INTRODUCTION. Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

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2 1 INTRODUCTION With Venezuela increasingly resembling a failing state, it seems there is no solution or savior capable of pulling the country out of its downward spiral towards chaos. While the country is going through an unprecedented economic and political crisis, its population of almost 30.5 million is being hit with mounting crime, triple-digit annual hyperinflation, a collapse of all essential public services, and widespread shortages of basic supplies. In a Wikistrat simulation conducted during the month of May, analysts highlighted a facet of the ongoing crisis that is being overlooked: the implications for China, which has been Venezuela s greatest economic supporter and for which the current crisis is considered to be a major test of its economic and foreign policy. Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

3 2 CHINA S DILEMMA: DOUBLE DOWN OR LOSE IT ALL Since the beginning of the Chavez regime in the late 1990s, China has unsurprisingly been increasing its support for and ties with energy-rich Venezuela, the tenth-largest oil producer in the world and owner of the largest proven oil reserves (about 298 billion barrels). In addition, Beijing has viewed Venezuela as its entry gate to Latin America. Under the leadership of Hugo Chavez and his successor Nicolás Maduro, Venezuela has been developing extensive relations with countries sharing a similar ideology, such as Cuba and Bolivia (and previously Argentina and Brazil). When Chavez launched his policy of anti-americanism (which was continued by Maduro), he needed an economic partner to fill in the resultant gap. This provided an opportunity for China to increase its presence via economic aid. Within a few years, Venezuela became Beijing s largest borrower outside of Asia and the third-largest overall recipient of Chinese aid receiving around 52 percent of all such aid to South America. Over the last sixteen years, China has provided over $125 billion to Venezuela ($57 billion since 2007) in the form of direct aid or very favorable loans, with Venezuela repaying many of these debts via shipments of cheap crude oil (some estimate the return rate to be around $7 billion a year). In addition, Venezuela grants Chinese companies priority in government projects sponsored by Chinese loans; in 2008, the China Development Bank launched a $6 billion fund with Caracas to support such projects. One (notorious) example of such a project is the 470-kilometer Tinaco-Anaco railway, which was financed via billions of dollars from China and led by China Railway Group Limited. But as with many other public projects in Venezuela, it was derailed by bad management and corruption: The project is already four years overdue, and there are no signs that it will ever pick up again. AN ECONOMIC PERFECT STORM Venezuela s economy is going through a perfect storm. Its GDP contracted by 5.7 percent in 2015 a decline surpassed only by Libya. It is expected to shrink again by 8 percent in In addition, the government s monetary policy led to hyperinflation of 180 percent in 2015, which is expected to hit 481 percent by the end of 2016 and 1,642 percent by next year. Moreover, the government-set exchange rate (in which the value of the bolívar is grotesquely inflated) has led to a flourishing black market for foreign currency.

4 3 TOTAL PER CAPITA Iran $143 billion Singapore $8,954 Pakistan $135 billion Venezuela $4,372 Venezuela $126 billion Iran $1,774 Nigeria $110 billion Malaysia $920 Brazil $80 billion Argentina $840 Indonesia $61 billion Pakistan $687 Top Recipients of Chinese Assistance, Total and Per Capita, 2001 to 2014 (U.S. dollars) Source: Charles Wolf Jr. and RAND Corporation The Tinaco-Anaco railway project tells the story of the Venezuelan economy in recent years. As oil prices and the overall political situation declined, so did the Venezuelan oil economy spiraling to the brink of bankruptcy, as 95 percent of Venezuela s export income comes from oil. With its foreign reserves plunging to a 13-year low of $12.6 billion and with yet another $10 billion in debt repayments due in 2016 many analysts fear that Venezuela is unable to repay its debt and that a default will inevitably take place within months. In addition, when Venezuela began sending daily oil shipments to China, prices were $100 a barrel, which meant it needed to provide a reasonable sum of about 228,000 barrels per day. Given today s prices, the OPEC member needs to provide almost four times more to satisfy its obligations, an expectation that may prove highly difficult to meet. Thus, China finds itself in a dilemma regarding Venezuela: stave off default via increased aid and investment loans in the hopes of current oil prices ($40 to $50 per barrel) stabilizing, or let the Venezuelan economy collapse. Such a move could lead to a new government in Caracas (or even the current one under the increasingly likely scenario of a default) shifting oil supplies to clients willing to pay in much-needed cash at the expense of the daily deliveries to China. Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

5 4 STRATEGIC TAKEAWAYS As long as oil prices stay above an average of $40 per barrel and Venezuela s foreign reserves total at least $10 billion, China is likely to continue to support Venezuela with a minimal lifeline of loans. The Venezuelan opposition is trying to force the referendum to remove President Maduro to take place before January If it takes place after that date, a successful recall vote would transfer power to Maduro s vice president and party fellow, Aristóbulo Istúriz. If the decision is made to hold the referendum before January 2017, China will likely hold off with future loans until the situation clears up. In the unlikely event of a public oil and gas workers strike, China is likely to withhold future loans until the crisis resolves itself. Venezuela s government has placed many of its allies among the workers unions and managers, but the likelihood of a strike is increasing nonetheless. The market is paying much attention to China s reaction to the Venezuelan crisis so as to gleam how it would respond to such a high-magnitude default and how it could impact the country s global economic policy.

6 5 OREN KESLER Research and Projects Team Leader, Wikistrat ABOUT US Wikistrat is the world s first crowdsourced consultancy. It leverages a global network of subject-matter experts via a patent-pending Collaborative Competition methodology to provide a variety of analytic services. Scenario generation, policy planning, risk assessment and red-teaming exercises are conducted by Wikistrat on a real-time, interactive online platform. DISCLAIMER This report is for informational purposes only and does not constitute financial, investment, economic, financial planning, trading or any other advice. You should consult with a competent independent financial advisor before making any investment or other decisions and should independently verify information on which you rely. The report is provided without any express or implied warranty of any kind including warranties of accuracy, completeness, or fitness for any particular purpose. Without limitation, although we have prepared this report based on sources we believe to be reliable, legally derived, and unbiased, we can provide no assurance with respect to the objectivity or any other aspect of its content. In addition and without limitation, this report may contain predictions, estimates or other information that might be considered forward-looking or predictive. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. We assume no obligation to update the report or any part thereof or to correct any inaccurate or outdated information and reserve the right to remove or modify the report, in each case without notice to you or any other party. Without limitation, this report is subject to the Terms of Service posted on our internet website at Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

7 CHINA S DILEMMA IN VENEZUELA AUTHOR: Oren Kesler EDITOR: Steve Keller GRAPHIC DESIGNER: Sheila Elizan For more information on Wikistrat s crowdsourced solutions and systems, contact: info@wikistrat.com