Venezuela: The U.S. Raises the Stakes for Maduro With Oil Sanctions

3 MINS READJan 29, 2019 | 02:47 GMT
Big Picture

The United States and the Venezuelan political opposition are leading a coordinated push to topple the country's incumbent president, Nicolas Maduro, from power. To accomplish this, the U.S. government is relying on a strategy of increased oil sanctions while Venezuela's opposition movement is stoking protest action on the ground. Now, Washington has raised the stakes for Maduro and his supporters by implementing sanctions that threaten Caracas' ability to continue profiting from oil exports in the long run.

What Happened

On Jan. 28, the United States Treasury Department enacted heavier sanctions on Venezuela's oil sector. The intent of the sanctions is to force political and military elites in the United Socialist Party of Venezuela (PSUV) to recognize head of the National Assembly Juan Guaido as interim president of the country. The sanctions bar people and companies subject to U.S. jurisdiction from doing business with state energy company Petroleos de Venezuela (PDVSA) or investing and operating in the country's oil sector. The sanctions, similar to those imposed in November 2018 on the sale and purchase of Venezuelan-mined gold, will significantly complicate PDVSA's ability to operate. The Treasury Department also increased sanctions pressure by trying to divert revenue from PDVSA's refining arm, Citgo, to the opposition. Citgo is a private company that imports and refines Venezuelan oil in the United States. It will continue to operate in the United States as long as revenue goes into U.S.-controlled accounts and not to entities controlled by Venezuela's current government. The intent behind this specific initiative is to redirect oil revenue away from Maduro's cash-strapped government and toward accounts accessible to Venezuela's internationally-recognized opposition.

Why This Matters

The new U.S. sanctions will have a direct impact on the political elites within the PSUV, reducing their access to Venezuela's oil revenue, a source of funding that has largely guaranteed the allegiance of the country's armed forces. PDVSA exports to the United States provide most of the Venezuelan government's export revenue. Unwilling to send oil shipments that benefit Venezuela's opposition, the Maduro government will try to reduce shipments to the U.S. Gulf Coast, prioritizing India and China as export destinations. But Washington's move also raises concerns for Citgo. Any redirection of oil shipments by Maduro will intensify the risk of the company going into default, leaving it vulnerable to attempts by creditors to seize Venezuelan assets in the United States. This, in turn, would cost any new opposition government valuable assets that could be sold to generate revenue.

New U.S. sanctions have Venezuela's government under Nicolas Maduro rightly concerned.

For Maduro's government, though, U.S. sanctions are the more immediate problem. Supplying alternate markets, or even providing the tankers to transport oil there, will become increasingly difficult. The sanctions on PDVSA will make some companies already operating in Venezuela —such as services firms, joint venture partners and shipping companies — wary of continuing operations in the country. U.S. companies are now barred from doing business with PDVSA, except for those individually allowed to do so. These firms would reduce their exposure to Venezuela sanctions risk, which in turn impacts Caracas' ability to produce and export crude oil. Some buyers of Venezuelan crude outside the United States could also reduce purchases, complicating PDVSA's business activities. Companies exposed to U.S. courts would also be reluctant to invest in new projects in Venezuela or lend money. Without Maduro's quick exit from power, heavier sanctions mean that Venezuela's oil production decline will worsen in the coming year, making recovery under a new government a more-costly prospect.

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