Even by its own standards, Venezuela is experiencing a period of crisis. Daily clashes occur between government and opposition forces as thousands take to the street to protest the government’s consolidation of power. Recently, twelve nations met in Lima to condone the rupture of democratic order in Venezuela. Mexico, Panama, Colombia, and the United States have placed additional economic restrictions on current and former government officials. Yet, despite these efforts, Venezuela’s government has moved ahead with a constitutional overhaul, prompting the United States to threaten stronger economic measures.
On August 9, the Atlantic Council’s Adrienne Arsht Latin America Center held a public conference call on with Francisco Monaldi, Fellow in Latin American Energy Policy at Rice University’s Baker Institute for Public Policy, and David Mortlock, Nonresident Senior Fellow with the Atlantic Council’s Global Energy Center, to discuss the Arsht Center’s latest publication, Venezuela: What Are The Most Effective US Sanctions?. The authors provided an in-depth discussion, moderated by center director Jason Marczak, about five US sanctions options and laid out principles to be applied, stressing the need for joint action with the international community.
Mortlock began the discussion by providing a brief overview of measures the US has taken against Venezuela in the last two years. “President Obama signed an executive order in March 2015 that authorized and imposed [sanctions] and then also authorized additional sanctions on individuals who were officials of the Venezuelan government or otherwise undermining democratic institutions in Venezuela,” he said. Since then, the US has slowly been increasing its pressure on the regime, most recently rolling out additional sanctions on Venezuelan officials. Now the United States is considering implementing tougher measures including bans on US oil exports to Venezuela, limiting business interactions with PDVSA’s state-owned oil company, limiting access to US financial markets, and prohibiting Venezuelan oil imports.
Mortlock stressed that tougher sanctions are intended to change President Maduro’s calculus, by raising the costs of eroding democracy for both the government and its supporters, adding that it could lead to a split inside the government’s coalition that would make negotiations more likely. “The purpose of moving from gradual to more severe is to 1. create that off ramp and 2. indicate that if the government does not take the off ramp the consequences are going to get more serious overtime,” he said. Both authors agreed sanctions should be accompanied by a clear understanding of the United States’ objectives and should seek to limit unintended consequences.
Monaldi emphasized that sanctions should be a last resort and should be focused on changing the government’s behavior. “This is an economy that has had a massive collapse of GDP, of about 28% in the last 3 years, and if you add to what has been happening in the last year, it’s probably going to be one of the worst recessions in the history of Latin America,” he argued. Polls have shown that many Venezuelans oppose broader economic sanctions and their potential impact on the people. However, Venezuelans today are less likely to believe that the country’s economic woes are caused solely by US actions, as the government maintains, said Monaldi.
When asked about next steps and potentially placing sanctions on Venezuela’s state-owned oil company, PDVSA, Monaldi urged the United States to look at the long-term effects, highlighting that the probability of default is already quite high. “Even a relatively small push in this direction could generate some difficulty in them making the payments and of course default would have some significant implications,” he added.
The authors also discussed the possibility of an export ban on US oil to Venezuela. This would force the country to obtain diluents for its heavy crude elsewhere, increasing the overall cost of production, subsequently limiting oil revenues. The effect would be less severe than a ban on imports, which would likely impact the already limited supply of food and medicine. The majority of Venezuela’s oil profits come from sales to the United States, as much of their exports to other countries are used to pay back loans. To limit the effects of such a measure on Venezuelan citizens, Monaldi urged that it must be coupled with humanitarian assistance as part of a broader diplomatic effort.
An import ban could also be felt domestically. As Mortlock pointed out, while sanctions are imposed and enforced by governments, they are implemented by private companies. To mitigate the effects on private businesses, he said the US government should provide extensive guidance on the restrictions. Sanctions could also be implemented in phases, which would still send the Venezuelan government a clear warning but give US companies more time to respond.
Looking at the road ahead, Mortlock emphasized that “when you get into broader economic sanctions on oil or imports or exports, the costs to the sanctioning country become much more significant”, adding that the US government and the international community should analyze shared costs when considering additional sanctions.
Marczak concluded by reminding that “in an optimal scenario there are no more sanctions that are levied. In an optimal scenario, the Venezuelan government changes course and starts to respect political liberties and respect the constitution and civil liberties that should exist in the country”. In absence of that, he added, imposing sanctions could be an effective catalyzer for change.