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Venezuela After Maduro: Assessing the Next Steps in a Highly Uncertain Environment

The Maduro era has ended. What now? Despite exuberance in some corners of the market around recent developments in Venezuela, extreme uncertainty about a post-Maduro Venezuela means the country continues to present very high risks. Organizations considering potential commercial openings would do well to adopt rigorous risk-management practices throughout the process to ensure a defensible—and sober—view of the viable opportunities on offer and any subsequent strategic decisions made on Venezuela.

Gating Items: Is Now the Right Time for a Venezuela Play?

As a practical matter, organizations eyeing Venezuela should start with gating items, hard facts that would necessarily impede operations. These include the inability to obtain hard currency, freely move goods, insure projects and secure legally enforceable contracts. Existing legal and compliance requirements around sanctions, licensing, geopolitical or other non-negotiable items—especially for organizations subject to U.S. jurisdiction—limit the viability of doing business in, or with, Venezuela. More often than not, gating items present insurmountable hurdles.

Beyond these gating items, organizations should consider the minimum commercial rewards (under specified timeframes) that would justify the uncertainty involved, prior to allocating significant time and resources toward analyzing business prospects. No less crucial is proper timing; many commercial prospects around Venezuela may be more than a decade away, even under optimistic scenarios. A wait-and-see approach may be the wisest option in the short term.

Some organizations may quickly develop a minimally-viable investment thesis around Venezuela. Others may determine that no viable investment thesis is on offer. In the latter case, they may even require a deeper analysis to justify inaction or to support alternative investments to the board or senior leadership. In either case, traditional risk management best practices and scenario analysis provide a rational and defensible path forward based on a meaningful assessment of material business opportunities in the country and a means to quantify risk once a strategic decision is made.

Scenario Analysis: Assessing Plausible Risks and Rewards around Venezuela

No one has a crystal ball, especially for a market as complex and challenging as Venezuela. Nonetheless, scenario analysis can illuminate possible futures by placing rational contours around likely outcomes, based on the best available information. Based on our experience helping clients in similar situations, we would start by developing baseline, upside and downside (stress) scenarios for Venezuela along key economic, political, social, regulatory and operational drivers. The analysis should comprise a defined period in line with the investment thesis (for instance, 5 to 10 years) and should include plausible responses by critical stakeholders to key events.

This process specifies key strategic actors, their capabilities and intent. It then contemplates the actors’ likely responses and impacts under plausible scenarios inside the country. What if Acting President Delcy Rodríguez is dethroned by one of the remaining pillars of regime power? If the various Chavista power centers fail to be dislodged, could Rodríguez stabilize the economy and operating environment to the satisfaction of U.S. demands. Were she to consolidate power among her faction, what degree of external pressure would force her to implement a democratic transition? If Rodríguez faces no meaningful external democratization pressure, what is the most likely outcome for rule of law and the investment climate?

In addition to domestic drivers, scenarios for Venezuela should also include plausible responses from stakeholders outside of the country, including powerful regional and international actors. For instance, one key external factor in recent years, particularly for the extractive sector, has been the U.S. sanctions regime towards Venezuela and the willingness of successive U.S. administrations to issue licenses to operate in country. As recent developments show, reactions from the U.S. and other major geopolitical powers will be critical to understanding scenarios that would meaningfully impact the viability of investments in Venezuela.

Materiality Criteria and Assumptions

Given the many variables under a multiplicity of scenarios, scenario analysis should employ a materiality filter based on qualitative and quantitative criteria. No organization can assess all of the potential outcomes and actions under a given scenario. Materiality criteria—whether from law, accounting, finance, or risk management—can be employed to identify thresholds for company-specific metrics around risks and rewards. Key assumptions under each scenario should be clarified and stress-tested. For instance, macro assumptions on commodity pricing, exchange rates and global growth rates should be made explicit and assessed for reasonableness.

The Need for Experts

The lack of credible information on Venezuela makes it essential to employ human intelligence work, local knowledge and analysis by experts on geopolitical, economic, legal, regulatory and operational matters. Opaque public reporting, incomplete record keeping, inadequate data governance and IT infrastructure, unreliable financial tracking and fraudulent reporting are just some of the many information challenges pervading Venezuela in recent decades. Only with a broad analytical toolkit can an organization build plausible scenarios, especially where in-house expertise is limited or unavailable.

Informed Strategic Planning

As a practical matter, many organizations will not tolerate some of the present likely downside scenarios for Venezuela. However, for those that can, a preliminary strategy should be developed under expected but stressed conditions. Organizations should ask: under a plausible stressed scenario, what posture will we adopt toward Venezuela? If market entry is viable, what should our entry strategy look like? Under what time horizons? What are the irreversible decision points?

Potential rewards and losses under a specific strategy should also be tested. This can include analysis of implications for cash flows, cost of capital, exchange exposure, probability-weighted losses and gains and tail risks that arise from material decisions under that strategy. These can then be improved, resized, redesigned or rejected. As elsewhere, the lack of reliable official data in Venezuela will stymie effective strategy development and modeling. However, expert judgement and estimates can be utilized as a reasonable alternative for estimating expected and unexpected outcomes.

The Path Forward

Whether or not Venezuela ultimately presents a transformative commercial opportunity in the region, an approach steeped in risk management (grounded in scenario analysis and proper planning) can help organizations make rational and prudent decisions given the available opportunities.

For some organizations, especially exploration and production companies facing stakeholder pressure to align with foreign policy objectives, scenarios analysis can assist with elucidating and defending the reasons and justifications for organizational reluctance or under-investment.

In any case, many organizations will face both external and internal stakeholders seeking clarity on the organization’s position on a commercial play in Venezuela. Irrespective of the organization’s ultimate decision, a good response will include recourse to a transparent, methodical approach grounded in reasoned, structured analysis and aligned with the organization’s risk appetite and commercial objectives.

Of course, for the subset of organizations that do ultimately choose to invest in or pursue commercial prospects in Venezuela in the short or medium term, strategic and operational planning informed by scenario analysis will be mission-critical. Operational requirements around real-time monitoring and mitigation policies and procedures—e.g., business continuity planning, crisis management protocols, compliance safeguards, security arrangements, public relations management, among others—will be fundamental to ensure achievement of organization goals and objectives in the country.

With deep expertise in intelligence, risk management and financial analysis across Latin America and leading experts on U.S. regulations on trade, sanctions and national security and geopolitics, FTI is uniquely positioned to assist clients on Venezuela. Please contact our experts for assistance, including conducting preliminary viability assessments on Venezuela and/or comprehensive scenario analyses and mitigation strategies.

For a broad summary of FTI’s service offerings around Venezuela and Latin America broadly, see our inaugural piece in this series, Venezuela in Flux: Commercial Implications.