Two of the region’s energy giants, Venezuela and Brazil, are mired in political crises that threaten to remove their current presidents from office. The outcomes of these crises have implications for the overall performance of these countries’ economies, and for the future of their energy sectors. In this post I seek to answer two questions: What is the likelihood that Nicolás Maduro and Dilma Rousseff will not make it to the end of 2016 as presidents? and What are the implications of a presidential crisis for Venezuela and Brazil’s energy sectors?
1. How likely is it that Nicolás Maduro and Dilma Rousseff will make it to the end of 2016 as presidents?
According to PredictIt, a political betting site, the odds are not good. The site predicts with 82% probability that a referendum will be called this year in Venezuela to recall the president (the prediction is that the referendum will happen, not that it will be successful). It also predicts with a 76% probability that Dilma will not make it to the end of the year as president. Keep in mind that these odds are generated by 5,600 bets in the case of Brazil, and half that number in the case of Venezuela, and that the people participating are not likely to be a representative sample of each country’s population. Nonetheless, it gives us a starting point to evaluate what factors affect their chances of staying in office.
Support from own political party.
Since the death of Hugo Chavez, many in the movement have taken distance from the new leader, and some have left the party altogether. As the crisis worsens, those remaining in the party will benefit from distancing themselves from Maduro, the failed heir. Supporting him would mean risking losing local offices they currently occupy. Maduro needs his party more than its partisans need him, so he is likely to find himself alone in the face of impeachment, making its success more likely.
In Brazil the relationship between the president and her party, the PT, is more complicated. The PT is not in a good position to take distance, especially after the indictment of former president Lula, the last relic of a pre-crisis PT, a soaring economy, and a future as a BRIC. If they sacrifice Dilma, they sacrifice themselves. On the other hand, clinging on may dictate a slow and protracted death for the party.
The path to impeachment
While Maduro has equivocal support in Venezuela, the path to impeachment is not easy. Only civic entities, composed of a minimum of 1% of registered voters, can initiate a recall referendum; and they need to collect nearly 4 million signatures, all of which must be approved by the electoral authority. Secondly, the option to remove the president must accrue more votes (not just a greater percentage or a majority) than got the president into office; that is over 7.5 million votes. Finally, if the purpose is to replace the government entirely through a new election, the referendum must be held between April 19 (mid-point in the current term) and the end of the year. If held any time thereafter, and the vote were to favor Maduro’s removal, then his VP would complete the term, according to the Constitution. So for the opposition to be successful it would need to quickly organize a massive campaign, get through the red tape, and ensure voter turnout. Other options to remove Maduro are on the table, but present obstacles of their own. The only precedent in Venezuela is that of the referendum of 2004 to remove Chavez from office, which was unsuccessful.
In Brazil there is the precedent of the impeachment of President Fernando Collor in 1992. This proves it is possible, but the parallels with the present situation are limited. Collor had no political party behind him and his fall from power was not threatening to bring anyone else down. The current corruption scandal has spread like an oil spill through the president’s party and beyond, reaching business people, political appointees and members of other parties. So despite the lack of political support for Dilma and her basement-level popularity rates, there is a critical mass of people in the political class whose futures are tied to the fate of the present government. Many are riding the fence, including the speaker of the House, Eduardo Cunha, who initiated an impeachment process to begin this weekend, while being himself under investigation.
The next steps will be crucial. A special committee composed of 65 members of the House, in proportion to the seats each party holds in the chamber, will first decide whether the case has merit. The party leadership was selecting their appointees today. If the process continues, the president will have the opportunity to present her defense, and then the matter will be put to a floor vote. For the process to move forward to the Senate for final judgement, 2/3 of the House (342 of 513) must support the accusations against the president. Typically it doesn’t get that far; presidents resign before a final judgement is made as they sense they have no support left.
In the meantime, the judiciary and its lead investigating judge, Sergio Moro, march on with their investigation and the number of people caught in the dragnet continues to grow: so far 62 people have been convicted and 94 more are under investigation. So the scales might tip against the president if enough people are indicted and plea bargains are made, ushering in a large-scale prisoner’s dilemma, where confessing for leniency wins over sticking together (for more detailed coverage of the scandal go here).
The final factor to discuss is the economy, working against both Dilma and Maduro. Economic hardship in Venezuela has cemented the idea that the Chavez era is over, though there is less consensus regarding the wisdom of bringing the opposition to power. In Brazil, the economic slowdown has prompted many people to take to the streets in protest in a way not seen during a previous corruption scandal during Lula’s first presidential term, when the economy was booming. The economic cost to Brazil of this crisis has been enormous: 2 million jobs are estimated lost to the scandal. Another factor working against presidents Dilma and Maduro is the length of time remaining in their terms, until 2019 for both of them, which is a long time to wait the crisis out.
2. What are the implications of the presidential crises for the energy prospects?
Regardless of the outcome of the current impeachment initiative, all infrastructure projects in Brazil have been greatly affected by the scandal: 29 major construction companies are under investigation leading to a paralysis in construction, including off-shore platforms. Petrobras has no money, and the investigation is spreading to other parts of the energy sector, including 10 new hydroelectric projects awarded to some of the companies indicted for corruption. This could lead to opportunities for foreign companies in areas of infrastructure previously reserved for Brazilian companies. Those with the stomach for uncertainty, like the Chinese, may be better positioned to take them. The process of sidelining Petrobras is already underway for drilling in the Pre-salt oil fields (see previous post), though not without opposition.
Renewable energy may also finally have its day. After being sidelined by the government under the spell of Pre-salt oil discoveries, renewable energy is now the focus of new legislation, and is experiencing the fastest rates of growth. Renewable energy investors are uniquely positioned to fill the vacuum left by the fallen construction companies by promoting a smaller scale, decentralized form of energy supply and the only truly “clean” alternative to the present mess.
In Venezuela things are stickier. A change in government would most surely result in a re-staffing of PDVSA with business-minded people, perhaps with those who left the company and the country after the failed strike in 2002. But the problems run very deep: the company and the country are bankrupt, investment in exploration and infrastructure have been long neglected, and the price of oil is not providing any cushioning. Attracting foreign companies back will require making huge concessions, and may not even be feasible at current prices.0