U.S. Sanctions To Hit Venezuela — What To Expect

By Daniela Barrios

On August 25, the president of the United States, Donald Trump, imposed new sanctions to Venezuela.

Many people think that these sanctions will only affect a privileged few connected to the government, but in the not so distant future it could affect the bulk of the population whose poverty is a direct consequence of a poorly management state-owned oil company. At the same time, this could also benefit the population, in as far as this could lead to a default of the country. In fact, this could force the current government to leave power.

These new sanctions forbid the exchange of Venezuelan bonds in the U.S. stock market, and also forbid access to credit. Fiscal financing vis-à-vis tax collection could be an alternative, but it can’t be effective as a consequence of the inflation that dissolves the power of the purchase of the tribute, a result of hyperinflation.

These sanctions also block oil production in Venezuela, given its extra heavy crude requires an improvement process in order to be transported and commercialized, and a large investment required for the aforementioned process.

Dividend payments to the Venezuelan government are also prohibited. The United States is the premier buyer of crude oil from Venezuela, and it is the only one that pays in cash, that is, Venezuela won’t have access to their only source of liquidity.

Meanwhile, the terms of the barrels of oil sold to the regional Petrocaribe program are unfavorable to the Republic because the oil is sold at a very low price. Thus, the suspension of the purchase of crude by prohibiting dividends to the Venezuelan government would hamper the imminent bond payments due in two months for USD $2 billion and will not be able to issue more bonds to obtain financing. This would lead the government to decide whether to pay the foreign debt or import food and medicines. By deciding to pay the debt and not import basic commodities, the government could see itself threatened by a new wave of protests which began, in part, due to the country’s overwhelming shortages. Should they decide not to pay off the debt in order to import basic goods, default could near leading up to the seizure of PDVSA (the country’s state-owned oil company) assets.

Exploring new markets would result in sending oil tankers to Asia or Europe, raising costs, and the fact that Russia dominates this region with its proximity between the continents and the Middle East. Consequently, the barrier could harden and leave the country to the will of the likes of Russia and China, and countries that have previously granted financing to the Venezuelan government. Russian oil company Rosneft, said in early August that it had paid USD $6 billion to PDVSA in advance, but that they had no intention of making any other advance payment.

Venezuela, despite having the biggest reserves of crude in the world, suffers high inflation and scarcity of basic products, because the government, each day, assigns less resources for their importations. Now, the government of President Nicolás Maduro has a big decision to make. What will they choose? To aggravate scarcity or to leave the country in an economic default and thus trigger the seizure of PDVSA properties?

 

Daniela Barrios is a political and economic analyst based in Caracas, Venezuela. She is currently the director at L&D Consultores Globales.