Venezuela, U.S. Sanctions and the Downward Spiral

8 MINS READJul 28, 2017 | 09:00 GMT
Opponents of Venezuela's constitutional assembly rally in Caracas after a symbolic vote against the measure. The vote to authorize the body that will rewrite the country's constitution will be held July 30.

Opposition activists celebrate outside polling stations after taking part in an opposition-organized vote to measure public support for Venezuelan President Nicolas Maduro's plan to rewrite the constitution in Ruices, eastern Caracas on July 16, 2017. Authorities have refused to greenlight the vote that has been presented as an act of civil disobedience and supporters of Maduro are boycotting it. Protests against Maduro since April 1 have brought thousands to the streets demanding elections, but has also left 96 people dead, according to an official toll. / AFP PHOTO / FEDERICO PARRA (Photo credit should read FEDERICO PARRA/AFP/Getty Images)

Venezuela's political and economic crises may soon go from bad to drastically worse. Within weeks, the U.S. government could implement sanctions against Venezuela's vital oil sector to prevent the government in Caracas from formally starting down the path to a one-party state. In their most severe form, the sanctions would wreck Venezuela's ability to export oil to the United States by denying the state oil company Petroleos de Venezuela (PDVSA) access to the U.S. financial system. And U.S. companies would also be barred from doing business with the PDVSA. That would lead to a quick and steep drop in Venezuela's already declining oil production. In turn, imports would contract sharply and inflation would skyrocket, spurring the mass migration of millions of Venezuelans. But the United States could also resort to lesser sanctions limited to individuals in the Venezuelan government. Either way, the unrest in Venezuela will continue.
The government's approval of an assembly to rewrite the Venezuelan Constitution would immediately trigger heavy sanctions. The assembly election is set for July 30. But this is just the latest in a series of security solutions the United Socialist Party of Venezuela (PSUV) has used to try to hold on to political power amid rising discontent from citizens. In other moves, the administration of President Nicolas Maduro began in 2015 to expand the size of civilian paramilitary units (known colloquially as colectivos) controlled by the ruling party elite. The government also increased internal surveillance of midranking military officers, for fear that they could mobilize troops against the government. And Maduro also began planning for a new paramilitary force drawn from the ranks of party supporters — although this initiative has yet to materialize.

Long-Ranging Effects

The president and his allies are pushing for the constitutional rewrite to cement their hold on power. Amending the document could allow them to create a one-party state in which the ruling PSUV eliminates formal avenues for opposition dissent. According to a Stratfor source, the assembly originally had been intended as a way to delay the 2017 regional elections and 2018 presidential elections. Diosdado Cabello, a potent figure within the ruling party, saw the assembly process as a way to expand his political power. So what began as a makeshift solution to delay elections has now turned into a trigger for sanctions that would most likely push the PDVSA into financial default.
The assembly vote could also affect events outside Venezuela. If the drive for a constitutional assembly advances, Cuba could lose a key source of leverage it has over the United States. Heretofore, Havana has used its intelligence-gathering capabilities in Venezuela, as well as its influence with the Maduro government, as a way to shape talks with the Washington over lifting the U.S. embargo against Cuba. Cabello and his faction — who have opposed Cuban influence on the government — could try to use the assembly to expand their control over government offices while shutting Cuban supporters out of key positions. For their part, the Cubans are trying to place Maduro's wife, Cilia Flores, in a position to lead the constitutional assembly to keep them from being sidelined later. However, serious U.S. sanctions could threaten either Flores or Cabello's ability to control the country.
In Washington, the administration of U.S. President Donald Trump has at least two reasons to oppose the constitutional assembly. Politicians such as Sen. Marco Rubio of Florida and Sen. Robert Menendez of New Jersey who oppose the Cuban government (and, by extension, Venezuela's) have heavily lobbied for the administration to take a firmer stance against the measure. But the White House's opposition to the assembly likely rests on the long-term implications of a one-party Venezuelan state. Even if the constitution is changed, the opposition would continue its protests, and dissent within the armed forces could threaten to boil over into a coup attempt. Those developments could potentially prove to be bloody and spark a lengthy armed confrontation among different factions of the government. So in deciding on the oil sanctions, Washington likely would be weighing an authoritarian state against a bloody coup. 

Many Avenues of Pressure

The Maduro government is facing pressure from too many parts of society to effectively defend itself. Domestic resistance in Venezuela is strong, and it is not motivated solely by the political opposition, which is generally ideologically opposed to the government. Since the collapse of oil prices in 2014, Venezuela's population has turned increasingly against the administration because of rising inflation and food shortages. Social unrest has been persistent and widespread over the past four months, even in areas where the opposition has traditionally held less sway. This unrest raises the possibility that neither Maduro nor a substitute from the ruling party could win the next presidential election.

The second source of pressure comes from former allies of the government, whether in the military or civilian sides of the party. These former supporters don't like the thought of losing power and have turned against the state. Individuals such as Attorney General Luisa Ortega form part of this front, which is pressing for a change of government. 
The third source is the armed forces themselves. Some commanders have an interest in maintaining the status quo because they receive relatively high wages and profit from criminal activities, such as drug trafficking or gaming the country's currency controls. But the threat of action by the military is a crucial risk. A military rebellion would likely be motivated by the belief that regime change would help ease the immediate hardships faced by the people, whose resistance and dissatisfaction are only growing. Although Venezuela's armed forces are notoriously opaque, the government's concerns can be seen in its response to military dissent since the start of the year. Counterintelligence authorities have heavily monitored potential troublemakers and arrested more than 100 members of the military. 

The United States is the fourth — and most important — source of pressure. Severe sanctions from the U.S. government represent an existential threat. Harsh measures by Washington could cause Venezuela's oil production, estimated by OPEC at about 2 million barrels per day, to decline, possibly by hundreds of thousands of bpd, denying the country vital oil export revenue. Washington is considering sanctions that would block Caracas' ability to process oil payments through the U.S. financial system and that would effectively end U.S. private sector cooperation with the PDVSA. Within a matter of months, these restrictions would cause significant cash-flow problems for the PDVSA and eat into the country's imports.

The Downward Spiral

As the sanctions kicked in, shipments to U.S. refiners, which amount to 750,000 bpd, would be rapidly disrupted, and Venezuela would have to find new buyers for its oil, leading to lasting damage. U.S. services businesses such as Halliburton Co. and Schlumberger Ltd. would pull out of Venezuela, and the government would have to quickly find substitutes to prevent a sharper production decline in the long run. U.S. refiners would cease exports of fuel, as well as the oil that Venezuela blends with its own crude for refining. And the PDVSA would have to try to sell oil that was bound for U.S. refiners at a discount elsewhere, further cutting its revenue. With less oil revenue, food imports would drop sharply and prices would spike, possibly driving millions of Venezuelans to abandon the country. The refugees would arrive first in Brazil, Colombia and the Caribbean islands near the Venezuelan coast, such as Trinidad and Tobago. And with the long-term decline of the economy, Venezuelans could be pushed even farther away, with some resorting to traveling along smuggling routes through Colombia to eventually reach the United States. 
For now, Maduro's government is committed to the constitutional assembly vote as its last line of defense. But if the government elites around him try to hold on despite an oil sanctions package, a major, violent confrontation between them and ruling party dissidents could follow. The constitutional assembly could also turn into a political dead end and lead government elites to the negotiating table with their foreign and domestic opponents under the threat of sanctions. And if Maduro gives in to U.S. pressure, the ruling party will likely fragment further between those who see the constitutional assembly as a safeguard and those who seek to coexist with the political opposition. But, in the end, it's not clear that the United States or the government's political opponents can reach a deal that satisfies the elites trying to hold on to power. What is clear is that U.S. sanctions could make Venezuelan politics take a turn for the worse.

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