Parsing Out Another Round of U.S. Sanctions

Venezuela is the crisis du jour and it is intensifying.

A standoff continues between incumbent president Nicolas Maduro and the presiding officer of the National Legislature legislative Juan Guaido – the new declared caretaker president of the country, as recognized by the U.S.

And not just the U.S.

Fifteen other Organization of American States (OAS), with two noticeable exceptions (Mexico and Bolivia) among the major members, and most of Europe have recognized Guaido. Russia, China, Cuba, and a few smaller global players back Maduro.

Meanwhile, the Venezuelan generals continue to support Maduro, although some anecdotal evidence is emerging that there may be opposition forming in the officer ranks. A first indication of this could have been Saturday’s declaration in support of Guaido by the military attaché of the Venezuelan embassy in Washington.

This has all the markings of a civil war in the making in a collapsed failed state.

Against this background, Washington decidedly upped the ante yesterday by declaring sanctions against the Venezuelan state oil company.

An action that is seemingly becoming the White House’s signature move.

There are many facets to this situation, and I have been analyzing them for the past several days.

Here are my conclusions…

Venezuela’s Most Important Company

Venezuela’s state oil company, Petróleos de Venezuela, S.A. (PDVSA), is not simply the nation’s dominant industry. It is a lifeline to revenue essential to the country’s economic survival.

PDVSA has also been a conduit for corruption and embezzlement, according to a statement from U.S. Treasury Secretary Steven Mnuchin.

However, it is also the only venue for bringing in hard currency to an economy where the inflation rate of the local currency, the bolivar, was more than 80,000% in 2018, and may well surpass one million percent in 2019.

We simply have no terms to describe this extent of currency disappearance.

The only other route for funds involves money from Russia and China. These carry significant strings, as I will note in a moment.

So, how are we to determine what these sanctions against PDVSA genuinely mean?

Well, let’s start with what we know about them…

A Communications Black-Out

First, Venezuela is one of the four largest oil exporters to the U.S.

The sanctions’ provisions as announced are not detailed and they do not prevent U.S. refineries from buying PDVSA crude. But they do explicitly prevent any payments back to the company for those deliveries.

Instead, the funds are to be put in designated accounts within the U.S. for later delivery to a new democratically elected government.

Second, they block PDVSA accounts and assets in all areas within U.S. jurisdiction.

Third, the sanctions explicitly prevent any contact by U.S. persons with PDVSA and any of its officers.

A personal aside on this last one: I think this does include my conversations with contacts and sources insider the company. We have been in regular communication through the past weekend. But in a rush to caution, I will not be making any more phone calls or sending emails until further notice. Nobody has been answering their telephones on that end anyway.

That is it.

The aftermath, on the other hand, has been quick in coming.

Venezuelans will experience additional misery.

In a country where food riots have been the norm, staples are difficult or impossible to obtain, and markets have simply disappeared, matters will get worse.

That’s because PDVSA has been the only source of the hard currency used to import consumer needs. Several years ago, a PDVSA contact only half-jokingly lamented: “I thought this was an oil company. Now we seem to be a supermarket.”

Nobody is joking these days.

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Consequences Beyond Venezuela

Then there is the response certain to come swiftly from Moscow and Beijing.

Both have invested heavily in Venezuela – Russia through credits translated into greater control over oil assets in country, and China by acquiring a major share of Venezuelan oil export revenues in repayment of loans extended.

Neither will take the American action without reprisal, and those return actions are hardly likely to be confined to the Western Hemisphere, either.

Already yesterday, Russian Foreign Minister Sergei Lavrov declared the U.S. sanctions in violation of international law and designed as an external tool for regime change. The former is a matter of dispute, the latter seems clearly correct.

But there is also a downside to U.S. oil producers.

Venezuela may have the largest oil reserves in the world, but this is heavy oil from the Orinoco River basin. Lighter oil is imported to mix with the domestic production allowing foe transport.

That lighter grade of crude is largely imported from the U.S. It may be of consequence that Mexico has opted not to support either of the dueling presidents, instead taking a middle ground and offering services as a mediator.

My sources at Mexican state oil company PEMEX are also privately expressing the hope that they can become the provider of the light oil needed by Venezuela.

Maduro has declared his country will find other customers for its crude. Credit problems, however, may make that easier said than done.

There is also the status of Citgo.

We Don’t Need Another Political Stalemate

The U.S. sanctions dictate that all PDVSA assets inside the U.S. are to be blocked. PDVSA remains the main owner of Citgo has been providing crude to that American refining and retail network. Operations are now uncertain.

All of this is reaching a head and make no mistake, it will erupt shortly.

As somebody who used to be responsible for design, implementation, and evaluation of economic sanctions, there are two counsels I would send along to U.S. policy makers:

One, economic sanctions alone do not bring down governments.

There are two other legs to this stool – diplomatic support and the application of military power. It is disquieting to see no structure in place for the first and an unsettling undersurface mumbling about the second.

I need to be very clear here. Sending U.S. troops into Venezuela would be an unmitigated disaster.

Two, we have to be very precise about what the end game is going to be.

Years ago, Washington attempted to unseat Hugo Chavez (Maduro’s predecessor) and failed. Then high-level personnel in PDVSA were employed. We failed miserably, followed by mass arrests in the company.

And yes, I had something to do with that – a story to be told some other time.

This necessary precision also includes having a path to extricate from the situation if it moves south.

It’s what we called in the intelligence business as having a “goodbye code.”

And that is something you cannot handle on Twitter.

Sincerely,

Kent

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