. He could direct more capital to be re-invested into PDVSA, the state-owned oil company, to boost oil production that's fallen by up to a third in the past 15 years, and to develop refining capacity, especially in light of the ultra heavy crude oil that's increasingly being drilled from the interior's Orinoco Belt. Venezuelans believe cheap gas is virtually a constitutionally protected right, and an attempt to eliminate it pursuant to an IMF loan package in 1989 is widely seen as the catalyst for the deadly Caracazo riots later that year, but Maduro could gingerly begin to reduce the domestic subsidy that keeps Venezuela's gasoline the cheapest in the world at about six cents per gallon.

Politically speaking, however, it's another story. Maduro, it's safe to say, is no Chávez. A former Caracas bus driver, Maduro was a loyal Chávez lieutenant from the beginning of the proclaimed Bolivarian revolution, and he served as Chávez's dutiful foreign minister for six years prior to his elevation to the vice presidency last December. But the skills that allowed Maduro to remain in the top echelons of Chavismo didn't lend themselves to leading a compelling campaign. His win owes more to the Chavista electoral machine, coercive mobilization tactics, a largely state-dominated media, and the resources that come from a decade of blurring the lines among Venezuela's governing United Socialist Party (PSUV), PDVSA, and the government. Maduro was undeniably a lackluster candidate, and he wrapped himself in the legacy, and in some cases, the actual godhead, of Chávez—one plucky website tracked how many times Maduro has mentioned Chávez during the campaign (over 7,200). After saying that the United States may have caused Chávez's terminal cancer, Maduro claimed earlier this month that a little bird spoke to him to tell him that the ghost of Chávez had blessed Maduro's campaign.

If campaigning proved hard, governing will prove even more difficult. The country, which was already virulently polarized, is now even more so, with basically half of the country behind Capriles, and still convinced he won yesterday's vote. Moreover, Maduro won't have any little birds to chirp out solutions at Miraflores, the presidential palace. Not only does Maduro have a charisma deficit compared to Chávez, but he won't have the magical ability to spend his way out of political trouble. Despite some vague bromides about fighting corruption, he will be hard pressed to stand up to the ossified interests in his own party and to longtime Chavista heavyweights who have long controlled the levers of economic policymaking in Venezuela—National Assembly President Diosdado Cabello, Energy Minister Rafael Ramírez, and Finance Minister Jorge Giordani, all of whom are expected to remain in their positions in the Maduro administration. Ironically, Maduro's narrow victory means that he'll have even less power to effect any real change in strategy unless Cabello, Ramírez, and Giordani want real change, too.

In some ways, economics in Venezuela is pretty simple because oil revenues comprise 20 percent of GDP, virtually all of its exports, and over half of the official government budget. When oil's up, Venezuela's up; when oil's down, Venezuela's down. So if oil prices rise further in 2013 or 2014, Maduro and the Chavistas will have a reprieve to sort the country's finances and avoid further economic disaster. But the fundamental problems—the inefficient dollar market, dependence on imports, a dilapidated oil infrastructure, and lack of access to Chinese and other international financial markets—won't go away. Galloping inflation might actually become worse if oil prices rise. That doesn't begin to describe the deeper problems that Venezuela faces in its culture and society from being a petrostate.

On the other end of the continent, Argentina faces similar difficulties but without the benefit (or curse) of wealth that bubbles out of the ground. Shut out from financial markets for years, the Argentine government has raided even its own pension fund for cash, and daily life in Buenos Aires also features crippling inflation, capital controls and a growing divergence between the official and market rate of its currency, and it could default later this year. GDP growth in Latin America's largest economy, Brazil, has also stalled over the past two years, despite the promise of offshore drilling. If the Argentine and Venezuelan economies implode at the same time, it could amplify concern about Latin America more generally, despite the fact that it's been one of the few bright spots in global growth since 2008. 

Back in Caracas, however, Chávez will forever be remembered as the president who delivered a significant share of oil wealth to Venezuelan's poorest citizens, so his personal legacy is likely secure. Though the delivery may have been inefficient and prone to corruption, Chávez deployed more oil revenues to the poor than his predecessors. His misiones to deliver health care, education, literacy, and housing programs lifted many Venezuelans out of extreme poverty, and they loved him for it. But the legacy of Chavismo, now in Maduro's hands, has become much less certain in a matter of weeks. As Venezuela tumbles toward darker economic times, the fragile gains made by the country's neediest could be wiped out in a matter of weeks, too.