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Chavez, Putin, and the World Economy

Written By Brian Hicks

Posted December 3, 2007

You can’t separate international economics from international politics. This weekend in Venezuela and Russia, one political tide ebbed while another surged.

Venezuela’s exuberant socialist leader, Hugo Chavez, got his leash yanked back by the electorate on Sunday, when his constitutional reforms abolishing term limits and giving him control of the central bank and other institutions were rejected in a 51% to 49% referendum tally.

Chavez, who had submitted himself for the approval of the nation because he fully expected it to support him, accepted the decision rather calmly.

He’s called Bush "the devil" at the UN, saying he could still smell sulfur in the air at the podium. He also called the former Spanish PM a "fascist," and in turn got smacked with a royal "shut up" last month from Juan Carlos, the King of Spain.

We can expect his disposition will turn from a contemplative one back towards the chart-wielding five-hour TV show host who has pledged to make his 21st-Century Socialism and Bolivarian Alternative into fixtures among the world’s leading political movements.

This includes a psychologically sensitive and politically evocative alignment with Cuba, a move that has rekindled anti-Castro sentiment in the United States even though Fidel’s health is waning and our pet embargo heads into its 46th year of futility.

Economically, Chavez’s policies may promise wealth redistribution and better lives for the poor, but the poor will suffer more from inflation, which rose at the highest rate in five years this November. Provisional central bank figures carried Monday by Bloomberg and Venezuelan daily El Nacional report 4.4% price increases for the month.

Professionals and those in the investing classes of course feel that they are under assault, as they bear witness to nationalizations of petroleum and communications companies that set a standard in the other Bolivarian Alternative nations of Ecuador and Bolivia, as well as a new tax on bank transactions that could discourage local investment.

This comes in addition to scarcity in basic goods that are supposed to be widely available in state-subsidized supermarkets. Milk, cooking oil and another seven staples are running short on shelves, which will irk even the most ardent Chavista, as Hugo’s followers are known. The Financial Times reports that many goods are funneled downstream to black market retailers where the unofficial exchange rate distorts prices by nearly two thirds compared to above-board stores, contributing heavily to the spreading shortages.

And in a phenomenon that runs counter to most left-wing movements, this weekend’s referendum and its "no" votes were stirred largely by university students. Seemingly unmoved by Chavez’s society-leveling ideology and more fearful of a Cuban-style dictatorship, students swayed the vote as Chavez’s poor, largely rural voting base came to the polls in low numbers.

Largely because the powerful incumbent lost this vote, accusations of election irregularities (i.e. fraud) are not flying forth from the opposition. That is not the case in Russia.


Russia’s economy has been listed by the likes of Goldman Sachs among the top four emerging economies of the 21st century, known as the BRIC countries (Brazil , Russia, India, China). Like Venezuela, which is Latin America’s number-one oil exporter to the U.S., Russia has seen its coffers padded by fossil fuel price increases. The country’s natural hydrocarbon resources were relatively dormant throughout the 90s, since low prices made it difficult to attract exploration capital.

Russia’s economy is soaring, rewarding international investors in resource companies like Gazprom, the Russian natural gas monopoly that listed its shares in London last year. Unlike Venezuela, investment banks have been eager to enter the Muscovite market, both with direct investments and also through ETFs that allow retail investors to capitalize.

Though it lags the iShares Brazil (NYSE:EWZ) and Hong Kong (NYSE:EWH) exchange-traded funds, the Market Vector Russia ETF Trust (NYSE:RSX) has delivered more than a 30% return in the past half-year compared to the break-even Dow.

Russia ETF

RSX follows thirty Russian companies that are traded around the world, not just on the Moscow Stock Exchange, and not just in the United States. In terms of individual stocks on Wall Street, Russian ADR Vimpel Communications (NYSE:VIP) is up over 120% since last December, and mining giant Mechel OAO (NYSE:MTL) has risen by over 274% during the same period!

Nevertheless, the political backdrop against which this economic growth has taken place is worrisome to even the most jaded investors. President Vladimir Putin came to power amid a resource price increase, has been renegotiating exploration and production contracts throughout his tenure (just like Chavez) to achieve more favorable terms for the government, and like Chavez he espouses a sort of egocentric political altruism. The attitude, more or less, is, "The Russian people deserve me."

With his term expiring, Putin has not gone the way of the referendum, but instead is throwing his weight behind a list of candidates who he feels will carry through his work. And since he is only prohibited from running for another consecutive term, Putin can take some time off and pull a Grover Cleveland, coming back to power after an intermediate (some would say a hack) fills his seat for a term.

Sunday’s election of the Putin-backed United Russia list is being contested by opposition leaders and international monitoring organizations. There were fewer than 400 observers present in polling stations across Russia’s eleven time zones stretching from Kaliningrad to Vladivostok. Even if there had been a strong showing of monitors at voting booths, there was plenty of room for intimidation of opposition voters and leaders away from the polls.

It may be unfair to always bring it up, but Putin’s KGB past is a salient part of his political personality. Yes, George H.W. Bush was the head of the Central Intelligence Agency, but he doesn’t know judo like Putin does. Putin may think that Russians crave his strength and direction, but absent true freedom, they will never know what an alternative could do for their lives.

As the United States economy takes a dip and resource wealth propels countries like Venezuela and Russia into a new age, the choices international investors confront are as political as they are economic. Stay with Wealth Daily for all the angles.



Sam Hopkins