Venezuela and the Current Fault Lines of the Great Power Politics w/ Professor Steven Ellner

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Ryan Morfin:

Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode, we have Professor Steve Ellner talking to us about Venezuela, and how it’s the front lines of great power politics today. This is Non-Beta Alpha. Professor Ellner, welcome to the show, and thank you for joining us.

Steve Ellner:

Thank you for the invitation.

Ryan Morfin:

Well, today we’re really excited to talk to you about what’s actually going on the ground in Venezuela, it’s an economy that has had a lot of political risk, a little uncertainty, economic risk, but it’s a rich country in terms of natural resources. But I think from a stability standpoint, a solvency standpoint it may be an interesting case study for our viewers to look at, as it could relate to the US economy as we start to go towards QE infinity and there could or could not be some real political risk around the corner with the upcoming general election. And so we appreciate you kind of giving us some insights today about what’s happening in Venezuela and how Venezuela arrived at its current situation. But maybe I’ll kick off the first question. How are things going in Venezuela with the coronavirus and local economy?

Steve Ellner:

Well, at first things were going quite well. As a matter of fact, in March the president, Maduro, imposed pretty strict measures, what seemed to be successful for the first couple months. March, April, May, but since early June, about the second week of June, there’s been a surge. At the same time Maduro announced what he calls seven and seven, which is seven days of lockdown and seven days of relaxing the restrictions, but on a State by State basis, so that you had I think 12 States that continue to have lockdowns. States at the border of Columbia, for instance, Zulia which is an oil producing State on the border of Columbia. So, they did not abide by these seven and seven measure, but other States did.

Steve Ellner:

So, people were able to get out of the house wearing masks but the restrictions were loosened. But perhaps as a result or perhaps as a result of an influx of Venezuelans coming into the country there has been a surge, and the vice president of Venezuela, Delcy Rodriguez announced on Friday that there were 330 cases that day or the day before. And she also announced, and they do this on a daily basis, the number of those cases that are what she called imported, which means people coming into the country, mainly from Columbia, but also some from Brazil. The government claims that there are illegal trails into the country and accuses the Colombian government. The relations between Columbia and Venezuela are quite poor. So, these accusations go back and forth, but the Venezuelan government claims that the Colombian government isn’t doing anything to hinder this movement.

Steve Ellner:

So, you have people coming into that as well from Columbia and she claims, or the statistics are that 103 of those 330 other cases involve people returning to Venezuela. The other statistic that was announced this week was 10,854 cases throughout this period, and of those a little over 100 deaths. That’s low by Latin American standards. Certainly, if you compare it to Brazil, but also Chile and Ecuador that has been very heavily affected. Peru also, that doesn’t seem that high. But what’s disturbing is the surge. The fact that the levels were quite low up until a little over a month ago. That doesn’t hold well for what may be coming for Venezuela in the coming weeks and months. But those are the official statistics. Of course, we don’t really know the real statistics but those statistics do reflect a deterioration over the last month. Venezuela is getting some support from its allies, Russia and China.

Steve Ellner:

Also, the European Union has contributed to medical equipment vis-a-vis the United Nations, the position of the government is that supplies can come in through the United Nations. But the other factor in the United States is working through the parallel government of Juan Guaido, who the United States recognizes is the only government of Venezuela. So, they’re trying to get supplies in through Guaido. Guaido mentioned about a month ago that supplies would be coming into Venezuela, but it’s kind of hard to imagine, to visualize how that will happen because he doesn’t control any territory in Venezuela. But that’s the situation as of now. Some of the supplies are coming in vis-a-vis the United Nations and others are coming in directly to the Venezuelan government from Russia and China.

Ryan Morfin:

Well, the poor folks in Venezuela, I mean, there was already issues on the economy and the food supplies. Was that real or is that an accurate statement? Because that’s what we see here in the news in US.

Steve Ellner:

No, I think that depiction is pretty much accurate. The economic situation in Venezuela has deteriorated. It’s deteriorated since president Maduro came in. Chavez died in 2013 and Maduro came in that year and shortly after Chavez’s death, there were elections. So, Maduro has been in power since 2013. But that coincides with the contraction of the commodity market, commodity prices, primary commodities being commodities that aren’t processed in the third world countries, that get processed elsewhere. And oil is one of them. And the price of oil has plunged since 2013. That has a big effect. The opposition says that the mismanaging of the Venezuela economy also is the fact that they claim it’s the factor, but you really have to consider three factors. The mistakes of the government, that in my opinion, are undeniable, the price of oil on the international level.

Steve Ellner:

Venezuelan oil was going from about $110 and then those dived to about $36. That’s going to affect any country that is so heavily dependent on oil as Venezuela is. And the third factor is the sanctions of the Trump administration. Actually, going back to the Obama government, but especially under Trump. Those are the three factors that explain the deterioration of Venezuelan economy, health has taken a big hit, food is naturally affected. And so the situation in Venezuela was pretty grim prior to the coronavirus pandemic, but the deterioration has been pretty sharp and these last couple of months.

Ryan Morfin:

And how is the health system holding up there? I don’t know the strength of it, or I’ve heard stories that Cuba has sent doctors over and there’s a lot of medical assistance between Cuba and Venezuela. How is the state of the healthcare system there?

Steve Ellner:

Yeah, well, Cuba has sent over doctors. Cuba sent over doctors for the very beginning and there were an estimated 3,000 doctors in this program that’s called in Spanish, [Spanish 00:09:21] which meant that the Cuban doctors were in the body as they were in the poor areas where Venezuelan doctors don’t set up shops. So, the Cuban set up shop in the poor areas. And so you had that from the very beginning. You’ve had that for some time, but doctors have been sent to Venezuela, just like they’ve been sent to other countries throughout the world. That is a factor, but the public health system in Venezuela is not in good shape. And I would say that the primary care under this government, so going back to Chavez was in better shape or is in better shape than the hospitals, but now with the coronavirus these cases are serious. People go to the hospitals and the hospitals were not in good shape to begin with. That’s the situation as it stands now,

Ryan Morfin:

And universities and schools, are children going back to school in the fall in Venezuela or?

Steve Ellner:

It hasn’t been announced, but I would say that it’s doubtful given the fact that the government took stringent majors from the very beginning. And now that there is a surge and the government is emphasizing the States that are not they’re not applying the seven and seven system. So, there’s a permanent lockdown in about half of the States of Venezuela. I would predict that the schools will not reopen in September.

Ryan Morfin:

Yeah, I think that’s probably going to happen here, even though they’re kicking the can down the road and they don’t want to announce it, but I think that’s what people are preparing for. So, you mentioned the oil economy and I believe Venezuela produces a lot of heavy crude and it’s typically refined up in the States. But China’s come in substantially over the last several years and has started to make bilateral loans and such. What is the state of play with the sanctions from the US, and then how has China helped buoy the government and the economy?

Steve Ellner:

Well, the sanctions have been very effective because they’ve been not only sanctions against Venezuela exporting oil to the United States and exporting oil to other countries throughout the world. But they also apply to anybody that’s involved in the transportation, the insurance in any phase of the oil industry with exception of … for service companies, Chevron and several others, and several service countries like Halliburton that were given exemptions, but those exemptions are now being are not being renewed rather. So, then a number of captains of ships, insurance companies, owners of shipping companies, they are being sanctioned, which means that their investments in the United States, any money that they have in the United States will get frozen. And oil companies as well, even Rosneft, which is the big Russian oil company that was handling the oil.

Steve Ellner:

And they were doing it sort of discretely in the sense that they were telling the United States, “We’re not receiving money for this oil, we’re just receiving money that Venezuela owes us.” And they were also transporting the oil to India. India had become a big recipient of Venezuelan oil to the tune of 300 barrels a day. And that declined to 200 or less than 200 barrels a day. But that oil, the India was not important at all directly, but it was getting shipped by Rosneft to Russia, and then shipped it to India. So, all those mechanisms were established, but then Rosneft was sanctioned and its assets in the United States were frozen. And Rosneft is partly owned by the Russian government. Also, two big oil companies have stocks, have partial ownership of Rosneft.

Steve Ellner:

So, they were affected and they decided to pull out directly from the oil transactions with Venezuela. So, it’s affected Venezuela in a big way, so much so that there reached a point in which the storage capacity of Venezuela was exhausted. They couldn’t export the oil. And even though production has reached very low levels, for a number of reasons, they couldn’t store the oil because they couldn’t export it because of all these mechanisms that were in place.

Ryan Morfin:

Yeah. I read somewhere that Venezuela only has one active well right now, you think that’s an accurate statement or they shut the cap Wells and closed down production cause there’s no exit for it? Wow. Well, that takes a lot of the asset production or economic productivity of the government’s oil company as Pedevesa. Right? Yeah. And so if we strip out the oil economy and there’s there’s a whole bunch of macro trends fracking a lot of extra supply globally, supply oil for Russia and China, putting prices down. How has the other portions of the economy? Since Maduro took over, how have they continued to evolve over the last call it seven years? And what has been the overhang, I guess of the oil industries demise, if you will, in the Venezuela? And how has it played out through the rest of the sectors?

Steve Ellner:

Well, the Venezuela it is attraction which has affected all the industries in Venezuela. Venezuela is heavily dependent on the oil. It’s actually a characteristic of oil exporting countries in the third world. There are a lot of studies that demonstrate that the dependence on oil is greater than dependence of other third world countries on their main export commodities so that in the case of the other OPEC countries the situation is similar so that when you have oral production decrease as sharply as it has in Venezuela, even before the sanctions, even before Trump’s sanctions and then you had US companies pulling out of Venezuela. These sanctions, as I mentioned before, they back to Obama. In 2015 Obama declared Venezuela a threat.

Steve Ellner:

It was actually called extra ordinary threat to US national security. And so that affected investments in Venezuela, especially US investments. Ford pulled out, Kimberly-Clark pulled out and then later on, other companies like General Motors Kellogg’s pulled out of Venezuela completely, but that kind of sends signals to the private sector of the United States that Venezuela was off limits. So, the contraction of the Venezuelan economy has a lot to do with world trends in terms of the price of oil, in terms of US policy towards Venezuela and also policies that Maduro set in place with regard to taps on profits, price controls. But I would say the biggest problematic area is the exchange control system, from going back to 2003, a dual system in which you have an official exchange rate, which is set by the government.

Steve Ellner:

It was the government will sell dollars to companies, to people who justify the need for those dollars. Say, they’re traveling abroad, or they need money to pay off a debt, or what have you. So, the government sells those dollars to Venezuelans, to the private sector in Venezuela at an artificially low level, but then people who can’t get those dollars have to go to the open market. You might want to call it a black market because up until recently it wasn’t legal, but it was tolerated. It was accepted. So, I’d say the best word is really the open market rather than the black market. But in any case, you had this dual system, and when Chavez went off to Cuba for the last time, this was late 2012 and the situation in Venezuela was kind of confusing because it was a somewhat of a power vacuum.

Steve Ellner:

Medusa was acting president, or was in charge of Venezuela, but nobody really knew what was going to happen to Chavez. And so in the context of this political instability and uncertainty, but the open market price of the dollar skyrocketed. And in a matter of months the official price was 4.3 bolivares, that’s a local currency to the dollar. The open market rate was between eight and nine bolivares. And in those months, skyrocketed to 18, 20, 30, 40, and it hasn’t stopped ever since then. It’s been going up on a daily basis. In my mind, that inability to get the exchange rate under control to maintain some kind of rational disparity between the official rate of the dollar and the non-official rate of the dollar, that has really had a big negative effect on the Venezuelan economy. So, to get back to your question, no, the entire Venezuelan economy has been affected. It’s not just the oil industry. It’s the entire economy that has been affected.

Ryan Morfin:

And so it’s this hyperinflation on the currency. I mean, do people store any value still in that currency, or are you seeing more barter economy type of transactions to start to increase?

Steve Ellner:

Th there has been a partial dollarization of the economy, which now the government accepts it. That was illegal in the sense that let’s say a condo charges a monthly fee to property holders and they couldn’t charge that in dollars. Officially, they couldn’t announce that. Now, they can. So, you have a partial dollarization of the economy, but what it means in a fact, and this has been the case of countries that have been affected by hyperinflation, Peru, Argentina, Brazil in the late ’80s. It means that people get their salary on a forth nightly basis and they go out and they buy everything they can, everything they’re going to need for those two weeks. Nobody can hold on to money because within two weeks, the depreciation such that it’s not worth nearly as much. So, they have to kind of estimate what they need in terms of food and other basic commodities and make those purchases practically the day that they get paid.

Ryan Morfin:

Interesting. So, the day you get the dollars, that’s your spot rate, and you got to spend it all to see what supplies you might need before next spot right it hits in local currency. Yeah, that’s fascinating. Well, it’s interesting because as we keep printing money in the US and other developed economies, at some point I think a similar question is going to be brought up, which is solvency of the economy. And so there has been talk about like the gold reserves leaving Venezuela, is that talked about at all in the local press there?

Steve Ellner:

Well, it’s definitely a topic. Because even though oil production has those dived gold is an area that the Venezuelan government intends on exploiting and it is, and that explains why there are dollars circulating in Venezuela that’s coming for remittances, but also from the export of Gold. The United States, as soon as Venezuela announced its intentions of exploiting the gold, this was around, I’d say 2018, the Trump administration issued an order that nobody in the United States, US citizens and other people living in the United States could not handle that gold. And so that has been also an impediment but the gold is being exported. Venezuela, I think has a second largest reserves of gold in the world. And so that has great potential for the government and it’s taking full advantage of that.

Ryan Morfin:

And so the 40 or 50 billion that the Chinese have lent over the last few years, are they, collateralizing these loans backed by gold mines and access to that? Or is it to the oil industry or is it both?

Steve Ellner:

Right. My understanding is, it’s more like $60 million. And the policy of the Chinese government, not at the outset, but after 2008, with the situation didn’t look that promising to third world countries, but in the case of Venezuela, the collateral was oil. So, the Chinese … It was touted as a win win situation, that Venezuela was getting this currency from China and China was gaining a certain amount of stability because the price was set and China was guaranteed the oil and so China could make predictions in terms of its own economy and everything else based on the price that was set for the future market of oil. But as a result, the Venezuelan government is committed to supplying China with this oil. And it puts Venezuela in a difficult situation, given the crisis situation that’s currently in.

Ryan Morfin:

Well, going back to the economy and the stock market. So, the stock market’s taken some pretty wild rides in Venezuela. Maybe you can talk a little bit about where we are today and where we’ve come in the last seven years.

Steve Ellner:

Sure. Let me just give you a little background in Karak stock market. Stock exchange was founded in 1947, and it had a heyday in the early 1990s as a result of the liberalization, the liberal reforms of the second government of Carlos Andres Perez. Perez was president, he was a pretty nationalistic leftist leaning president in the 1970s, but he came back in 1988. He became president ’89 and implemented a very liberal reforms in terms of privatization and deregulation. And the stock market did quite well in the early years. But then by the early to mid 1990s, a lot of these companies migrated to US stock exchanges. And when Chavez comes in ’98, ’99 the Karak stock exchange lost a lot a business.

Steve Ellner:

The only bright spot for the stock exchange was the selling of government bonds, but now with inflation and then the hyperinflation that was a bad business, buying bonds in the local currency it doesn’t make any sense at all. So, currently, there are only 24 various companies that are active. They’re altogether about 50 or 60 companies on the stock exchange, but 24 that are active in some ways, but not that active really to begin with. But one promising development occurred earlier this year when the owner of a rum company, Santa Teresa, very popular rum in Venezuela, good quality also. [Spanish 00:27:53] who belongs to an old standing family dating back to probably the 19th century, if not the early 20th century, so issued stock in large quantities that were traded on the stock exchange.

Steve Ellner:

And at the same time something that I think is pretty interesting that didn’t get any publicity that I see what was pretty interesting, I think that it’s worth examining in some detail, and that is, he says that there is a possibility that Venezuela will import the Chinese model of the early 1980s. Now, that means that China, which had been under [inaudible 00:28:48], very closed society, in a very closed economy, [inaudible 00:28:54] dies in the mid ’70s. And then Dan comes in and the early ’80s, and there’s an opening up of that closed economy. And I think that’s very significant that [Vomier 00:29:10] says this, firstly, because he’s not a politician, he’s not political at all, but he’s not an opposition because he’s nonpolitical, simply nonpolitical.

Steve Ellner:

And there is a big block of business people in Venezuela who are in that category, they’re not supporting the government, but they’re opposed to opposition business people who were political in the sense that they’re directly involved in politics and form part of the opposition block. There is also a block of business people who don’t support that policy so that I Vomier has been in that category from way back. And he’s saying that there is a possibility that Venezuela will go down this route, a more friendly policy towards the private sector without the scenario that the people in Washington want to predict of a regime change or a complete change or complete overhaul of economic policy and economic model.

Steve Ellner:

Basically, the way I interpret this is that policies could change and the government could become more business friendly without changing the basic orientation of the government. There was an article in the LPS, a Spanish newspaper that I read recently that made reference to Vomier statement and talked about this would mean the liberation of prices that you wouldn’t have the price controls that you have now and a number of other policies that would be beneficial to the private sector.

Ryan Morfin:

I mean, I can understand looking at China’s hyper-growth, the seduction of that model and saying those are the seeds, but China also had the rest of the world access to different markets. And so I guess without a political solution, how does the Vomier model get ignited if you will? I mean, you’re going to have to find, I think a political solution to the trading partners in the region, in the Western hemisphere.

Steve Ellner:

So, as a result of a number of factors at the international level and within Venezuelan politics, the situation has changed somewhat. And as a result you have a situation quite different from a year ago at this time in which early 2019 Juan Guaido declared himself president of Venezuela with US backing, with the backing of most Western European countries, with the backing of a lot of Latin American countries. And it looked Guaido’s political days were numbered. But in the last year things haven’t worked out according to plan. Guaido wasn’t able to unseat Chavez the day that he declared himself president on January 23rd, 2019, and attempted coo on April 30th. And then the fiasco of evasion from Columbia a month or so ago.

Steve Ellner:

That is result of public opinion Venezuela has changed quite a lot, and perhaps the most prestigious pollster, Luis Vicente Leon, of that analysis. Leon, is pro opposition, he’s anti-government, but he’s quite objective. And his polls indicate that the majority of Venezuelans, even those firmly opposed to the government, they don’t want to hear, they want to hear anybody talk about regime change. They’re interested in practical, pragmatic solutions to their problems, immediate solutions to their problems.

Steve Ellner:

And so I think that in that context, you can understand the emergence of a new political block, which really isn’t completely new. But it’s much more solidified that it wasn’t in the past, and that’s a block of opposition Congress people and several important prestigious leaders who go back to the late 1980s, who go back some time and were members of established political parties who were supporting negotiations with the government elections, not to not presidential elections, but elections for the national assembly in December.

Steve Ellner:

One of those people is Claudio Fermin. Claudio Fermin is no leftist in political. It is economic policy. In fact, he was very much associated with Carlos Andres Perez, in his second government, is a pretty conservative government. He was Perez’s protege. And so he’s conservative on economic policy, but he’s leading this effort to participate in these elections. The other factor to consider is the political context in the United States. Certainly, there were sort of a consensus between the leadership of the Democratic Party and specifically Biden and Trump in terms of be very critical of Maduro and not considering Maduro a legitimate president. But on the other hand, Trump has gone a lot further. I mean, Trump has called Maduro a nautical, a terrorist.

Steve Ellner:

And it may be that if Biden does win elections, given the dynamics and depending on who his secretary of state is, and nobody knows at this point, I think I would venture to guess that the feeling among these business people like Vomier are the moderates in the Maduro camp, and the moderates in the opposition camp that I referred to. But that there may be a change of policy, not a policy that would necessarily pull the rug out from under Guaido, but what would be more in line with countries like Spain, which recognizes Guaido but also recognizes Maduro.

Steve Ellner:

Venezuela has diplomatic relations with Spain, that is the Maduro people. There’s an ambassador in Spain. So, I think that the thinking is that the sanctions would be perhaps soften if not removed completely. And that they would be the possibility that between 2021 and 2023 you could see a change of policy, the Maduro government realizes that the economic situation is so dire that, I mean, they’re really desperate for private capital so that on both funds, you’ll have a modification of positions and maybe a new political and economic scene in Venezuela.

Ryan Morfin:

Yeah, no, it’s going to be interesting time to see how this kind of plays itself out. And I think once it does, just given the abundance of natural resources and the wealth that’s in the ground, Venezuela should really be, if it can get the political economy, a very strong economy, but I think it’s figuring out that political solution. And it seems like Juan Guaido has kind of lost momentum. I mean, I’m not on the ground there, but it just doesn’t seem there’s the over whelming support to have change. And so I guess it’s going to take another election to try to find a new stable state.

Steve Ellner:

Yeah. And as I mentioned before, the opposition is very much divided, but not only divided between this moderate block that I mentioned before, that favors participation, they favored participation in the presidential elections of 2018, which Maduro won, but has been questioned by the United States and its allies. But those people are saying that those elections were valid and that Maduro won the elections, even though they were some infractions in terms of violation of certain norms. But there wasn’t electoral fraud. So, you have a divide there between the hard line opposition. But even in the camp of the hard line opposition you have, and even more let’s use the term radical, I don’t like using that term because it’s interpreted in somebody’s way, but let’s say the more radical fringe of the opposition which is headed by Maria Corina Machado, who was a candidate for president.

Steve Ellner:

She aspired to be president back in 2012. She attacks Guaido very strongly. I mean, she calls Guaido a sellout practically. I mean, when you get defeated so many times, and when you raise such great expectations, a lot of people who support you drop out and become disillusioned. And that’s what’s happened to Guaido. I think maybe a mistake that he made was creating all these expectations, making it seem as if Maduro was going to be ousted in the matter of days. And that was a message that was definitely conveyed, not only by Guaido, but the opposition in street protests referred to in Venezuela as the [Foreign language 00:39:58], the term I don’t know where it comes from. But street protests that lasted for months, they were bloody protests in 2014, in 2017.

Steve Ellner:

And in both cases, the opposition leaders were saying, “Maduro has been overthrown in a matter of days or weeks.” And it didn’t happen. So, I think that as a result of a repetition of this excessive confidence in the part of the opposition, people who want to overthrow Maduro by any means possible. I think as a result, you have a big block of Venezuelans who don’t like Maduro at all, but feel kind of misled if not to see by the leaders of the opposition.

Ryan Morfin:

Or maybe they just don’t trust the opposition either to find a palatable, reasonable, like you said, immediate resolution for their needs. In some ways Venezuela is really a front line of … Well, maybe it’s a proxy war between great powers, but it seems to be economic warfare playing out. And maybe you can talk a little bit about kind of some of the tools that you’ve seen employed or whether it’s through the sanctions or the government trying to take back control of its trading relationships. What other kind of mechanical or policy implementations have been made that have kind of really effectuated the economic warfare going on?

Steve Ellner:

I think Washington perceives that the Chinese motivations are different, that they are more of an economic player than a political player. And so Washington, as well as Guaido and his people have attempted to convince the Chinese two things. One, that the Maduro government is a bad investment, that the Chinese will not get their return on the investments. As I mentioned before, Venezuela owes China approximately $60 billion, a lot of that in oil. And so that’s one of the arguments. And the other argument is that if Guaido comes to power, if the opposition comes to power in Venezuela, then those commitments on the part of the Venezuelan government will be honored. If China pulls back from the middle of government, if China withdraw support from Maduro, then Guaido will honor those commitments. So, up until now those arguments haven’t worked in case of China.

Steve Ellner:

China has indicated officially that China supports Venezuela. It’s not as vocal as Russia is. The Russian foreign minister attacks the United States for the sanctions against Venezuela. China is a little bit more laid back, but nevertheless has indicated support for Maduro. I think that may change under a new administration. If the confrontation between China and the United States softens just a little bit, I think China will look at Venezuela in more pragmatic terms and will make a decision, not on the basis of geopolitical factors, but on the basis of economic ones.

Ryan Morfin:

That is interesting. I mean, it is very much the front lines of a lot of different, interesting current events. Well, sir, I’d love to have you back on the show in the future as this continues to play out. I’m sure there’s going to be a lot of activity. It’s not one of those countries that’s going to be boring for any stretch of the imagination. So, we appreciate you coming on and would love to have you back in the future. Thank you for watching Non-Beta Alpha. Before we go, please remember to like, subscribe, on Apple podcasts [inaudible 00:44:10] channel. This is Non-Beta Alpha.

 

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Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

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Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

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Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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