Venezuela is 'a target-rich environment' for more US sanctions -- but it could backfire

  • President Donald Trump has struck a more aggressive stance on Venezuela during his first year in office.
  • There are signs his economic sanctions are having some effect, but sanctions leveled against individual officials don’t appear to have cut into the Venezuelan president’s backing.
  • Venezuela’s economy is set to continue deteriorating, but what effect that will have on its political scene is not yet clear.

President Donald Trump has reportedly deemed Venezuela one of his top three national-security priorities, alongside North Korea and Iran. And throughout his first year in office, Trump has taken an aggressive stance toward the fraying South American country’s government.

Trump has sanctioned dozens of Venezuelan officials, including government ministers and military officers, since he took office – including the vice president, who was accused of involvement in international drug trafficking, and President Nicolas Maduro himself, whom the Trump administration has labelled a “dictator.”

August saw the US’s most drastic action, restricting the Venezuelan government’s access to the US financial system,preventing it and the state oil company, PDVSA, from issuing new debt in US dollars.

Despite these actions, there are more Venezuelan officials who could be hit with sanctions, and the US is likely to go after them, according to Mark Feierstein, who was senior director for Western Hemisphere affairs on President Barack Obama’s National Security Council.

“I think we can expect them to sanction more individuals. Venezuela is a target-rich environment,” Feierstein said at a December 12 event at the Americas Society/Council of the Americas in New York City. “If you’re looking for senior officials engaged in corruption or rights abuses, there are plenty more people that can be targeted.”

Trump’s financial sanctions fell short of hints Washington could impose an oil embargo, which many warned would be a step too far. But the administration’s actions, along with individual sanctions, appear to have had mixed effects, and there are now signs that deepening them in an effort to isolate Maduro or boost his opposition could backfire.

Hitting ‘the core of how PDVSA works’

“I think the sanctions have affected more than the government expected and than even I expected,” Francisco Monaldi, a Venezuelan energy expert at Rice University, said during an event at Columbia University on December 4. “In the sense that even though [the sanctions] were relatively limited, they have been triggering a lot of difficulties in the [government’s] business dealings [and] in their partners in the oil industry.”

Disruptions in Venezuela’s oil industry can have outsize impact on the country, as oil brings in about 95% of its export revenue, which has been used to purchase imports like food and medicine as domestic production dries up.

Doing business was already challenging in Venezuela, and a number of international firms had shuttered or withdrawn their interests in the country in the months prior to Trump’s actions. But the effects of the current sanctions go beyond reputational risks, said Luisa Palacios, the head of Latin America at advisory firm Medley Global Partners.

Because of PDVSA’s habit of paying late, sanctions that limit its ability to issue debt hit the “core of how PDVSA works, which is with arrears,” or payments made on debt, Palacios said at the Columbia event.

The sanctions have also accelerated “the problems that PDVSA and Venezuela were already having at accessing the international payments system” because of issues like corruption and misdealing that had turned off banks and other business partners, according to Palacios.

“So the sanctions have just elevated significantly the risk of any counterparty of dealing with Venezuela, because then you have to check whether are you going to be in violation of sanctions,” she said.

The deleterious effect the sanctions have had on PDVSA’s operating capacity may also exacerbate mismanagement and underinvestment issues that plague the company and have led to a considerable decline in oil production, according to Francisco Rodriguez, the chief economist at Torino Capital.

“I’m really concerned that we’re going to have a real collapse in Venezuela in oil production over the course of the next year,” which would in turn affect the government’s ability to pay its debt, Rodriguez – who was head of the Venezuelan Congressional Budget Office from 2000 to 2004 – said at the AS/COA event. “It’s the perfect storm hitting PDVSA, in an economy that depends completely on what PDVSA produces.”

A variety of factors, like regulations, exchange and price controls, and insecurity would inhibit the broader Venezuelan economy’s ability to respond in the event oil income dried up, Rodriguez added.

“So you’re really likely going to have an economy where you can get its only source of revenue collapse and nothing else come to replace it. I think that that could lead us to a very bad year” in 2018.

Problems for the US, problems for the opposition

While there are indications that economic sanctions are having an effect, signs of the hoped-for political outcome – creating fissures in Maduro’s base of support – haven’t appeared.

Feierstein, who said he was supportive of sanctions, said their impact had been disappointing. “There’s obviously the threat [of sanctions] against others, but … it’s surprising, to me at least, how few people have broken with Maduro,” he said during the AS/COA event.

Maduro’s government has had success sidelining the country’s political opposition, circumventing the opposition-controlled legislature, securing electoral victories with the help of fraud and dirty tricks, and working to block main opposition parties from future elections. (The opposition is also hindered by its own divisions.) He’s also marginalized opposition within his own political sphere, in part by purging potential rivals from PDVSA, though their ouster could further erode the firm’s health.

Maduro’s approval has also hovered around 20% over the past two years, which is not high, but is noteworthy in light of the turmoil in Venezuela over that time. At the end of October, one poll showed his approval at 31% – the highest since early 2015. That position may help him marshal public sentiment against additional economic sanctions.

A Datanalisis poll Rodriguez cited found 56% of Venezuelans opposed US financial sanctions and just 32% supported them.According to that poll, about half of the respondents who self-identified with the opposition were against sanctions.

“I think that we have pretty consistent public-opinion evidence right now that sanctions are unpopular in Venezuela,” Rodriguez said, “And … I think it’s creating a problem for the US [and] creating problems for the Venezuelan opposition.”

Maduro’s government has brought up sanctions during negotiations with the opposition in the Dominican Republic, making their removal a precondition for any agreement. (The government has been criticised for using talks as a stalling tactic.)

That demand was not a coincidence, Rodriguez said, “because they’re going to use every opportunity that they have to tell Venezuelans the reasons why you’re undergoing all these difficult times right now have to do with sanctions and furthermore the fact that the opposition lobbied for them means that the opposition doesn’t care about Venezuelans.”

How Venezuela’s ongoing economic deterioration shapes public sentiment remains to be seen. But with evidence current sanctions lack public support, Rodriguez said he thought the country’s opposition “would feel quite uncomfortable with an escalation of the economic sanctions. I think that they would feel that it would hurt the Venezuelan opposition more than help them.”

“So there’s some good risk that that the whole sanctions strategy may backfire,” he said.

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