Airlines abandon Venezuela and further isolate the former oil giant

Two major airlines are departing Venezuela for good this month, leaving behind a crisis-wracked nation that’s becoming increasingly isolated from the rest of the world.

Lufthansa of Germany and Latam, the largest air carrier in Latin America, have both decided to stop flying to Venezuela, saying it’s unviable to continue service to the country embroiled in worsening economic difficulties.

The German airline—one of the world’s largest—cites Venezuela’s burdensome foreign exchange controls as one of the main reasons for its one-way departure. Airlines flying to Venezuela have an estimated $3.8 billion trapped in the country because the government refuses to trade their locally earned currency for U.S. dollars, which are becoming increasingly scarce in the petro-state.

“We deeply regret suspending our service,” Lufthansa said in a statement last week. “Lufthansa is currently unable to transfer its earnings in local currency to U.S. dollars to take them out of the country.”

Fewer flights to Venezuela will make travel to and from the country more difficult and expensive. But it’s  just a symptom of a much larger problem: Venezuela is becoming increasingly isolated in a variety of ways. But unlike communist Cuba or Iran, which have toiled for decades under U.S. trade sanctions, Venezuela’s isolation is mostly a problem of its own creation.

The country’s finances are a mess. Venezuela has run up its debts so steeply and done so little to increase its revenues that the country has cut itself off from international lenders, which are offloading old Venezuelan bonds for half of their initial worth.

Russ Dallen, an investment banker in Caracas, says the Venezuelan government hasn’t been able to issue bonds for the past three years. To service old interest payments and avoid default, Venezuela is depleting its reserves, which went from $24 billion a year ago to just $12 billion now.

“They are living off their savings account,” Dallen told me in a phone interview from Caracas, where he’s worked for sixteen years.

A big part of Venezuela’s problem is falling oil prices, which have depleted its revenues dramatically over the past two years. But mismanagement of the national oil company PDVSA has made things worse. Over the past decade the government has replaced technical experts at PDVSA with party loyalists. Subsequently, the country’s oil output has fallen from 3.15 million barrels per day to just 2.3 million now.

“They’re not producing enough of the one good that they’re making,” Dallen said.

The revenue problems and the stringent currency controls have also isolated Venezuelan companies from the world.

Factories, food producers and even breweries regularly struggle to import raw materials needed to make stuff for Venezuela’s people.

That’s because the government sets exchange rates and forces businesses to get permits to buy U.S. dollars for imports. The system worked to provide for cheap imports when Venezuela was flush with cash. But as oil prices fell and dollars become increasingly scarce, fewer businesses are getting the allocated greenbacks they need to operate.

“These controls must be eliminated,” Lorenzo Mendoza, the head of Venezuela’s largest food conglomerate, said in February.

Mendoza’s company was forced to shut down its brewery—the country’s largest—last month because it couldn’t access the U.S. dollars it needs to import barley. The local branch of Coca Cola also recently stopped operations in Venezuela due to a lack of dollars to import sugar.

“If you want different results eliminate exchange controls so that business can be responsible for sourcing their own materials,” Mendoza wrote in a memo earlier this year.

Politically, the situation is slightly better for Venezuela, which can still count on the support of some small nations in regional forums. During the years of Hugo Chávez, Venezuela built a formidable regional bloc of nations at the UN and the Organization of American States by supplying its client states—mostly Caribbean islands—with cheap oil. It also has the backing of ideologically aligned governments in Ecuador, Nicaragua and Bolivia.

But the tide appears to be changing. The OAS’ new secretary general is now pushing for a special session to discuss the derailment of democracy in Venezuela. That session would force Venezuela to go before an international forum and answer questions about why it has refused an amnesty law for political prisoners, and why it has refused to allow its citizens to hold a recall referendum against President Maduro.

The fate of that special session is still unclear, however. On Wednesday Argentina led a group of Latin American countries in approving a resolution that calls for more time for Venezuela and the opposition to dialogue before the rest of the hemisphere gets involved. But even the fact that other countries had to get together to draft that resolution shows that Venezuela’s state of affairs is increasingly alarming other countries.

“In previous times the issues would likely have not even been discussed on the record,” says Daniel Lansberg, an international risk analyst at Northwestern University. “Venezuela’s current liquidity crunch due to low oil prices has weakened their influence considerably.”

What really worries most companies still operating in Venezuela are economic policies that make it harder for the country to connect with the outside world.

The exchange controls that have left airlines’ money stuck in Venezuela have now pushed five airlines out the country. Others airlines are dramatically scaling back on flights. Delta once had daily flights from Atlanta, but has reduced its schedule to one flight a week. American Airlines, the largest carrier still operating in Venezuela, has gone from 48 flights a week to 10, while it waits for the government to cover a $750 million debt.

“The country is really underserved,” Jason Sinclair, a spokesman for the International Air Travel Association (IATA), told me.

IATA data shows that the number of passengers that pass through Venezuela’s main airport each month has plunged over the past two years, while airports in neighboring Colombia and Peru are thriving. Lima’s airport has doubled its traffic in the past six years, according to IATA.

Sadly for Venezuelans, there doesn’t seem to be an immediate solution to their country’s increasing isolation—at least not with the government maintaining its current course.

Due to its anti-capitalist invective and constant threat of expropriating companies, the Maduro administration is not trusted by foreign creditors, except for China, which pegs its loans to oil shipments. Oil prices are recovering too slowly to help lift the economy, which means there will continue to be a shortage of money to pay for imports, or cover debts with airlines.

The country closed its border with Colombia almost a year ago in an ill-advised attempt to stop contraband. The move has ruined business with one of Venezuela’s main trading partners, and hurt the standard of living along Venezuela’s western border.

Venezuela once attracted immigrants from all over the world drawn to its bustling oil industry. It hosted multinational companies, and was even a popular tourist destination for gringos seeking some fun in the sun.

Now it risks becoming a pariah state, or a failed backwater that sits on huge oil reserves. And all at a time when its neighbors are growing. Even its staunchest political ally Cuba is becoming more connected with the outside world.

“It’s tragic,” said Russ Dallen, the investment banker, who arrived in Caracas during more prosperous times. “It’s a country that is basically falling apart.”

Manuel Rueda is a correspondent for Fusion, covering Mexico and South America. He travels from donkey festivals, to salsa clubs to steamy places with cartel activity.