Why Obama gave Venezuelan socialists exactly what they wanted

Nicolas MaduroReutersVenezuelan President Nicolas Maduro

Last week, President Obama designated 7 members of the Venezuela’s socialist political elite threats to the US and placed sanctions on those individuals.

Venezuelan President Nicolas Maduro is having a field day with the designations.

The country’s legislature just passed a bill that allows him to rule by decree for the next 9 months — which includes a nationwide election cycle this fall.

Maduro is playing on Venezuelans’ deep hatred for US intervention of any kind to unite a country in which his approval rating has fallen to around 30%. He and his supporters are framing Obama’s sanctions on these 7 individuals as an attack on Venezuela as a whole.

In an open letter published in the New York Times on Tuesday, Maduro implied that Obama was trying to “govern Venezuela by decree,” though no new sanctions have been placed on the country.

“It is a tyrannical and imperial order and it pushes us back to the darkest days of our relationship between the United States and Latin America and the Caribbean,” he wrote.

The 7 officials in question are all a part of the country’s security apparatus, which for the last year has busied itself quelling opposition protests.

Maduro letter new york timesvia @Kelly_EvansMaduro’s letter in the New York Times

One of them, Gustavo Gonzalez Lopez, was just promoted to Interior Minister for “prominent role” in shutting down protests, despite the fact that he’s been accused of human rights abuses.

Indeed, last year when protests all over Venezuela started getting violent and opposition leaders were imprisoned, the Obama administration’s reason for staying silent was to prevent a situation like this — one in which the Maduro regime could turn Obama’s words into a rallying cry.

The notion that the US can and does act with impunity in the region is accepted across political affiliations in the country.

Maduro also argued in the Times that Venezuela has always been a “responsible and trustful” energy provider, especially through its state oil company, CITGO.

However, years of fiscal mismanagement combined with declining oil prices make that claim hard to sustain. The country’s economy is in trouble. The inflation rate is over 60% ad goods are scarce.

So why did Obama decide to say something now? Because Venezuela is in a different position than it has been during recent fights with the US.

On top of overwhelming dissatisfaction with the Maduro administration, the Venezuelan people are experiencing an economy is on the brink. During the reign of late president Hugo Chavez the regime had a playbook for unhappy times like these — shore up the base with gifts and social programs.

Now the government no longer has the resources to quell opposition by giving constituents anything from televisions to washing machines.

Oil, which has taken a nosedive over the last few months, makes up 95% of the country’s exports, and to balance Venezuela’s budget, oil’s breakeven price needs to sit at around $US117.50. The price of crude oil (WTI) — CITGO’s main product — is currently $US43.56.

VenezuelaREUTERS/Miraflores Palace/HandoutMaduro greets oil workers during a visit to a facility at the oil rich Orinoco belt at the state of Monagas.

Brookings Institute analysts Harold Trinkunas wrote that this means the country has two options — seek a loan from the International Monetary Fund or default.

A default would cut off Venezuela from international credit markets, but that is nearly the case under present circumstances anyway due to Venezuela’s low creditworthiness. If it defaults, Venezuela might continue to make good on its oil shipments to pay for its loans from China, if only to keep at least one potential source for emergency financing available. To minimize the amount of international assets that might be seized by creditors in the event of a default, Venezuela would be likely to shift its exports onto leased tankers. It would also be likely to require buyers to take delivery of product while it is still in its home ports. CITGO, which is wholly owned by the Venezuelan government, would be at risk in this scenario, but the Venezuelan government is already considering selling or mortgaging it for a short-term financial boost. Even a partial default, though, would mean further economic hardship for Venezuelans, greater scarcity and deeper economic contraction.

So far, Venezuela has been able to hang on and pay creditors by restructuring debt. However the country has already spent $US5.9 billion in new financing it raised, according to Bloomberg. Wall Street traders put the odds of the country defaulting at 50%. At that point the government will have to make a choice — pay investors or keep the government running.

And time is running out.

NOW WATCH: 14 things you didn’t know your iPhone headphones could do

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.