Director of Analysis Reva Bhalla explains the political logic behind Venezuela's moves to transfer its currency reserves to politically-friendly countries and move its gold back home.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

The Venezuelan government has announced four key policy moves designed to enhance the country's economic security. The first is the transfer of $6.3 billion in currency reserves to banks in Russia, China and Brazil. In the second move, Venezuela announced that it would transfer $11 billion worth of gold, mostly held abroad in Swiss banks, back home to the Venezuelan Central Bank. Third, was the nationalization of Venezuela's gold sector, and fourth, was the creation of joint ventures between Venezuelan state firm PDVSA [Petroleos de Venezuela] and state mining firms. The Venezuelan Central Bank lists its currency reserves at $6.5 billion and its gold reserves at $18 billion. A whopping 60 percent of Venezuela's reserves are thus distributed in gold, while the rest are distributed in bonds and cash. Many in the investor world have written off these moves as irrational moves by Chavez's economic team that will only enhance investors' skittishness in Venezuela. In our view, the moves make good political sense for the Chavez regime but are also extremely revealing of the government's growing vulnerabilities. We pointed out at the beginning of the year that the rising level of economic decay, runaway corruption and growing political uncertainty in Venezuela would make the Venezuelan regime more reliant on its allies, particularly China and Russia. But both Russia and China have become increasingly skittish over the rising level of political uncertainty in Venezuela. Both of these countries have deep insight into the state of PDVSA's financial disarray, and they both can see very clearly that there is no clear successor to Chavez who would be able to manage the regime as tightly as he has. For that reason, every time Venezuelan delegations go to Beijing and Moscow asking for larger installments on these loans, the Chinese and the Russians are coming back asking for greater collateral. And this likely explains Venezuela's decision to transfer its currency reserves to Russian and Chinese banks. This allows Venezuela to draw larger amounts from these loans, but it also gives Russia and China the option, theoretically, to block Venezuelan reserves down the line should they feel the need to insulate themselves against a potential Venezuelan default. Now, Chavez has had a lot of reasons for trying to insulate his country's reserves. More recently, Chavez has likely been unnerved by the West's freezing of assets of his close friend and ally, Moammar Gadhafi. There is also a very active sanctions lobby in Washington D.C. that has been spending a lot of time highlighting the links between PDVSA and IRGC-linked companies in Iran that is putting Venezuela on the sanctions radar. Another likely reason behind this move has to do with pending arbitration disputes on Venezuela's nationalization decrees. Venezuela has a number of lawsuits now exceeding up to $30 billion with Conoco Phillips, Exxon Mobil, among other major firms. Now, the Venezuelan move to transfer the majority of its gold assets back home and nationalize the gold sector likely have a lot to do with PDVSA's increasing cash flow problems. In trying to address this problem of improving PDVSA's efficiency as well as the efficiency of key mining companies, the Venezuelan government has announced a policy to create joint ventures between PDVSA and mining firms in the country. Theoretically, this type of consolidation could lead to greater efficiency, but if you look at the history of PDVSA's nationalizations, the company's expanded portfolio has led to greater inefficiency and not less. Given the rising political uncertainties of the day especially given that Chavez is his sick with cancer, the Chavez government cannot afford to see its social development projects held back by PDVSA's cash flow problems. Those projects are crucial to the regime's political support and with elections slated for 2012 and the potential for those elections to be moved up sooner depending on Chavez's health, you can see why the government is so eager to have reserves at home, and that is the gold assets back home, so it can draw on its reserves more easily and thus have the cash flow to support these politically crucial development projects. And the Chavez government made the nationalization move at a time when gold prices are at an all-time high. Nationalizing the gold industry allows Venezuela to add more gold to its existing reserves while reducing its exposure to the dollar while relying on local resources. In other words, Venezuela can sell oil abroad in dollars and then transfer its currency reserves to gold, which will now be much more accessible at home. Venezuela can then issue bonds at much lower rates, offering its gold as collateral, thus getting the cash it needs to support these politically crucial social development programs.