The Global Financial Crisis Batters Chávez

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Propaganda in Caracas reflects sour relations with Washington Jorge Silva/Reuters

Little of the oil wealth has gone to shore up crumbling infrastructure Meredith Davenport/Polaris

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Most recently, he has threatened to jail Manuel Rosales, governor of the northwestern state of Zulia and Chávez's biggest domestic rival, on corruption charges. Rosales, he says, is a "tumor in the body of the state." For economic relief, Chávez is hoping oil will climb again. "It's not the end of the world," Deputy Oil Minister Ivan Orellana says while checking his BlackBerry for the price of crude. "A rebounding global economy and OPEC [production] cuts will push prices higher."

During the boom, Chávez rewrote contracts on oil projects while jacking up taxes and royalties and demanding that foreign investors such as ExxonMobil (XOM), Total, and ConocoPhillips (COP) cede majority control in their operations to the state oil company, Petróleos de Venezuela. Since then, production has continued to ebb. In late October, Venezuela announced plans to open four new projects in the oil-rich Orinoco Belt to private minority partners. But even in the best case, those wells won't be minting new petrodólares for three years—probably too late to help Chávez balance his books.

HARD CHOICES

This leaves Chávez with limited options. "He can either cut spending or devalue the currency," says Patrick Esteruelas, an analyst with New York consultancy Eurasia Group. "There are risks in both." A devaluation would give the government more bolivars to spend, but would also spur inflation and risk more shortages. Observers in Caracas expect Chávez to put off a devaluation until well past the election.

He could of course cut spending—but there are complications. Government subsidies, for instance, keep gasoline at 12 cents a gallon—spurring Venezuelans to drive more and leaving less oil to export. But attempts by previous governments to raise gas prices have provoked angry uprisings. And the stakes are even higher now. Over the years, Chávez has armed many of the poor, creating revolutionary militias. At least some of their weapons are contributing to an unprecedented surge of violent crime. With more than 4,000 killings per year, Caracas now tops the world in murders per capita. And the U.S. State Dept. warns visitors of armed gangs who throttle victims until they pass out before robbing them.

Many Venezuelans fear that a suffering economy could stir even more violence. From his high-rise office at Banco Venezolano de Crédito, Oscar Garcia Mendoza, the bank president, gestures out the window to the working-class neighborhood below. It's a warren of tin and terra-cotta rooftops extending toward the dark green Ávila mountains that separate Caracas from the Caribbean coast. "It's going to get ugly," he predicts. In the worst case, Chávez's opponents fear that economic crisis and an outbreak of violence might lead the President to assume emergency powers and steer Venezuela toward a Cuba-style regime. His rhetoric suggests as much. "Socialism is the only way to save us," Chávez said at an early November election rally.

In a sense, Venezuela's economic mess parallels the crisis in the U.S. Venezuelans, like American homeowners, jacked up spending as the value of their assets soared. Chávez, focusing on his political agenda, led the charge, driving up government outlays from 22% to 33% of gross domestic product in only five years. Imports increased fivefold, to an estimated $52.2 billion, from 2003 to 2008 as domestic production stalled, hampered by an overvalued currency, price controls, and a welter of regulations.

Venezuela reports foreign reserves topping $40 billion. But its finances are largely shrouded in mystery. One of its development funds, known as Fonden, reportedly has $30 billion to $50 billion. Chávez has dipped into it routinely to finance pet projects at home and abroad. But those outside the inner circle have only the faintest idea about the nature of the fund and fear it may be full of little more than IOUs from Chávez's pals throughout the region. And financial convulsions in Argentina stoke concern that troubles in Buenos Aires could put losses in Chávez's books.

The most prominent forces poised to provide relief—private investors, both domestic and foreign—have long been punching bags for Chávez. This is especially true since his reelection in 2006, which Chávez saw as a mandate for socialism. Since then he has moved to nationalize "strategic" sectors, including steel, cement, telecom, and electricity, and the Banco de Venezuela. That leaves the investment climate frigid. "It's the definition of high-risk," says Edward D. Jardine, president of the Venezuelan American Chamber of Commerce. And by all signs, Hugo Chávez's Venezuela is getting riskier.

Baker is a senior writer for BusinessWeek in New York. Wilson is a special correspondent based in Caracas.