The death of Hugo Chavez - a factor of political risk in trade and economic relations

The news of the death of the president of Venezuela, Hugo Chavez once again leads us to analyze the prospects of trade and economic cooperation with resource-dependent economies which simultaneously hold a high political risk.

15 projects have been concluded with Venezuela just in the past 2 years, the majority of which are concentrated in the oil and gas industry. Initially, it was clear that the most significant risks that would confront the implementation of these projects were political risks. A large number of joint projects are a result of the isolation of Venezuela from developed countries as a result of the policies of Hugo Chavez of the last decade. Therefore, such projects as the launch of the assembly production of the "Lada" and "KAMAZ" cars, is considered more of a political move and not cost-effective solution for the Venezuelan industry. 

The past two years have brought a great uncertainty about whether Chavez would recover, since the opposition that may replace him could review the contracts and abandon certain unprofitable economic agreements, in particular, the production of the above mentioned vehicles, or the services of the companies "Gazprom" and "National Oil Consortium" in the oil and gas industry. The political risk, to a lesser extent, affects only projects for the joint production of bananas ("JFC Group" CJSC ), aircraft leasing ("Ilyushin Finance" OJSC ) and activities of "Aeroflot" OJSC.

In addition, Venezuela accounts for the largest number of joint projects, out of all the oil exporter countries that Russia has contracts with. Most of them affect the cooperation in the oil and gas industry. The fact is that Venezuela needs assistance in the development of its own resources, but because of political differences with most developed countries, Venezuela is forced to use the services of Russian companies. It should be noted that, thanks to the poor relations of Venezuela with Western countries, it became possible for Russia to enter into such projects like the establishment of assembly production of cars without any competition. Similar projects do not exist with other countries, since they prefer to use the services of Western companies.

It is also worth noting that cooperation with the traditional old partners, such as Cuba, Angola, Egypt and Vietnam, as well as new partners, such as Iran, Syria and Venezuela, is developed to a greater extent than is necessary for economic reasons. Russia has already lost a lot of resources in Libya, lost hundreds of millions of dollars because of UN Security Council sanctions against Iran and probably stands to lose a lot in Syria. The death of the Venezuelan President will clearly indicate how political risks could be realized in the in the trade and economic relations between the two countries.

A.U. Knobel – Ph.D., Head of the International Trade Department