What Form Could US Sanctions on Venezuela Take?

The following was originally published in the New York Times Español last week. It represents a clear-headed assessment of possible measures and their potential consequences, something that is largely absent from the public debate. The article came out before a new round of sanctions were announced on Friday. (Translated and published by WOLA with permission of the author and the NY Times.)

HOUSTON, Texas – Following the election and swearing-in of Venezuela’s illegitimate National Constituent Assembly, there have been multiple announcements of individual sanctions against President Nicolas Maduro and some members of the body. However, the White House has maintained that additional sanctions options, including some aimed at the state-owned Petroleos de Venezuela (PDVSA), are still on the table.

To grasp the magnitude of the effect that sanctions may have on PDVSA’s finances, it is important to understand that a good portion of the company’s cash flow comes from the barrels of oil they sell in the US market. The oil company, in turn, generates 95 percent of the country’s foreign currency.

The list of economic sanctions options that lie before President Trump, all of which he could take without congressional approval, organized from least disruptive to most disruptive according to their economic effect, include:

  • Limiting new financing to PDVSA by US firms. This measure would make it more difficult for PDVSA to restructure its debt, forcing it to resort to financial institutions from other countries that are prepared to work under such circumstances; increasing the costs of financial operations, and increasing the risk that Venezuela would default in the payment of its foreign debt.
  • Prohibit exports of oil from the United States to Venezuela. This would affect about 110 thousand barrels per day of exports of refined products and light crude. PDVSA would then have to increase its imports from Europe or Africa at a higher cost. The increase in the cost of imported diluents would make it more difficult to re-export more than 200,000 barrels per day of diluted extra-heavy crude, which would reduce profit margins and possibly also reduce exported volumes.
  • Prohibit Venezuelan oil imports to the United States. By preventing the company from exporting about 750 thousand barrels per day to the US, mainly of heavy crude oil, PDVSA would have to look for markets in Asia, with higher transportation costs and a significant discount. The margin of profit and the volume of exported oil would fall substantially.
  • Finally, the Trump government could designate PDVSA itself as a target for sanctions, which would prohibit the use of the United States financial system and contracts with US companies, and would hinder all transactions made in dollars. This measure would be the most destructive and would amount to the sum of all the previous ones.

PDVSA produces about 2.1 million barrels per day, of which approximately 500 thousand are sold at a loss in the domestic market; About 600,000 are committed to pay debts with China, Russia and other creditors, and about 100,000 are still being subsidized to Cuba and other countries in the region. If we subtract the almost 200 thousand in imports, PDVSA’s net cash flow comes from around 700 thousand barrels a day.

Although PDVSA may seek other markets, more severe sanctions would result in a significant drop in Venezuela’s and PDVSA’s foreign revenues, as well as a significant reduction in imports and consumption, which would lead to a debt default and deepen one of the most serious economic depressions in the history of Latin America, resulting in a humanitarian crisis. The overall effect on the Venezuelan economy would be devastating. Sustained application of economic sanctions would also make recovery of the Venezuelan oil industry even more difficult. Although it is true that a similar effect in slow motion would take place if Maduro’s government remains in power, sanctions would accelerate the debacle.

Geopolitically, the government would likely increase the already growing participation of Russian state oil company Rosneft in the Venezuelan oil sector. Not only as partners, but as suppliers of diluents and buyers of crude oil exports. This trend would be even more pronounced if PDVSA falls into default.

Russia could help to significantly limit the impact of sanctions; at least for a while, since the costs of doing so on a long-term basis would be high. Putin has aligned himself with President Maduro in a geopolitical power play. Meanwhile, faced with the questioned legitimacy of the Venezuelan government, international companies have been hesitating to sign oil contracts without the approval of the National Assembly – held by an opposition majority. Rosneft has continued to do so and even seems determined to take advantage of opportunities left by others to increase their exposure in Venezuela under very favorable conditions.

Unlike Russia, China’s government – the other major geopolitical actor – has been far more cautious in avoiding open involvement in internal political conflict or increased exposure. However, if sanctions are imposed, Venezuela would become more dependent on China where it will have to place a larger portion of its oil output.

Can the Venezuelan government evade its responsibility for imposition of sanctions by shifting responsibility for the economic crisis to the US government, as Moses Naim argues? Could the sanctions divide the moderates from radicals in the government, or rather will they unite them against a common enemy? Everything will depend on the type, order, timing and coordination of the sanctions that take effect.

Sanctions could motivate moderate actors within the government coalition to push for a resolution of the political crisis—although there is no guarantee of it—under certain conditions.

They will be most effective if the United States acts multilaterally with the support of Europe and Latin America, and applies sanctions selectively and gradually to have a greater impact on the government and less of one on everyday Venezuelans, while establishing clear conditions for the implementation and lifting of the sanctions, particularly tying them to the reestablishment of the rule of law and democracy,

But if applied arbitrarily, unilaterally and broadly, sanctions could devastate the population, hamper a democratic transition and increase the geopolitical influence of Russia and China in Latin America.

For the sake of the Venezuelan people, the best option is a negotiated solution that avoids sanctions. But if implemented, they should be only used as a last resort to push forward negotiations and be accompanied by aid to alleviate the already existing humanitarian crisis.