Venezuela: No fly zone?

In the short period in which President Nicolas Maduro has ruled, following the death of Hugo Chavez, the country has seen a series of changes that have worsened the quality of life and amplified the president’s revolutionary speeches. These days, Venezuelan citizens find it increasingly more difficult to embark on trips abroad, as government regulations and economic conditions create prohibitive conditions for them to travel.

The latest news headlines highlight how the international airlines operating to and from Venezuela have $3.3bn locked in the country because of currency controls enforced by Maduro’s government. This has led airlines such as TAME, TAP, Air Canada, Delta, American Airlines, United and Copa, to temporarily suspend the sale of airline tickets or, in some cases, even flight operations. This is quite a significant move for the airlines in a country where demand for airline tickets largely exceeds supply.

The Venezuelan tourism minister, Andres Izarra, recently reiterated[Sp] that Venezuela is one of the top lucrative destinations in the continent, claiming that many other airlines will replace those who leave their spot. In the interest of saving business, some airline officials have engaged in negotiations with the government and the National Institute of Civil Aeronautics (INAC) to exchange[Sp] fuel for debt alleviation. Although the offer was welcomed by some airlines like Air Canada, the offer does not address the liquidity issues the airlines face.

The situation has had an immediate effect on the population. The volume of air travel to and from Venezuela has swelled in the past two years, as many Venezuelans have migrated to the US or Europe. Family visits, however, have not been the only factor pushing flight demand. Many Venezuelans have developed businesses or acquired real estate abroad, especially in the state of Florida. Last year the Venezuelan-American Chamber of Commerce estimated that 600,000 Venezuelans visited the state of Florida. Changes in travel restrictions and currency controls might cost Florida’s economy an estimated $1bn.

Controlling currencies

In the 1990s, traveling to Miami was fairly easy with air fares as low as $99 [Sp]. Today, the reality is very different for Venezuelans wanting to go abroad. This has been due to the increasingly complex and restrictive foreign exchange currency controls set by the government and the recent scarcity of airline tickets.

In 2003, the Chavez government established a system to manage and limit access to foreign currencies. The system requires Venezuelans to submit a request to a government agency to access foreign currency at an official government exchange rate using their travel data. Each person is entitled to an annual quota of funds depending on the purpose and mode of payment.

This system has survived over the years, fostering the rise of a black market, where dollars and euros are sold at a price significantly higher than the official exchange rate, and where Venezuelans can then exchange foreign cash currency for illicit profit. Some benefit from this system by selling their personal quota to more affluent citizens who need to travel and are willing to pay extra to access foreign currency.  

However, this system became more complicated and opaque, when the Venezuelan authorities recently introduced a floating exchange rate[Sp] which is determined by the government. Another change was that personal quotas were reduced[Sp] from $2,500 to $700 per person for travel to cities like Miami, Lima, Bogota, San Jose de Costa Rica or Panama. These destinations are frequented by Venezuelans for business and pleasure.

Some argue that in addition to dissuading travellers, these measures are meant to create more artificial barriers for Venezuelans trying to go abroad. This has led to an increase in transit[Sp] and financial flows towards Cuba, the ruling party’s most intimate political ally and recipient of substantial aid including free oil. Travel to Cuba, has become a relatively easier way[Sp] for Venezuelans to claim their personal quota with less hurdles and restrictions.

Airline tickets are rare, and more expensive with short range popular destinations sometimes costing as much, if not more, than a transatlantic flight to Europe. According to Europa Press[Sp], long distance flights are equally expensive and difficult to find. Over the month of January, the average price of a flight from Caracas to Madrid has climbed by a multiple of 12[Sp] on internet search engines. 

Shortages across the board

As the government reinforces their revolutionary ideals, doing business in Venezuela is becoming increasingly difficult. Worsening air travel does not affect only the privileged few that can afford it in Venezuela.

The country is heavily dependent on imports to satisfy domestic consumption of goods and services, especially since local industries and production have plunged over the past decade[Sp]. For some companies, it has become difficult to import spare parts, manage shortages and operating costs because of high inflation rates reaching 56 percent. Others have faced the difficulties of accessing foreign currency from the government and the unpredictable black market exchange rates. Businesses in general have also had to look out for ways to mitigate political risks, including government appropriations or draconian price control policies.

At the same time, scarcity of goods has been a rising struggle for Venezuelans. Basic products such as toilet paper, milk, butter, rice, flour and other household necessities are in erratic supply and are rationed when available. Most embarrassing and disruptive for this oil- and minerals-rich nation has been the severe and repetitive energy shortages affecting businesses as well as healthcare and other basic services.

As the economic machine suffers, the society struggles with rising crime rates ranking among the highest in the region. According the National Observatory of Violence in 2013 there were nearly 25,000 deaths[Sp] officially recorded in the morgues. This number does not include the many deaths that go unreported.

These socio-economic pressures boiled over in February, when a nationwide student protest led to several deaths. The government went as far as disrupting Twitter’s service and suspending the broadcasting of Colombian channel NTN24 covering the events.

The economic situation and deteriorating conditions for business and citizens indicate that the government has yet to deliver on the promises of a safer and prosperous country. So far, it seems that there is a downward trend that many Venezuelans are trying to resist in a political system that has been monopolised by the ruling party and its Cuban allies.

Dr Rolando Tomasini is a consultant specialised in supply chain and purchasing strategy working with leading multinational corporations from different sectors. He is the author of several award-winning books and case studies on humanitarian logistics and corporate social responsibility at INSEAD.