Published by Economist Intelligence Unit

The first full year in power of the president, Nicolás Maduro, was one of the most volatile in the 15 years since Venezuela embarked on the socialist revolution led by his predecessor, Hugo Chávez (1999-2013). In 2014 Mr Maduro faced the biggest anti-government protests in more than a decade, major divisions within the ruling party, a severe drop in international oil prices and further international isolation, as its main ally, Cuba, pledged to normalise relations with Venezuela's sworn enemy, the US.

Managing exchange-rate pressures was a major challenge throughout the year. At the start of the year, Mr Maduro proclaimed that the exchange rate would remain fixed at BsF6.3:US$1. Exchange-rate controls were imposed by Mr Chavéz in 2003 as a means by which to stem capital flight and control inflation, but have led to shortages and the growth of a black market to satiate demand. The black-market rate stood at BsF64:US$1 in January 2014. That figure is perhaps the best indicator of the economy's decline over the course of the year; the currency ended the year at a black-market rate of around BsF175:US$1, an effective depreciation of 63% against the dollar in 12 months.

By insisting that the official strongest rate would remain at BsF6.3:US$1, Mr Maduro stemmed fears of a devaluation. However, additional exchange mechanisms were announced during the year—and more goods shifted to them—meaning that the currency was effectively devalued anyway. The Sicad I mechanism was introduced towards the end of 2013, valuing the local currency at a fluctuating rate of around BsF11:US$1; it was fixed at BsF12:US$1 in September 2014. An effective devaluation from the strongest rate of nearly 90% came in March, with the launch of the Sicad II mechanism, which offered dollars at around BsF50:US$1. Importers complained that they had to move up the scale from the official strongest rate through Sicad I, Sicad II and sometimes onto the black market. This resulted in skyrocketing rates of consumer price inflation and widespread, worsening shortages.

International airlines, which, for years, had fought with the government over revenue that they could not repatriate in hard currency, began to pull out and cut routes in 2014. They are owed nearly US$4bn. American Airlines (US), the largest international airline operating in Venezuela, slashed 80% of its flights to the country in June. Foreign airlines began charging for flights in hard currency, with big premiums, making air travel too expensive for the majority of Venezuelans.

Anger spills into the streets

Economic difficulties, a rise in violent crime and general fatigue with the state of the nation resulted in nationwide protests in February. Protests by university students coincided with a call by two hardline opposition leaders, Leopoldo López and Maria Corina Machado, to take to the streets in a movement they named La Salida ("the Exit"). On February 12th the capital, Caracas, was the epicentre of violent clashes that continued across the country for around two months, resulting in more than 40 deaths. Mr López was detained and charged with inciting the protests and held responsible for the deaths. He has remained behind bars ever since, prompting international criticism. Ms Corina Machado was charged with involvement in a plot to murder Mr Maduro in late 2014.

While headline-grabbing and widespread, the protests were relatively small in terms of the number of participants. The protesters were mainly from the wealthier classes; although they demanded sweeping change, they had few proposals as to how to achieve it. The protests fizzled out after a government crackdown resulted in the jailing of key opposition figures. The US Congress passed a bill in late 2014 that imposed targeted sanctions against top Venezuelan officials for alleged human-rights abuses that took place during the protests.

Like Mr Chávez, Mr Maduro has never enjoyed the support of the wealthy in Venezuela. However, his support among his base—the poor—also declined steadily over the course of 2014. By the end of the year, just 24.5% approved of his performance as president. That said, the opposition has failed to appeal to poor voters, buttressing Mr Maduro's political position.

An economy in freefall

Although political strife was widespread in 2014, it was overshadowed by Venezuela's terrible economic performance, even before a massive drop in international oil prices late in the year. Annual inflation soared past 60% and shortages of goods were widespread. The government's decision early in the year to stop publishing key economic data—including monthly inflation, scarcity and GDP data—made the real magnitude of the crisis unclear.

When oil prices slumped in the final quarter of 2014, Venezuela—which has the world's largest oil reserves and is heavily dependent on oil revenue—was hit badly. Around 95% of foreign income comes from oil sales. Each US$1/barrel decline in price translates roughly to a US$700m loss in fiscal revenue over the year. Mr Maduro insists that the country can cope with oil prices as low as US$40 per barrel, but this is not realistic. The country's foreign reserves, composed mainly of gold, continue to hover near their lowest level in more than a decade, at around US$20bn (around three months of import cover), a decline of nearly 30% since January 2013. Furthermore, while export earnings are down owing to the low oil price, the government's inability to provide foreign exchange has dampened import spending even further.

Policy dominated by politics

The government's policy response to the economic deterioration in 2014 was piecemeal and largely ineffective as the more pragmatic, moderate voices within the government were sidelined or demoted. Rafael Ramírez—who had called for a unification of the three-tiered exchange-rate regime and the raising of oil prices (the world's lowest)—began the year as oil minister, head of the state oil company, Petróleos de Venezuela (PDVSA), and economy vice-minister. However, by the end of the year, Mr Ramírez had been demoted twice, first to the position of foreign minister and then to a post at the UN, where Venezuela won a rotating Security Council seat in 2014.

Although pragmatic economic reforms are now desperately needed, Mr Maduro is in a precarious position. He is already unpopular, and any measures that would result in higher inflation or a reduction in generous social programmes would jeopardise his support among his base. Furthermore, the hardline Chavista elements within the ruling party, who are steadfastly opposed to any "neoliberal" economic reforms, strengthened their position in 2014, and Mr Maduro will be unwilling to defy them.

The coup de grâce for Mr Maduro came in December, when the US president, Barack Obama, and his Cuban counterpart, Raúl Castro, announced a normalisation of diplomatic relations between the two long-time adversaries. Just days earlier, Mr Maduro had rallied against the "insolent imperialists" in Washington. Cuba, which has benefited from billions of dollars in Venezuelan subsidies—including cheap oil under the PetroCaribe oil-financing initiative—is clearly worried that the Maduro government will be unable to resist mounting pressure to reduce foreign aid.

Cuba has, for decades, played a useful role for Latin American governments of both left and right leanings. "Solidarity" with Cuba has been a convenient, mainly risk-free way to stand up to the US government and beat the nationalist drum. Now Venezuela faces the prospect of replacing Cuba as the US's main adversary in the region—just as its economy is imploding and the administration's ability to govern is threatened by internal dissent—or capitulating and losing the support of the already restive domestic left. The timing could hardly be worse for Mr Maduro.