By Risa Grais-Targow

With Venezuelan President Hugo Chavez gravely ill and the Castro brothers in their twilight years, debate has begun to focus on the future of Chavez's brand of leftist politics in Latin America. There is widespread speculation as to which leader might assume Chavez's role in the region, even though his influence has arguably been on the decline. Among the possibilities bandied about is Ecuador's President Rafael Correa. Correa easily won a third term in the Feb. 17 elections, beating his closest opponent, Guillermo Lasso, by more than 30 percentage points. Correa also expanded his base of support in the National Assembly, where his Alianza Pais looks likely to achieve an absolute majority. Correa, like Bolivia's Evo Morales and Nicaragua's Daniel Ortega, owes much to Chavez, who served as a model for socialist policies, anti-imperialist rhetoric, and doled out hundreds of millions of dollars to his regional allies. While Correa may aspire to use his strong mandate to assume leadership of the Chavez-created Bolivarian Alliance for the Americas, his ability to do so will be limited.

First and foremost, Correa simply lacks the resources. Ecuador is a relatively small country (its GDP is about 20 percent of Venezuela's), and while it is a major oil producer, it does not boast the quantity of oil that can sustain Chavez-like regional "petro-diplomacy" and aid programs. Moreover, in the likely event that Chavez's chosen successor, Vice President Nicolas Maduro, wins a new election, there is no evidence to suggest that he doesn't want to fill Chavez's regional leadership role himself. So far, Maduro's actions suggest that he will represent policy continuity. He is close with the Cuban regime and has imitated Chavez's playbook thus far, including cracking down on the private sector and suggesting that foreign agents were planning an assassination attempt against him.    

That doesn't mean that Correa won't try. He boasts much of Chavez's charisma, and has taken every opportunity to vault himself, and Ecuador, onto the international stage, typically at the expense of US policy interests. This has been particularly true since Chavez first became ill in June 2011. Correa boycotted last year's Summit of the Americas in protest of Cuba's absence, and more recently made headlines by granting Julian Assange political asylum. While Venezuela grapples with its internal transition challenges, rather than its regional agenda, Correa could heighten his anti-imperialist rhetoric. Regardless, however, Correa's decisive victory-along with the endurance of Morales in Bolivia, Ortega in Nicaragua, and more center -- left governments in Peru and Brazil -- suggests that the left in Latin America has staying power, with or without Chavez.

Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.

By Daniel Kerner and Risa Grais-Targow

The Bolivarian revolution in Venezuela is rapidly approaching its biggest test yet: The defiant Hugo Chavez, the man who has personified Venezuelan politics for 14 years, has publicly admitted that his days as president may be numbered. His movement has a slight edge in elections that are likely to be called within months, but much will depend on the president's ability to transfer his personal appeal to his chosen successor.

Throughout multiple treatments for what appears to be cancer, Chavez had refused to publicly acknowledge that he may be too weak to lead his country. But on December 8 he announced that he would need a fourth round of surgery in Cuba, and named Vice President Nicolas Maduro as his successor, setting in motion plans for a potentially rapid transition.

According to the Venezuelan constitution, new elections must be held within 30 days should the president be forced to step aside before inauguration day (January 10) or during his first four years in office. Maduro would likely face Miranda Governor Henrique Capriles Radonski, whom Chavez defeated by about 10 percentage points in the October 7 presidential election.

Anointing a successor is a clear admission by Chavez that he is unlikely to complete his six-year term, making an election inevitable. There are three main reasons the government will likely call for a vote as soon as possible.

The future of Chavismo depends on Chavez's ability to transform a movement that is largely based on a cult of personality to one that can survive without him in perpetuity. Chavez remains popular, despite the fact that a majority of the public thinks poorly of the government's ability to solve problems. Chavez therefore needs to aggressively make the case to the Venezuelan people that Maduro has the talent and vision to carry on the revolution. Chavez's ability to campaign for Maduro is uncertain, but it will only lessen with time.

Second, foreign exchange dynamics are untenable for much longer. The country has an unorthodox three-tiered exchange system, with two different official rates for businesses and individuals needing dollars, as well as a parallel (illegal) rate. Black-market rates indicate that the bolivar should be much weaker than it is in the official windows, and dollars are becoming increasingly scarce.

The government would likely prefer to hold fresh elections before a devaluation, which would propel already-high inflation and be politically costly for Maduro's candidacy. In the meantime, the government can rely on domestic and foreign debt issuance to meet fiscal and foreign exchange needs to buttress the political environment in Maduro's favor. 

Finally, Chavismo wants to capitalize on an opposition that remains weak and divided following Capriles Radonski's defeat, by forcing it to compete before an official candidate selection process can take place. Capriles Radonski faces a gubernatorial election on 16 December, which he is likely to win. But if he does not, the opposition will have to scramble to coalesce around a new candidate in a short amount of time.

That said, the opposition is likely to take advantage of its best chance to win since Chavez came to power by uniting around a single candidate. It is far from certain that Chavez will be successful in transferring his personal appeal to Maduro, but Chavismo retains a slight edge in the coming election.

Regardless of who wins, Venezuela faces a very challenging 2013. Maduro would be forced to make difficult economic adjustments and manage divisions within Chavismo. An opposition president would have to make the same adjustments before setting out on a reform course, but would face even more obstruction from Chavismo stakeholders across the state apparatus.

Daniel Kerner is an analyst in Eurasia Group's Latin America practice. Risa Grais-Targow is an associate in the firm's Latin America practice.

By Adam Siegel

As part of a recent crackdown, Colombian authorities have seized some of the latest tools favored by drug trafficking groups. Forget private planes, speedboats, and homemade submarines. These guys are investing in backhoes and bulldozers -- because some of Latin America's best organized criminal gangs have gone into the mining business.

Colombia's drug trafficking organizations -- from rebel groups like the FARC and ELN to paramilitary successor gangs known locally as Bacrim -- are methodically asserting control over illegal mining operations in the country, including the unlicensed extraction of gold and other metals thought to compose at least 30 percent of Colombia's total mineral exploitation. Current Minister of Mines Mauricio Cardenas has argued that unlicensed mining "should be given the same treatment as drug trafficking," while the recently-retired chief of the National Police, General Oscar Naranjo, calls the involvement of drug gangs with mining the greatest future challenge for Colombian law enforcement.

With Latin America in the midst of a new "gold rush" (and the price of gold rising from $270 to as much as $1,800 per ounce over the past decade), expanding to mining is in many ways a logical step for Colombian gangs. Profit from mining operations is high and relatively low-risk compared to other revenue-generating activities like cocaine trafficking, extortion, or kidnapping for ransom. In a mineral-rich region like Antioquia- -- here royalties from legal gold mining already provide over 45 percent of state revenue -- the governor is clear about the changing calculus for drug gangs: "Gold is now more lucrative than coca."

Unauthorized mining itself is not new in Colombia, where small-scale, artisanal mining has been practiced for hundreds of years with relatively little interference from the state. Many of the illegal mining operations are plainly visible, but Colombian authorities are often reluctant to shut down mines because they don't want to trigger unrest by depriving poor miners of their livelihoods. These miners are treated more as opportunists than as criminals, lack of permits notwithstanding.

But this laxity has opened doors for criminal gangs, whose physical presence at the mines is (in many cases) minimal. Reports from local media and authorities detail a number of methods used by groups like the FARC or prominent Bacrim like the surging Rastrojos: Some charge a five to 10 percent "tax" on daily production or monthly earnings, while others charge "protection" fees or make money by providing heavy machinery, like the aforementioned bulldozers.

Yet the sheer scale of these illegal armed groups' involvement in the industry is quickly changing the government's calculus. President Juan Manuel Santos called the new trend "a cancer," and his administration has launched a number of offensives aimed specifically at shuttering these operations. In the Cordoba department, for example, the first phase of Operation Trojan ended in July with more than 400 arrests, 87 mines closed, and 155 bulldozers in state hands. In all of 2011, Colombian authorities shut down 276 mines and arrested more than 1,200 people. By May 2012, an unofficial accounting by the National Police showed 363 closed mines and at least 900 arrests.

The urgency of the Santos administration underscores some serious security challenges: Revenue from mines helps bankroll a decades-long insurgency, while competition for access to resources stokes violence among illegal groups and within the local communities already burdened with poverty and high levels of forced displacement. The environmental impact, in the form of mercury runoff and pollution, is severe.

The alarm is being raised in neighboring Peru as well, where the business consulting firm Macroconsult recently issued a headline-generating report estimating that illegal mining profits surpassed those of drug trafficking last year. With Peru's coca economy again on the rise and less concrete evidence that the rebel group Shining Path is making the same mining inroads as insurgents in Colombia, the issue of illegal mining still has the "social problem" and "economic issue" veneer seen previously in Peru's northern neighbor. Mexican authorities, meanwhile, have taken a more aggressive stance, opening a number of investigations into the escalating ‘protection' fees that drug traffickers like the Gulf Cartel and Los Zetas are said to be charging local mine operators.

The details of the problem vary from country to country, but there are implications for Latin America as a whole -- and for the region's mining industry, with more than $425 billion in investments already announced over the next ten years. As demonstrated in Colombia, the profits from supporting and extorting illegal mining are too large (and too easy) to pass up. By some estimates, in the past five years the FARC has transitioned into making some 20 percent of its total earnings from mining operations and 35 percent from drug trafficking. Put another way, that's hundreds of thousands of dollars in monthly income (for relatively little work) going to the rebel group's locally operating fronts. Countless additional illicit funds from drug trafficking are also laundered through these operations because they ultimately produce a legal item.

Organizations like the FARC, with operatives in Ecuador and Venezuela, are well-positioned to extend their mining ventures into those countries. In fact, there is evidence they already have. Groups like the Zetas are present in Mexico and Guatemala, and they have shown no hesitation in taking on new activities as they expand through Central America. Indeed, a key lesson here is that even in Colombia -- long the cocaine-producing capital of the world -- traffickers are always looking for ways to keep their income fluid and diversified (and, according to some reports, are even willing to team up with rivals to do so).

For the global mineral market, it is unclear whether the trend is toward dominating the "illegal" industry or extorting the legal one. Either way, the presence of these groups may create an unwelcome new "gold standard" for the region: greater violence, more corruption, and a higher cost of doing business.

Adam Siegel is a researcher in Eurasia Group's Latin America practice.

By Adam Siegel

Colombian president Juan Manuel Santos is likely to open the Sixth Summit of the Americas in Cartagena next month with a standard welcome for Barack Obama and the 33 other leaders of the Western Hemisphere, but maybe there's a more fitting greeting for the U.S. president: "This is an intervention." After decades of partnering with the U.S. to pursue an aggressive, often controversial 'war on drugs,' a number of Latin American leaders say they're ready to discuss major shifts in regional anti-drug policy. Some of them have begun talk of "decriminalization" -- and they want to do it at the Summit, where the United States will have no choice but to talk up the merits of the prohibition policies it has long favored.

The former presidents of Brazil, Colombia, and Mexico generated headlines in 2009 by jointly declaring that "the war on drugs has failed" and calling for decriminalization of marijuana, but the commentary was dismissed in some quarters as an easy argument to make for men no longer politically accountable as heads of state. Since then, however, several sitting Latin American leaders (on both the left and right) have called for candid debate of current drug policy. Among them: Mexico's Felipe Calderon, Costa Rica's Laura Chinchilla, Argentina's Cristina Kirchner, Guatemala's Otto Perez Molina, and Colombia's Santos -- who told Britain's The Observer last year that "A new approach should try and take away the violent profit that comes with drug trafficking... If that means legalizing, and the world thinks that's the solution, I will welcome it."

Santos' caveat -- "[if] the world thinks that's the solution" -- nods to the global reach of Latin America's drug trafficking organizations, underscoring the desire for a debate that includes producers and consumers (who are concentrated in the U.S. and Europe). This distinction is important; indeed, personal consumption of drugs like marijuana and cocaine is already technically decriminalized in Mexico, Costa Rica, and Colombia, while the total number of convictions for personal drug possession in Guatemala and Argentina combined was just 161 in 2009, according to the Inter-American Drug Abuse Control Commission. So when an ex-military general like Perez or a former defense minister like Santos talks about decriminalization, it's not because they care so much about personal liberties. Rather, they have one major goal in mind: choking off the resources that fuel drug cartels and the violence they practice.

As Perez explained recently in advance of a Central American conference on alternative drug strategy sponsored by his administration in Antigua, "drugs are expensive precisely because they are prohibited...traffickers will lose if they cease to be profitable." While no detailed proposal is yet on the table, his idea of decriminalization is clear: create a legal framework to make the production and transport of cocaine legal, at least throughout Central America -- a region through which approximately 80 percent of the cocaine heading to the United States stops. Bringing the business of this $37 billion industry out into the open, it is assumed, would reduce the imperative of traffickers to corrupt public officials and their need to use violence against both governments and rivals for access to the best trafficking routes.

Other leaders, from Vice President Joe Biden to Nicaraguan president Daniel Ortega, have rejected the decriminalization proposals out of hand. Nevertheless, the coordinator of Obama's trip to Colombia recently indicated that the U.S. was "ready to have a good dialogue between all countries to hear their views," though he reiterated that U.S. opposition to any legalization will not change. Of the suggestions offered at the Guatemala conference last weekend, some could be endorsed by the U.S. -- such as the creation of a regional Central American court for trying traffickers that would reduce local corruption and relieve pressure on national justice systems, while others -- mandating that the U.S. take "co-responsibility" and pay individual countries for every drug raid or plant eradicated -- don't stand a chance.

Obama's challenge at the Summit will be to offer policy alternatives to the status quo. Latin American leaders warn that Washington has asked them to take tough choices over the years, and they want to see the U.S. demonstrate the political courage to consider a few of their own. Latin Americans are far from united on decriminalization or any other single solution, but the gathering in Cartagena will make clear that they have become increasingly willing and able to propose new ideas they know that Washington won't like. If Guatemala's Perez Molina gets his way, we'll even see him start discussions on a formal drug transit corridor for moving cocaine between South America and the United States.

Wartime U.S. presidents talk often of the need to "listen to the generals on the ground." In coming years, beginning in Cartagena, Washington can expect its "frontline partners" in the war on drugs to offer up strategies and ideas that U.S. policymakers won't like. Some Latin American leaders may give Obama a break during an election year, but they aren't prepared to wait much longer.

Adam Siegel is a researcher in Eurasia Group's Latin America practice.

Today, we turn to the last in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.

Here's a summary:

Venezuela -- A lose-lose election. No matter who wins the October 7 presidential election, Venezuela's political and economic conditions are likely to worsen. President Hugo Chavez would maintain the same distorting economic policies, and the economy would struggle to overcome the effects of a large pre-election increase in spending and debt issuance. An opposition win would likely lead to an eventual improvement in economic policy, but the transition could produce instability as Chavez supporters, who would still control most of the state apparatus, try to counteract reform. 

Q- Can Chavez win another election? What will affect the outcome?

A- Chavez has the edge because of his relatively persistent popularity despite a growing dissatisfaction with the status quo. The president's popularity (his approval ratings are currently around 50 percent) comes despite high inflation (estimated at nearly 28 percent in 2011), low growth, good shortages, and an electricity crisis. To alleviate these negatives, Chavez will likely engage in a massive campaign spending spree, fueled by high oil prices. His government will also issue a large amount of debt to provide dollar-denominated assets to curry favor and counteract dollar shortages. The major wild card is Chavez's health. He announced in July that he was diagnosed with cancer, but little is known about the severity of his illness. Should his health deteriorate significantly, Chavez's reelection chances will diminish, as the public's faith in his ability to lead drops.

Q- Who is the opposition?

A- The Coalition for Democratic Unity (MUD) will select its presidential candidate when it holds primary elections on February 12. Miranda Governor Henrique Capriles Radonski, a young and popular governor from one of Venezuela's most important states, is the favorite. The opposition hopes to capitalize on the growing dissatisfaction with Chavez and to continue the momentum from the 2010 legislative elections, when a unified opposition list of candidates won 54 percent of the popular vote against the president's United Venezuelan Socialist Party (PSUV). The MUD would promote more orthodox macroeconomic policies, likely leading to lower inflation and more fiscal stability in the long run. The opposition would also adopt oil-related policies that are more attractive to foreign investment.

Q- What are the different risks arising out of the election outcome?

A- A Chavez win would mean a continuation of the same economic policies that have produced widespread market distortions and a strained relationship with foreign oil companies. It will be even harder for the country to recover from the large uptick in spending and debt Chavez is likely to push to improve his election chances. Given Chavez's wide-ranging power within the government, however, it would be easier for a Chavez government than a more fragmented opposition to make some economic adjustments, such as devaluing the currency or tweaking the foreign exchange system.

An opposition win, while positive for long-run growth, could paradoxically lead to more instability in the short-run. The government would be opposed at every turn by Chavez allies, contributing to policy paralysis. The most stable outcome would probably occur if the opposition wins, and Chavez's health makes it difficult for him to continue leading his movement behind the scenes. The most unstable environment would likely arise from a rapid deterioration in Chavez's health, causing him to abandon the presidential race and creating a power vacuum that would roil both the governing party and the opposition.

By Daniel Kerner

President Cristina Fernandez de Kirchner scored a clear victory in Argentina's first ever open primary election on August 14, setting the stage for her to sweep the October 23 presidential election. Fernandez de Kirchner's win in the primary came on the back of Argentina's strong economic growth. That growth, however, is based on unorthodox economic policies that are unlikely to change if Fernandez de Kirchner wins reelection, and that implies macroeconomic concerns in the future.

Fernandez de Kirchner is in a very strong political position. Popular support for her is at the highest levels since she came to office in December 2007. Moreover, several indicators suggest voters are content with the status quo and that there is little demand for change. Fernandez de Kirchner's 50.06 percent of the primary votes compares favorably to the 45.6 percent she won in the 2007 presidential elections. The increase is mostly because of robust economic growth and the opposition's weakness.

Fernandez de Kirchner's overwhelming victory bodes very well for her chances in the October elections. Participation was high at more than 77 percent, which means that these results should be taken as indication of how voters are likely to behave in October. In fact, support for her could even grow as her front-runner status attracts additional voters.

In contrast, the opposition is in disarray. There is a substantial distance between Fernandez de Kirchner and other candidates and no other candidate is likely to emerge as serious competitor. Ricardo Alfonsin obtained only 12.7 percent of the votes, a former president, Eduardo Duhalde, got 12.6 percent, and the socialist candidate Hermes Binner received 10.27 percent.

There is some speculation that opposition parties could coalesce behind a single candidate in October. That is unlikely. All three opposition candidates were close and there is little incentive for any of them to step aside. Additionally, any decision to leave the race would mean abandoning that party's candidates for legislative and local elections, and that would be resisted. Barring a major economic or social deterioration in the run up to the October elections, Fernandez de Kirchner is favored to win. In fact, the primary is likely to generate the perception that Fernandez de Kirchner is unbeatable.

With Fernandez de Kirchner on track to win reelection, attention now turns to what might happen during her next term. There is unlikely to be any major change or improvement in economic policy after the election, in fact, quite the opposite. Strong growth and popular support mean that the government perceives little need to adjust policy. Fernandez de Kirchner's likely victory in October (and probably with a comfortable margin) will only reinforce this feeling. In addition, the profile of some of the individuals that seem to be gaining strength within government suggests that Argentina's unorthodox economic policies are likely to continue, which bodes poorly for the country's macroeconomic outlook.

Daniel Kerner is an analyst in Eurasia Group’s Latin America practice.

By Risa Grais-Targow

Cuba. Oil. Two words that tend to get U.S. politicians hot under the collar, though usually not in the same sentence. That could change as the 2012 campaign season heats up in the U.S. and as Cuba's plans for offshore oil exploration materialize. The Chinese-built, Italian-owned Scarabeo 9 rig is scheduled to enter Cuban waters in August or September, and a consortium of international oil companies is set to begin drilling soon after. The struggling island nation, which currently depends on generous oil deals from its friend and neighbor Venezuela, has high hopes that its potential offshore resources might rev up its sagging economy. (Cuba claims that it has 20 billion barrels of "probable" oil in the continental shelf just off Havana, while the U.S. Geological Survey thinks that number is closer to 5 billion barrels.) But as the rig makes its steady way from Singapore, officials in Washington are getting anxious. Many lawmakers doubt that Cuba has the regulatory capacity or expertise to drill safely, particularly without the U.S.-manufactured equipment that the more than 50-year-old embargo has kept out of Cuban hands. And with BP's spill in the Gulf of Mexico still fresh in the U.S. public's mind, politicians are flagging the possibility of a Macondo-like spill 50 miles off the Florida coast.

The specter of such a disaster has already prompted several legislative efforts to punish foreign firms that drill in Cuba -- or at least those who chose not to comply with U.S. safety standards. Since January, Congressional hardliners from Florida have introduced three bills proposing to deny contracts to such firms or visas to their employees. The bills are designed to appeal to anti-Castro constituencies in the run-up to the elections, but widespread haggling over the issue is set to increase as Cuba's drilling plans progress, and the issue could become a talking point for presidential candidates in battleground states. For its part, Cuba will keep scrambling to convince the international community that it will uphold international safety standards. But those PR efforts will do little to cool the heated debate brewing on the Hill.

That said, none of the bills is likely to move anytime soon, given another powerful constituency: oil. Pro-drilling legislators in the House will be wary of punishing foreign oil companies (some of which have U.S. operations). The issue will also be overshadowed by pre-election priorities such as job creation. In the absence of Congressional action, the administration will likely take an ad-hoc approach. It might twist companies' arms behind closed doors, as it recently tried to do with Spain's Repsol, to get them to abandon their plans altogether. Or, if that doesn't work, it might simply push for guaranteed safety compliance. Measures that involve engaging directly with Cuban officials are unlikely, leaving room for less controversial alternatives such as allowing companies that specialize in emergency response to contract with Cuba and creating some kind of exception to the embargo that allows Cuba to use certain U.S.-manufactured equipment to prevent or minimize spills.

Risa Grais-Targow is a member of Eurasia Group's Latin America practice.

By Daniel Kerner

Venezuela's President Hugo Chávez faces the real possibility that he may lose the 2012 presidential election after more than a decade in office, in part because of his administration's failure to ensure adequate power supplies. Venezuela was forced to implement strict rationing in 2010, which thwarted the country's economic recovery. But while last year's problems were caused mostly by shortfalls in rain that stressed hydropower reservoirs, the problems are now the result of the government's failure to meaningfully address capacity and transmission problems.

The recent measures to address the situation are unlikely to solve the sector's problems. On June 13, the government announced it will offer up to 50% reduction in rates to households who reduce their consumption by up to 20%, but will also fine consumers 200% of their bill if they increase consumption by over 20% from a 2009 baseline. In addition, commercial users have been asked to install their own generating capacity, and face surcharges or electricity cuts if they do not. Finally, illuminated billboards will be shut off after midnight. The measures could contain demand, but do not address the fact that the system cannot meet peak demand.

The government has promised to increase generation capacity, the only real solution to the current structural problems. But it is unlikely to deliver given financial and logistical challenges, and Venezuela will still face transmission bottlenecks. The country is estimated to have around 24,000 MW of installed capacity; effective capacity, however, is around 17,000 MW. The government claims it installed 1,250 MW of new capacity in 2010 and will install an additional 2,568 MW in 2011, but the data's reliability is suspect -- the government stopped publishing data on Venezuela's power system last year, a tacit admission that the problems are severe. The government has also promised to invest some $21 billion in the sector over the next several years, but a long list of spending commitments and the government's proven inability to manage the electricity sector means these promises are hard to take seriously.

The shortages are likely to have a dramatic impact on an economy that is only now slowly recovering -- it grew by 4.5% in the first quarter, the first positive figure in a year and a half. Similar measures in 2009 and 2010 helped cut industrial activity by 6.4% in 2009 and 3.4% in 2010. Energy saving measures could limit industrial production, and blackouts could disrupt oil output.

Higher energy prices and electricity shortages, however, pose a serious political liability for Chávez's hopes of reelection, especially if they affect economic growth. In 2009, power shortages helped reduce his approval ratings from 61% to around 50%. A variety of opinion polls show that Chávez has lost support. The government has done its best to protect Caracas from the power shortages as a means of avoiding the political costs. But the state of Zulia, which recently suffered a day-long blackout, is home to the country's second largest city, Maracaibo.

Chávez will still likely have an edge over the opposition, however. He does have a strong group of core supports among the rural poor who are over represented in the legislature and he is gearing up to expand debt-fueled spending on social programs. But the election is shaping up to be the tightest of his decade-long run as president and Chávez is more vulnerable than ever before to economic and social problems.

Daniel Kerner is an analyst in Eurasia Group’s Latin America practice

By Risa Grais-Targow

By all rational measures, Cuba is effectively irrelevant to the United States. The island is small, its economy is about the size of New Hampshire's, and since the collapse of the USSR it poses no strategic threat. Yet the Castros have a habit of popping up in the headlines. In part, that is because of the inevitable fascination with a small country that has been a foreign policy irritant for the United States since 1959 and, more recently, its outsized role in Florida politics. But change is coming to Cuba, slowly but surely, and with change comes the possibility of unexpected volatility.

Cuba is gearing up for the first Cuban Communist Party (CCP) congress in 14 years, to be held April 16-19. Much of the event will be focused on formalizing Raul Castro's small steps toward economic liberalization (e.g., trimming the state's workforce and allowing more room for entrepreneurs) outlined in a November 2010 wish-list of 300 reforms. Another, perhaps more important, development will be the identification of the next generation of leaders, including the appointment of a new second-in-command for the CCP (the second most powerful position in Cuba). The long delay since the previous CCP congress suggests that there has been much internal wrangling over that issue.

The Castros are clearly on the way out (Fidel is 84 and Raul is 79), and the CCP has promised that the congress will usher in a new generation of leaders. Just how new and young they will be remains to be seen. On March 25, Raul Castro announced that the 50-year-old Economy and Planning Minister Marino Murillo, who has been the architect of much of the economic reform agenda, would now oversee its implementation as a sort of economic czar, signaling Raul's devotion to the reform process. The CCP may, however, simply shuffle senior party members into new positions rather than appoint younger reformers.

Such developments could also be important for the U.S. and perhaps trade with Cuba. Unless Congress decides to revisit the issue, the Helms-Burton Act of 1996 stipulates that the Cuban embargo cannot be lifted while the Castro regime is still in power. A shift in the leadership could also open the way to dealing with other potential concerns. For example, Cuba is actively exploring for oil in the Gulf of Mexico, raising U.S. concerns about how it would handle disasters similar to the 2010 Macondo well blowout.

But the CCP faces deeper challenges than this round of leadership refreshment. Most young Cubans are disenchanted with the regime. They have spent most of their lives in post-Soviet Cuba dealing with grinding economic hardship. Finding true believers among that generation is likely a difficult task and the regime's ability to implement meaningful reforms will affect the stability of Cuban politics further down the line.

Risa Grais-Targow is an analyst in Eurasia Group's Latin America practice.

By Christopher Garman

The turmoil in the Middle East and Japan has almost completely overshadowed U.S. President Barack Obama's trip to Latin America, but his visit to Brazil is a strategic down payment on improved relations with an emerging world power.

Under former President Luiz Inacio Lula da Silva most of Brazil's foreign policy initiatives were driven primarily by the Ministry of Foreign Affairs (Itamaraty) with a long-standing preference for improved South-South ties or by Lula personally.

Brazil's President Dilma Rousseff, however, is more interested in economic concerns and there are already signs that such issues will have more impact on her foreign policy, perhaps yielding a better relationship with the United States. Some of that shift can be explained by Rousseff's economic training and her many years as a government technocrat. Equally important, however, is her underlying pragmatism, something that many pundits failed to identify during the presidential campaign.

Her more skeptical view of China yields the clearest evidence of this change. Under Lula, Brazil sought to strengthen its relationship with Beijing driven in part by a desire to counter-balance U.S. geopolitical clout. By contrast, under Rousseff, private sector concerns over how Chinese imports are undermining the competitiveness of Brazil's manufacturing are surfacing more strongly in Brazilian policy. Where Lula blamed the U.S. Federal Reserve's quantitative easing for global imbalances, Rousseff has placed equal blame on China's managed currency policy.

It would be a mistake, however, to think this new focus will translate into a wholesale transformation of the relationship. Rousseff is not about to work jointly with the United States, either bilaterally or in multilateral settings such as the G-20, to pressure China on its currency policy.

Additionally, even though Brazilian policymakers are signaling a desire to supply the U.S. market with exports from its vast new oil deposits, Brazil's new statist exploration and production framework designed to develop the country's pre-salt reserves is much less attractive to U.S. majors. In fact, there seems to be more room for cooperation on renewables and environmental regulations in deep-sea drilling than in upstream E&P.

It comes as no surprise that Obama did not support Brazil's push for a permanent seat on the U.N. Security Council in the same way it supported India's bid. The United States may want to deepen its relationship with Brazil, but the ill will generated by Iran episode (Lula's attempt to broker a nuclear deal with Tehran) hasn't yet completely faded. Obama also remains constrained on trade, given protectionist pressures in the U.S. Congress that gives him little room to deliver either reduced U.S. agricultural subsidies or lower ethanol tariffs, both of which are high among Brazil's priorities in the bilateral agenda.

But with pragmatists leading the two largest countries in the Americas, relations look set to improve.

Christopher Garman is the director of Eurasia Group's Latin America team.

By Heather Berkman

During last month's State of the Union address, President Obama said little about the region south of the border. There was no reference to Mexico, unless you count acknowledgment of the need to tackle immigration reform. There was the expected call for a congressional push on trade deals with Panama and Colombia. The White House's recent move to lift some restrictions on US travel to Cuba thankfully remained under the radar. He did announce that in March he would visit three countries in the region: Chile, Brazil, and...El Salvador.  

Chile is one of the region's most dynamic emerging markets, one that has signed trade agreements in recent years with Japan, China, South Korea, and the European Union. Brazil is Latin America's heavyweight and an increasingly important player in international politics. But why is the president visiting El Salvador?

Central America's smallest country has a population of about 6 million, less than a third the population of metropolitan Mexico City. Locals call the country the "pulgarcito" (little thumb) in honor of its size and shape. Its economy depends heavily on remittances from the two million Salvadorans living in the United States and on U.S. consumers buying its exports. El Salvador is a member of the U.S. - Central America Free Trade Agreement, but its trade impact on the United States is negligible. Plagued with gang violence and high levels of organized crime, the country suffers from one of the highest murder rates in the world, and it has appealed to the United States for help in combating crime.

El Salvador's president, Mauricio Funes, has made strong relations with Washington a priority, and the country's current president of congress was photographed hugging a cardboard cutout of Obama shortly after he won the election in 2008. Flattered though he may be, this hardly explains why the real President Obama chose El Salvador for a presidential visit.

A broader look at the region brings the country's importance for Washington into sharper focus. U.S. policymakers have become increasingly concerned with the rise of drug trafficking in Central America, especially as Mexico's efforts to crack down on drug cartels have pushed traffickers and their operations into remote areas of Guatemala and Honduras. Both those countries share a border with El Salvador.

The U.S. military coordinates with Salvadoran authorities at the country's Comalapa Air Base to plan drug interdiction operations, which some Salvadoran officials say has helped their country avoid the spike in drug-related violence that plagues its northern neighbors. In addition, El Salvador has remained politically stable. Honduras is still regrouping following the ouster of President Manuel Zelaya in 2009. Guatemala's government lacks the resources and the political will to effectively combat drug traffickers. Throw in the likely reelection of Daniel Ortega in Nicaragua this year, Washington's ongoing tensions with Panama's mercurial President Ricardo Martinelli, and Costa Rica's lack of regional political weight, and El Salvador begins to look more like Washington's foothold in the region.

During the Cold War, U.S. policymakers watched Central America carefully for signs of communist encroachment. Today, it's mainly drug trafficking that Washington cares about, a less immediate priority. But if U.S. officials really want to see progress on that front, a deeper commitment to El Salvador's stability might be a smart use of resources. Obama's visit could be a useful step in that direction.

Heather Berkman is an analyst in Eurasia Group's Latin America practice.

By Eurasia Group's Latin America practice

Following a solid economic recovery in 2010, most Latin American countries are looking ahead to a favorable 2011. Several elections are approaching, but there are no potential political upheavals or major economic policy shifts on the horizon. In Argentina and Venezuela, incumbents will attempt to muddle through with existing policies. Cuba will try to liberalize its economy, but with little near-term success. The region's riskiest areas are in Peru, Colombia, and Mexico, while Brazil remains the region's good news story.

In Argentina, former president Nestor Kirchner's fatal heart attack in October had a profound impact on the country's political dynamics. He was Argentina's most important political figure and its main decision-maker -- especially on economic issues -- in his wife's government. But his death is unlikely to change the overall direction of policy next year, given the growing likelihood that President Cristina Fernandez de Kirchner will win reelection in October as a result of her rising popularity and Argentina's strengthening economy. The president's advisers may be more willing to consider economic policy changes than when her former husband was alive, but only at the margins.

In Venezuela, deteriorating economic conditions, rising crime, and pervasive shortages of electricity and basic consumer goods have pushed President Hugo Chavez's popularity numbers lower over the past two years, and political tension and uncertainty is bound to increase in the run up to the crucial 2012 presidential elections. His most recent electoral setback in the November midterm legislative election provides a check on his administration and its policies. But Chavez has not moderated his politics or economic policy in response, and though Venezuela has one of the worst growth outlooks in the region, his administration will likely push forward without major policy changes in 2011. Growth will be slow and inflation will remain high. Authorities will continue to intervene heavily in the economy and could resort to a new round of company takeovers to combat rising inflation and worsening food shortages.

Sluggish economic growth and dwindling state finances will encourage Raul Castro's government to slowly liberalize elements of the Cuban economy in 2011. The economic reform plans are ambitious, but Cuba is not moving toward political change, and the island's inability to trade with the United States will continue to hinder its recovery. Any change in U.S. policy toward Cuba is extremely unlikely, especially as Republicans take control of the House of Representatives and a longtime supporter of the embargo, Representative Ileana Ros-Lehtinen (R-FL), assumes the chairmanship of the House Committee on Foreign Affairs.

Brazil will probably surpass expectations. President-elect Dilma Rousseff will assume office on January 1 and may surprise some of her critics with continuation of the sort of economic pragmatism that made her predecessor successful. Her administration will make a genuine effort to control spending in payrolls and pensions, which will be critical to limiting inflation and taking pressure off monetary policy. She is also likely to advance a microeconomic reform agenda designed to deepen capital markets and overcome the hurdles for infrastructure investments and tax reform.

The key political event next year in Peru, one of the region's fastest-growing countries, will be the April presidential and congressional elections. The result is likely to be policy continuity, but there is a chance that populist candidate Ollanta Humala could become more competitive in coming months. If Humala wins, he is unlikely to shift away completely from the current macroeconomic policy mix, but he would seek to greatly expand social programs and infrastructure investments, and raise taxes to finance spending, particularly on extraction industries.

In Colombia, popular newly elected President Juan Manuel Santos will make progress on reforms that improve the likelihood that rating agencies will upgrade the country's standing to investment grade status. But approval of the government's reform agenda will take time.

Mexico will face economic-reform paralysis in 2011 driven by pre-electoral politicking in the run-up to the 2012 elections. The battle against the drug cartels will occupy much of the government's time and resources. The Felipe Calderon administration is gaining ground in its fight against organized crime, but cartels could engage in higher-profile attacks as they feel more pressure from the government. There will be a rising risk of more high-profile events, including terrorist-like attacks aimed at security forces and public officials. But the violence will likely remain concentrated among drug traffickers themselves and mostly confined to key drug-producing and -trafficking regions along the northern border and west coast.

This post was written by analysts in Eurasia Group's Latin America practice.

Reading Ian Bremmer's post below on the idiosyncrasies of Kim Jong-Il and Saparmurat Niyazov, I'm reminded that one of the toughest challenges for any analyst of politics is in predicting how an individual leader will make a particular decision. It's especially dangerous to assume that the president, prime minister, great dictator or "dear leader" sees his available options as we see them -- and that the key to accurately forecasting his choice is simply to find the most rational solution to his problem. He's not us, and we're not him. It's also dangerous to dismiss certain leaders as "madmen" whenever they surprise us and take some action that undermines our interpretation of their interests.

Six months ago, my friend Geoff Porter and I wrote a piece on Muammar al-Qaddafi. In it, we argued that the Libyan leader loves to spring surprises, but that his political calculations are not as crazy as they appear. Similar arguments can be made for Kim Jong-Il and Mahmoud Ahmadinejad -- though the Iranian president made things a little tougher this week with a broadside attack on Paul the World Cup prognosticating octopus.

But what to make of Venezuelan President Hugo Chávez's recent decision to exhume the remains of Simón Bolívar, the revolutionary giant credited with liberating Venezuela, Colombia, Panama, Peru, Ecuador and Bolivia from Spanish imperial rule? Conventional wisdom among historians is that tuberculosis killed Bolívar in 1830. But three years ago, not long after losing a public referendum he expected to win, Chávez began claiming that his hero had been murdered by a Colombian rival. Chávez ordered the exhumation to verify that the body buried in Bolívar's grave is in fact Bolívar, to run tests to determine the great man's true cause of death, and to rebury him among people of whom Chávez has a higher opinion.

Some say Chávez is simply manufacturing a murder mystery to divert public attention from Venezuela's deteriorating economy. True, things are bad. In the first quarter of 2010, Venezuela's economy contracted by 5.8 percent. Earthquake-ravaged Haiti is the only other country in the Western hemisphere to see its economy shrink so far this year. National oil company Petróleos de Venezuela (PDVSA) produces virtually all of the country's export revenue. The country's cash cow helped Venezuela produce 3.3 million barrels of oil per day (bpd) in 2001. But a massive strike in 2002, the firings of thousands of PDVSA employees that followed, and the president's habit of milking the company for extra revenue have taken a toll. The government claims that it still produces 3 million bpd. Some experts claim the number is closer to 2.6 million. OPEC says Venezuela is now producing closer to 2.3 million.

In June, inflation hit 31.2 percent year on year. Venezuela imports nearly three quarters of its food, but shortages of basic foodstuffs in state-run grocery stores have eroded Chávez's popularity. A scandal erupted this spring when officials discovered tens of thousands of tons of imported food that had been abandoned to rot in state-run warehouses.

In other words, Chávez has plenty of reasons to create a diversion.

It's also true that no one does political theatre like Venezuela's president. The honor guard in blue gloves and white biohazard suits opening Bolívar's coffin made for unforgettable (official state) television. Anyone who missed the moment (and speaks Spanish) can relive the magic by reading President Chávez's live tweets from the event. 

But history suggests it would be a mistake to overestimate Chávez's sanity when it comes to Simón Bolívar. He has renamed the country the Bolivarian Republic of Venezuela and refers to his political agenda as the Bolivarian Revolution. He has been known to punctuate public speeches with his hero's jewel-encrusted solid gold saber. Some have accused Chávez of believing he is the reincarnation of his hero.

That's not fair. In their biography of Chávez, authors Cristina Marcano and Alberto Barrera Tyszka recount an interesting story of how this mistake was corrected in the past. During the two years that Chávez spent in prison following a failed coup attempt in 1992, a former cellmate recounted a particularly memorable night of smuggled rum, kahlua and tobacco. Chávez "began to tremble and speak like an old man," the witness remembered. Addressed as the ghost of General Bolívar, Chávez replied, "No, I'm not General Bolívar. Don't flatter me." When another inmate guessed that Chávez might be inhabited by the spirit of his great grandfather General Pedro Perez Delgado, Chávez replied "That's right my son, here I am."

Maybe it never happened. Most of the witnesses who served as sources for this story are former allies who are no longer on Chávez's Christmas list -- though a key source mentioned by name in the account is now deputy foreign minister. It does seem to fit the profile that has emerged over the years of a megalomaniacal leader who believes he must fight American colonialism just as Bolívar fought Spanish imperialists -- a man who sometimes leaps across the boundary separating fantasy from reality.

In other words, to forecast what one individual might do, we have to account for every possibility -- including that, on some subjects, the man we're studying might be just a little nutty.

Willis Sparks is an analyst in Eurasia Group's Global Macro practice.

Hugo Chavez will hold his congressional majority in September's legislative elections in Venezuela. His support base remains strong. His government still exerts plenty of influence in rural regions of the country that are disproportionately represented in congress. A new electoral law will maximize the value of every pro-government vote. Majority control of congress will allow Chavez to dominate the legislative agenda in the run-up to a presidential election in December 2012.

But beneath the surface, his popularity across the country is headed downhill as Venezuela's economy buckles beneath the weight of its internal contradictions and an overloaded electricity grid leaves much of the country in the dark.

Venezuela's GDP shrank by 3.3 percent in 2009 -- and by 5.8 percent in the last quarter of the year -- according to latest central bank estimates. The country remains mired in recession while its Latin American peers have begun to recover. The government is spending freely on the back of higher oil prices in a bid to stimulate the economy, but growth prospects are limited by supply-side bottlenecks and strong disincentives for private investment. Venezuela's mix of heavy government spending with strict price and foreign exchange controls continues to feed inflation, which hit 26.2 percent on an annual basis in March. To keep a lid on the problem, the government has taken over or threatened to nationalize retailers that pass higher import costs to consumers. This strategy will probably make scarce goods still scarcer and prove unsustainable.

But the single biggest challenge to Venezuela's economic health may well come from strains on the country's power grid. Power demand has risen 6 percent a year over the past decade, outstripping the rate of expansion in generation capacity. Officials began rationing power at the end of 2009 and implemented a plan in February to cut electricity for up to four hours every other day across the country (with the exception of Caracas). Nationwide outages will weigh heavily on the country's ability to recover from recession by slowing production for the manufacturing and service industries, which together account for more than 25 percent of GDP and more than 30 percent of jobs in the formal sector. A state takeover of the last three privately run power generation companies in 2007 has reduced incentives to add capacity.  

Hard times are already taking a political toll on the president. According to respected local pollster Datanalisis, Chavez's popularity slipped from 61 percent following his February 2009 referendum victory to 43 percent in February 2010. More than 65 percent of respondents in the latest monthly poll think that Venezuela is in a "critical situation." Chavez's approval ratings remain well above the lows of 2003, when he survived a coup attempt and his support dipped to around 30 percent. But with Venezuela's economy running on fumes and the government unable to turn things around, Chavez's numbers will probably sink further.

Chavez still has formidable political advantages. He holds a virtual monopoly on Venezuela's resources and will take advantage of both higher oil prices and the fiscal boost provided by January's devaluation of the country's massively overvalued currency to increase government spending in ways that limit the economic pain for low-income voters. His government has a formidable patronage-based reach into Venezuela's sparsely populated rural areas, which are disproportionately represented in congress. The government approved an electoral law last year that favors Chavez by weakening the proportional representation system and allowing the largest single group to effectively sweep the elections. Meanwhile, the government-dominated national election council recently redrew electoral boundaries to maximize the impact of government supporters' votes and limit potential opposition gains.

After the September elections, Chavez and his United Socialist Party of Venezuela will no longer have the full control of congress they've enjoyed for the last five years. In 2005, the opposition boycotted legislative elections. With Chavez weakened, his rivals won't make that mistake again, and if they can present a (more or less) unified front this time, they will probably make some limited headway at the ballot box. But they're unlikely to win more than 35 percent of seats. Even a weakened majority in congress will allow Chavez to run the government with few checks or balances, but his political standing will become steadily more precarious as the recession drags on.

The country's oil wealth won't help as much as it used to. Production, now between 2.2 million and 2.3 million barrels per day, will likely stagnate or continue to decline in the next several years as state-owned oil company Petróleos de Venezuela, S.A. (PDVSA) sinks under the burdens of its spending obligations and poor management. In addition to transferring a growing share of its revenues to the government in royalties, transfers, and direct social payments, PDVSA is being tasked with buying and distributing food to combat shortages, on top of financing recent power infrastructure upgrades.

Given Chavez's tendency toward confrontation with foreign oil companies, multinationals are unlikely to make major investment commitments, despite the Venezuelan government's latest efforts to court these firms to develop new projects in the Orinoco region. With the country's oil production in decline, price hikes will yield diminishing returns. In 2006, the government needed to spend about $2.5 billion to generate a single percentage point increase in GDP growth. By 2008, it needed to spend more than $13 billion to generate the same increase.

With less revenue to dull the economic pain, a rising cost of living, and shortages of vital goods, apathetic voters who support neither the government nor the opposition -- and who make up half the electorate -- could step off the sidelines and return to the polls for the first time in years. Chavez will resort to authoritarianism as his popularity sinks, setting the stage for a volatile 2012 election campaign.

It will be harder than ever for Chavez to control what happens next.

Patrick Esteruelas is an analyst in Eurasia Group's Latin America practice.