US sanctions on Venezuela could backfire, speakers warn at forum

Conditions in Venezuela have deteriorated under the Maduro regime to a point where other countries are beginning to consider ways to intervene and rescue the country’s citizens who haven’t fled already, speakers suggested during a Mar. 13 discussion at the Atlantic Council.

Conditions in Venezuela have deteriorated under the Maduro regime to a point where other countries are beginning to consider ways to intervene and rescue the country’s citizens who haven’t fled already, speakers suggested during a Mar. 13 discussion at the Atlantic Council. But the US would make a serious mistake if it applied broad unilateral sanctions to force the government there to make badly needed reforms, one speaker warned.

Targeted sanctions aimed at officials in the government and in state oil company Petroleos de Venezuela SA (PDVSA) have not had their intended effect, noted David L. Goldwyn, president of Goldwyn Global Strategies and chairman of the AC’s Energy Advisory Group. “The government clearly intends to default on most of its debt and depend on Russia and China, its two biggest creditors, to survive,” he said.

“But if the US tried to unilaterally impose more sanctions, the global conversation would move from what Venezuela’s government has done wrong to how the US is trying to force a regime change,” Goldwyn said.

Rebecca Bill Chavez, a former deputy assistant US secretary of Defense for western hemisphere affairs, said, “The legitimacy question is very important. Additional sanctions will need to be multilateral. Meanwhile, we’re seeing incidents in other countries where local residents are attacking Venezuelan refugees. This could encourage other countries to supply aid so those countries could deal with the refugees.”

No new projects in 20 years

As the Venezuelan crisis implodes, the country’s oil industry, where crude oil represents about 95% of total exports, is in a death spiral, observed Francisco J. Monaldi, a Latin American energy policy fellow at the Center for Energy Studies at Rice University’s Baker Institute in Houston and author of a new AC report, “The Collapse of the Venezuelan Oil Industry and Its Consequences.”

“The debacle was long in the making. PDVSA was made into a social industry after Hugo Chavez was elected president. The government was taking every dollar it could out of it,” Monaldi said. “There is not one oil project in Venezuela now that started in the last 20 years. Expropriation and forced renegotiations took a heavy toll. Eventually, no one got paid except for Wall Street, and that has ended too. In the middle of history’s biggest oil boom, PDVSA’s production collapsed.”

Part of the problem is that when PDVSA was formed, the government made it operator of any new projects there and gave it power to make all decisions even when it did not have a majority stake, Goldwyn said. “The workers who remain are hungry, poorly treated, and insecure. It’s hard to keep people on the job under those conditions,” he said.

“PDVSA has been destroyed in the last 20 years,” said David Smolansky, who was mayor of El Hatillo municipality in Caracas until September 2017 when he was forced to leave Venezuela because of government persecution. “Hugo Chavez siphoned money off to buy loyalty. PDVSA, which was run by civilians, now operates as part of the military. The implied message is that the company and its oil fields will be defended by armed force.”

Rebecca Bill Chavez said, “Internal security is a serious problem. The national homicide rate is an estimated 140/100,000. Poor access to food and shelter has made neighboring Colombia divert resources to handle more than 400,000 refugees from Venezuela.”

US sanctions against a foreign government are determined by the State Department and administered by the Department of the Treasury’s Office of Foreign Assets Control, according to Kerry Contini, a partner in the Outbound Trade Practice Group at the Baker McKenzie law firm in Washington.

So far, the ones against Venezuela have targeted individuals, Contini said. But a second set is aimed at specific activities, notably financing by PDVSA and bonds issued by the government, she said. “The goals weren’t that clear, but when they were put in place, the US government said it was because Venezuela’s government was selling state assets at deep discounts without any of the money reaching the people,” she said.

Capital has moved elsewhere

Monaldi said, “Several foreign partners have diverted their capital elsewhere. PDVSA never pays its loans on time, so working with it could be seen as providing debt to the Venezuelan government.”

Smolansky noted, “Officials fear these targeted sanctions. They need to be expanded, not just by the US and Canada, but also the European Union. The international community could be more aggressive with targeted sanctions.”

Contini said US sanctions against Russia were multilateral from the beginning. “But targeted sanctions may be working against non-US financial institutions, which are starting to ask whether it’s worthwhile to continue processing Venezuela’s loans.”

But imposing a US embargo of Venezuelan crude could have several unintended consequences, several of the speakers warned. “In the last 4 months, PDVSA exported about 400,000 b/d to the US. If that had to be switched to China, there would be additional costs,” said Monaldi. “US refiners have expressed their concern, but the Trump administration has said it is still being considered. There are several less drastic steps the US could take.”

Goldwyn said, “If a Venezuelan crude embargo was imposed, US refiners would have to scramble to reconfigure their plants to process other imports. Their total added costs could run $10 million/month. Gasoline prices would climb, which would be bad politically, particularly during summer driving season ahead of fall’s midterm elections.”

Monaldi said, “In Venezuela, Chevron is still the biggest single outside investor, but Russia and China have signaled they’re willing to get more involved.” Their credit support has extended the Maduro regime, Goldwyn noted. “If Venezuela quit insisting on controlling projects, it could force US companies out and facilitate a fire sale with Russia and China.”

Smolansky said, “Russia’s interest is more geopolitical, but companies like Rosneft are having problems too. People in Venezuela are surviving, not living. It’s the biggest threat to the Western Hemisphere, and Russia is well aware of this. Oil is 97% of Venezuela’s economy, but it should be used to build other industries. It will be difficult, but Mexico and Brazil both provide good models to follow.”

Contact Nick Snow at nicks@pennwell.com.

More in Economics & Markets