7 August 2019

Juan Palenzuela

7 August 2019

Good morning,

When I was growing up, the desperation for change in my country was a middle-class affair. With substantial oil revenues buoyed by record oil prices during the 2000s and early 2010s, the Chavista government had the cash to spend heavily on things such as building free houses, subsidising everything from food to cellphones, cars, clothes and even beach holidays. This expenditure boosted GDP and kept most people happy, while the government slowly eroded independent state institutions. Stealthily, piece by piece, democracy was disassembled.
 
The situation became dire when oil prices crashed in 2014. As soon as the expenditure that kept the population permissive disappeared, the socialist government faced new popularity challenges and was forced to look for new ways to stay in power. The government became more coercive and inventive in uncovering novel sources of financing, such as creating its own cryptocurrency and outright drug trafficking.
 
In the face of this, the international community has pushed for change, an effort led by the United States. In the latest chapter, the White Houseannounced a new executive order yesterday that effectively blocks all property and interests in property of the Government of Venezuela in the United States. It also authorises the Secretary of the Treasury to impose sanctions on anyone who provides support to Nicolas Maduro and his illegitimate regime. The move could pave the way towards an economic embargo akin to the ones imposed on Cuba, North Korea, Syria and Iran.
 
But many from the oposición, myself included, are deeply concerned about this measure. Contrary to ushering in democratic change, these sanctions are likely to exacerbate existing problems and strengthen the authoritarian government.
 
Economic embargoes like these have extremely poor track records. The same policy has failed in Cuba for over 60 years, where it has strangled its citizens. Similarly, it does not appear to be working well in Iran or North Korea.
 
The experience with Iran in particular shows that there is no way of guaranteeing that Venezuela’s allies – China, Russia, Turkey and Iran – will comply. They will almost certainly continue doing business with the government. Additionally, the sanctions could in fact antagonise other countries in the region, many of which still trade with Venezuela; and undermine the multilateral effort. It will also give the Venezuelan government a new reason to blame the US.
 
What is the point of the policy, then? On the face of it, and according to US national security adviser John Bolton, it’s about starving the Maduro regime of finance to “accelerate a peaceful democratic transition”, despite the potential it creates for Maduro to play the victim.  
 
Another explanation could be that it is aimed at cultivating domestic support for President Trump in the US. The sizeable Venezuelan and Cuban communities in Florida, which are staunchly opposed to the Chavista regime, could be essential to securing the swing state in the 2020 election. Stranger things have happened. 
 

News

Labour’s shadow chancellor John McDonnell has said a Labour government would allow a second Scottish independence referendum if the Scottish Parliament votes to hold one. His view contradicts that of Scottish Labour leader Richard Leonard, who earlier this year said that the party would refuse to grant Holyrood the power to hold another vote. McDonnell's comments follow the publication of an opinion poll that suggests there is now majority support for independence in Scotland. 
 
North Korea fired two missiles into the sea off Japan's coast yesterday, described as a “warning” aimed at American and South Korean forces undertaking joint military drills. The country also suggested it could seek to take a “new road” in relations with the US and South Korea, in the latest in a series of recent provocations by Pyongyang.
 
Pakistani prime minister Imran Khan has vowed to fight India's decision to revoke Indian-administered Kashmir's autonomy, including at the UN Security Council. The move, Khan said, was in breach of international law. Pakistan announced its intention to close its airspace to Indian flights, downgrade its relations with India and raise its alert status, among other retaliatory measures.

Business & Economy

Disney’s latest results failed to impress investors. Shares in the company fell 4% yesterday after it published its quarterly results. Profits in the three months to June dipped 51% to $1.4bn, despite a string of successful movies that drove revenues up 33% to $20.2bn. Disney’s massive investment in its forthcoming streaming service and unusually low attendance at its theme parks are the main reasons behind the weak results.
 
Glencore is set to halt production at Mutanda mine in the Democratic Republic of Congo, the world’s largest cobalt mine, towards the end of this year. The move follows a dramatic fall in prices for the key battery metal that resulted in a 32% drop in earnings for the first half of this year. The mine, which is also a significant producer of copper, is “no longer economically viable” said the company’s chief executive Ivan Glasenberg.
 
Neil Woodford has liquidated his entire 16% stake in Eurocell, a windows and doors business, after the company published results showing weak profits and a doubling of its debt relative to last year. The move comes amid increasing pressure to meet liquidity demands from investors.

Markets

What happened yesterday?

Stock markets are still recovering after Monday's sell-off, triggered by a fresh round of American tariffs on Chinese goods. The sales intensified further after Chinese authorities allowed the yuan to break to its lowest level against the US dollar in over a decade. 
 
London stocks finished slightly lower yesterday, as did European stocks. The FTSE 100 ended 0.72% lower at 7,171.69, after opening in the red and having already suffered heavy losses on Monday. 
 
Stocks at the NYSE closed sharply higher on Tuesday, bouncing back from their worst day so far this year as trade tensions eased somewhat. At the close, the Dow Jones Industrial Average was up 1.21%, while the S&P 500 closed 1.30% firmer at 2,881.77. 

What's happening today?

Interims
Bank Pekao Sa
Glencore 
Hill & Smith 
Legal & General 
Morgan Sindall Group
PageGroup
Phoenix Group Holdings
Spirax-Sarco 
Standard Life Aberdeen
Ultra Electronics

Q3 Results
UDG Healthcare

UK Economic Announcements
(08:30) Halifax House Price Index
 
Int. Economic Announcements
(07:00) Factory Orders (GER)
(12:00) MBA Mortgage Applications (US) 
(15:30) Crude Oil Inventories (US) 
(20:00) Consumer Credit (US) 

Columns of Note

David Gardner argues in the FT that it is a mistake to sanction Iran’s foreign minister Mohammad Zarif, who negotiated the nuclear deal Iran signed with six world powers in 2015. Although the US is not wrong in also considering Zarif to be Iran’s most effective propagandist, sanctioning him unnecessarily escalates tensions and, more importantly, it has probably blocked the best path back to mediation. 
 
Also writing for the FT, Martin Sandbu says that Ukraine is living through a unique period of opportunity to throw off a legacy of dysfunction that has held the country back, after new president Volodymyr Zelensky’s Servant of the People party won parliamentary elections in a landslide. The new political class have a duty to “de-oligarchise” the country, clean up the judiciary, remove immunity for politicians and further economic reform. The opportunity is there, and EU leaders have a duty to boost and incentivise reforms by publicly reminding Ukrainians of their own treaty, which entitles any European nation that respects EU values to apply for membership.

Did you know?

Venezuela was the fourth richest country in the world in GDP per capita terms in 1950, outperformed only by the US, Switzerland and New Zealand.

Parliamentary highlights

House of Commons
In recess until 3rd September

House of Lords
In recess until 3rd September

Scottish Parliament
In recess until 2nd September.