On Monday, President Donald Trump threatened to take “strong and swift economic actions” if Venezuelan President Nicolas Maduro proceeded with his plan to create a super-legislative body to rewrite the country’s constitution.
Trump’s remark came a day after Venezuelans overwhelmingly rebuked Maduro in an unofficial referendum.
White House officials reiterated Trump’s comments on Tuesday, saying “all options are on the table” for penalising the Maduro government, even sanctions targeting Venezuela’s oil sector, which powers the South American country’s economy.
Trump administration officials have said that Venezuela’s energy sector and its state oil company, Pdvsa, could be targeted as part of “sectoral” sanctions, which would be a significant escalation of Washington’s efforts to pressure the embattled Maduro government.
Those efforts have been largely limited to sanctions targeting high-ranking Venezuelan officials implicated in wrongdoing, and the Trump administration is still considering sanctioning additional officials.
“U.S. sanctions on the Venezuelan oil sector could include: financial sanctions on PDVSA, limitations on U.S. firms doing business with PDVSA, banning of oil and/or product exports from the United States to Venezuela and banning of U.S. crude imports from Venezuela,” Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute for Public Policy, wrote for The Inter-American Dialogue’s Latin America Advisor newsletter.
Venezuela sends an average of 700,000 barrels of oil a day to the US — about half of Venezuela’s exports and about 10% of US imports. Much of it is bought by Citgo, Pdvsa’s US-based refiner and retailer, which employs about 46,000 people in the US. Venezuela has also been a major supplier to Phillips 66, Valero Energy, and Chevron.
“The move will likely cripple PDVSA-owned Citgo, which would be forced to buy higher-priced crude on the spot market for its refineries,” Joe McMonigle, an oil analyst and former Energy Department chief of staff under George W. Bush, said in a note Tuesday. “But US refiners, who oppose the sanctions, would also be impacted as it would force Gulf refiners to find replacements for heavier grades of Venezuelan crude.”
US fuel prices would probably rise, Monaldi writes, though supply would likely come from elsewhere. Venezuela could find other buyers for some of the oil shunned by the US, but cutting into Venezuela’s supply of gasoline and other refined products, much of which it gets from the US, would create problems for its struggling economy. Pdvsa’s current financial and production shortcomings would also be intensified.
The potential for sanctions to push Pdvsa into default complicates matters. The US Treasury is investigating a deal that would give Russian state-owned oil company Rosneft 49.9% ownership of Citgo if Pdvsa defaults on its loans. Rosneft executives are reportedly negotiating a swap for Rosneft’s collateral in Citgo in order to avoid fallout from potential US sanctions.
The strongest measure under consideration is prohibiting Venezuela from using US dollars in oil transactions, limiting its exports and cutting off vital supplies of hard currency, according to a report by Reuters.
Such a measure would be more punitive than barring US firms from deals with Venezuela, as it would prohibit any trader from conducting transactions with Venezuela using dollars.
Oil-industry officials have been urging the White House to avoid oil-focused sanctions, saying some US refiners could be heavily affected.
The White House has said it is carefully evaluating potential actions, with senior officials telling reporters this week that they were “mindful” of potential negative effects sanctions could have the US but willing to accept them in the interest of foreign-policy or national-security objectives.
‘A collapse without precedent’
The Trump administration has also found some allies in the US for such harsh sanctions, particularly from a contingent of Florida Republicans who have been vocal in their opposition to Maduro.
“I don’t believe the Venezuelan people are enjoying the benefits of a declining oil industry,” Florida Sen. Marco Rubio told the Miami Herald. “It’s going entirely to enrich those who are tied to it, and to pay for debt obligations.”
“I’m for them,” Florida Rep. Ileana Ros-Lehtinen said.
“I don’t think we should but oil from Maduro,” she added. “We shouldn’t buy oil from the thugs around the world, and that sends a strong signal.”
But a number of observers have urged caution, arguing that such sanctions could exacerbate the hardship people in the country currently face.
Oil accounts for about 95% of Venezuela’s export revenue. While about half of Venezuela’s exports go to the US, about 40% goes to Chinese and Russian firms to pay outstanding debts.
So eliminating all exports to the US would cut Venezuelan government income by 75%, according to Angel Alvarado, an opposition congressman and member of the legislative economic commission. That would hinder the government’s ability to purchase imports like food and medicine — goods that already very hard to get for many Venezuelans.
“We already have a humanitarian crisis in Venezuela,” Alvarado told the Herald. He pointed out that sanctions would accelerate the crisis, compounding what he saw as underlying flaws in the country’s economic model.
“The consequences for Venezuela would be catastrophic,” he said. “It would be a collapse without precedent.”
“There is no way to apply economic sanctions now in Venezuela without making the humanitarian situation much worse. People will starve to death,” David Smilde, a Venezuela expert at Tulane University, told AFP.
Luis Almagro, the chief of the Organisation of American States, said that he supported sanctions targeting specific officials but cautioned that sweeping economic actions could worsen suffering in Venezuela.
Any increase in economic hardship could push more Venezuelans to flee, burdening neighbours like Colombia and Brazil with an influx of people in need of financial, social, and medical support. Those countries and others in the region have already seen considerable increases in the number of arriving Venezuelans.
Smilde and Geoff Thale, the latter of the Washington Office on Latin America, also argued that Maduro — who, like predecessor Hugo Chavez, frequently responds to US pressure with charges of “imperialism” and interference — could reap political benefit from such drastic sanctions.
“They are more likely to make the government feel they have no option but to resist, and they offer the government a nationalist rallying cry against the US,” Thale said of sanctions.
“I believe it is possible that the Venezuelan government will be strengthened by US sanctions,” Smilde said, adding that it “would unleash enormous resentment among the Venezuelans” and be viewed negatively by countries in the region. Such punitive measures could even push Venezuela to deepen relations with Russia and China, he added.
Such measures by the US could also give the government an opportunity to link the opposition to the US as the parties responsible for the country’s immiseration. And harsh actions by the US may chill the openness some governments in the region have shown for more assertive efforts to repudiate Maduro.
The ultimate goal
It remains unclear how the Trump administration is weighing such factors as it deliberates potential sanctions.
But the humanitarian and political crises in Venezuela drag on, many in Washington and other capitals in the region may reevaluate risk and reward in regard to effecting change.
“I think there may be frustration on the part of some people that so far the sanctions have not been as successful as we would have liked, that they have not advanced a democratic transition, and therefore other things have been put on the table,” Mark Feierstein, who was special assistant to the president and senior director for Western Hemisphere affairs in the Obama White House, told Business Insider.
“I imagine policymakers are going to weigh both the pros and cons of that,” he added.
“Whether [the sanctions] would be effective is harder to assess and depends on what effect we would be looking for,” Bob McNally, president of energy consultancy Rapidan Group and former White House energy adviser, told Platts. “Can we impose a cost on Venezuela? Yes. Will it soften or change the Maduro regime? That’s not clear.”
“Ultimately the goal here is a peaceful democratic transition,” Feierstein said, “and we need to be thinking hard about what measures that are most likely to advance that.”
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