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Venezuela's president, Nicolas Maduro, waves to supporters as he arrives at the national Assembly for his inaugural ceremony in Caracas, Venezuela, on Friday, April 19, 2013. (AP Photo/Gil Montano)

Venezuela’s president, Nicolas Maduro, waves to supporters as he arrives at the national Assembly for his inaugural ceremony in Caracas, Venezuela, on Friday, April 19, 2013. (AP Photo/Gil Montano)

Venezuela, which has the world’s largest proven oil reserves and is one of the top oil producers, faces the worst of any probable scenarios as it embarks on a post-Chávez transition: a stalemate.

Nicolás Maduro has won a razor-thin margin in the most disputed presidential elections in decades. His failure to secure a large victory has denied the heir of Venezuela’s transformational socialist revolution and of a defining populist movement in Latin America of the solid mandate that is required to implement urgent reforms to render the country economically and politically stable.

Most attention has been placed on serious accusations of election fraud by the Social-Democratic opposition led by defeated candidate Henrique Capriles and the subsequent street violence, and on US and European reluctance to recognize the new election results. However, the fact of the matter is that Maduro was sworn in Friday as president of Venezuela until 2019 with international legitimacy to spare.

Maduro is the handpicked heir of Hugo Chávez, who imposed a broad revolution but died of cancer before completing an embryonic correction phase that Maduro in fact was already spearheading. Capriles lost by as few as 270,000 votes—less than 2%—a stunning result considering Maduro had the advantage of a sympathy vote from the dramatic death of Chávez a little over a month ago, and of massive state expenditure ahead of the elections.

The electoral authorities have not only ratified the vote, but insisted that an audit currently under way and that will take about a month to complete will not change the results. The fact that Maduro has sworn in a new cabinet, and that most Latin America governments, including all the important ones, have recognized the new government. China, Russia, and dozens more have recognized Maduro’s leadership as well—not to mention the overarching government control over most of Venezuela’s institutions. This makes any reversal very unlikely.

THE MARKETS validate that forecast. Even after rating agency Standard & Poor’s changed its outlook on Venezuela’s debt to negative from stable on Friday, citing the election results and political instability, bond rates and yields inched up this week and the cost of insuring debt fell.

Maduro’s biggest challenges stem not from the fraud claims, but from the extremely polarized country and testy political instability that he will have to manage, precisely when Venezuela needs to implement serious reforms to fix its unsustainable economic model.

There is no evidence of mass fraud—that much is clear—but it is undeniable that Venezuela is split two ways, between Chavistas and anti-Chavistas. The government and the Chavista block are also internally fragile, as pragmatists and the more radical left battle for control. Whatever the case, Maduro will face strong headwind from all sides.

That said, Venezuela has no other option but to implement urgent reforms. Maduro has already made that clear. He will lead “a revolution within the revolution,” he said in his inauguration speech Friday. This week, after swearing in his new cabinet, he said, “We are starting a new cycle of the Venezuelan revolution…. A government of the streets.”

Indeed, this is called a counterrevolution, and revolutions tend to have them eventually. China, Russia, Iran, Cuba, and countless others had them. What is uncertain is how they turn out. Revolutions can consolidate and correct themselves, or they can implode from within.

IN VENEZUELA, it was Chávez who began that corrective counter-revolution. Maduro picked up in 2012 as Chávez was treated for cancer in Cuba. The unexpected election results this month loosened his grip on power.

The question now is whether Maduro can quickly garner the political and popular support to consolidate his government.

Most people are not optimistic. They expect Maduro to implement more of the same failed policies, demagoguery, and corrupted horse-trading and instability—but they underestimate the resilience of populism when it comes to reinventing and correcting itself.

Maduro knows the only hope for the survival of Chavismo is to pump more oil to offset falling crude prices, while cutting public spending and putting the country’s finances in order. He must do this without triggering popular backlash. Oil revenue is falling even as resources are squandered in mismanagement, corruption and inefficiency.

Reforms have already begun. In January, Venezuela devalued its currency 32%, a long-expected move that was an inevitable step in balancing rising government spending, but which will also hike inflation and dampen economic growth while only postponing more manipulative currency measures. “We have to learn to do a lot with a little, more with less,” Maduro said the day his provisionally-led government announced the devaluation.

He reinforced his reform-minded signals when naming his new cabinet. Most belong to the previous government, no doubt to secure Chavismo unity, but he introduced some pragmatism when he named Nelson Merentes, a pragmatic central bank governor, as his new finance minister.

“Mr. Merentes’s appointment suggests that there will probably be more flexibility in terms of foreign exchange policy, and potentially in other areas, though political constraints will likely continue to limit the degree to which Mr. Maduro can be more moderate in economic policy,” political risk consultancy Eurasia Group said.

MERENTES IS MARKET-FRIENDLY while remaining Chavista to his core, which is ultimately the kind of left-to-center transition that Venezuela needs to attract foreign investment while easing the societal polarization that threatens instability. Markets are anticipating a relaxation of currency restrictions.

The priority, though, is the oil sector, which has been the bread and butter of Venezuela for decades. Oil analysts, starting with the International Energy Agency, OPEC and the Energy Information Administration, calculate Venezuela is already running up a deficit, with estimates of its breakeven price requirements to finance public spending ranging between USD 100 and USD 120 a barrel.

Venezuela has failed to reverse falling production from depleted wells and to efficiently develop its huge resources in the Orinoco Belt, the single largest oil treasure in the world. The technology and knowhow are there, but Venezuela has diverted much-needed resources that state-owned oil and gas company PDVSA needs to finance his populist programs—not to mention politicized what was once one of the world’s biggest and most influential oil companies.

Production remains stuck at below 3 million barrels per day, despite ambitions plans and raucous contract signings with foreign companies that aim to double production by the end of the decade. There are more than enough international partners willing to pour their billions into Venezuela to extract that oil, yet most projects remain in the planning phase. The reason: PDVSA, which by law owns 60% of all oil ventures, does not have the means to put up its share of the money.

“We need to overturn the culture in which historically, because of oil, we’ve done little with a lot,” Maduro earlier this year when he still had Chávez to support him. Now, alone and with only legacy to hang on to, he will have to prove to international markets, investors and governments—as well as to all Venezuelans—that he will be able to deliver stability.

Andrés Cala

Andrés Cala

Andrés Cala is an award-winning journalist, columnist and analyst specializing in geopolitics and energy whose career spans three continents and over a dozen countries. His work has been published and translated globally, including in Foreign Policy, the New York Times, the Wall Street Journal, the Dow Jones Newswires, the Christian Science Monitor, and TIME. Mr. Cala is the lead author of America’s Blind Spot: Chávez, Oil, and US Security.

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