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How U.S. Sanctions Against Venezuela Backfired

How U.S. Sanctions Against Venezuela Backfired

The United States levied harsh…

Is Biden Preparing To Ease Restrictions On Venezuelan Oil?

Is Biden Preparing To Ease Restrictions On Venezuelan Oil?

Biden's surprise foreign policy move…

Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Why Biden Needs To Change His Tune On Venezuela

Since the U.S. presidential election started in earnest toward the end of 2020 there has been considerable speculation regarding President Biden’s plans for crisis-torn Venezuela. President Biden has flagged that he intends to take a more diplomatic and humanitarian policy approach to the world’s hotspots and crises. Already, Biden has done this with respect to the lengthy war in Yemen, which the United Nation’s calls the world’s worst humanitarian crisis, by withdrawing U.S. support for the Saudi military offensive in the strategically important Middle Eastern country. Now it appears that it is strife-torn Venezuela’s turn. There are growing signs that Biden’s approach to the crisis destroying what was once Latin America’s wealthiest nation will differ significantly from his predecessor’s hardline policy. 

It can be argued that Washington’s harsh sanctions targeting Maduro’s autocratic regime have not only failed to instigate regime change but strengthened his grip on power and worsened the country’s humanitarian crisis. By the end of 2020, two years after former President Trump started ratcheting up sanctions against Venezuela’s illegitimate government, President Maduro had taken control of the National Assembly. Government aligned legislators won 257 of the legislative body’s 277 seats during the December 2020 election. That not only gave Maduro and his ruling socialist party power over the last legislative institution which his regime couldn’t control and had defied them, but undermined internationally recognized interim president Juan Guaidó’s position. The European Union in early January 2020 released a statement calling Guaidó a privileged interlocutor but announced it no longer recognized him as Venezuela’s interim president. That decision was made because Guaido was no longer the head of Venezuela’s recognized legislature.

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By extending his authority over the National Assembly and preventing Guaido’s reelection, Maduro not only destroyed his legitimacy and further fragmented domestic opposition but took effective control of the only legislative body capable of authorizing oil licensing deals. Maduro desperately needs foreign investment to revive Venezuela’s flagging oil industry and state oil company PDVSA which is on the brink of collapse. The economic crisis gripping Venezuela since 2015 is the result of sharply weaker oil prices and the significant degradation of Venezuela’s economically vital oil industry. This is a crucial development because without urgently needed capital, expertise and skilled labor from foreign energy companies Venezuela’s heavily corroded energy infrastructure can’t be salvaged. The latest developments could ultimately strengthen the positions of Russia and China to the detriment of U.S. regional interests.

The Kremlin, which already owns a significant interest in a range of Venezuelan oil assets and is Maduro’s lender of last resort has been clamoring for greater legal security for those assets. Moscow is also demanding greater legal protection for any future investments it will make in Venezuela’s energy sector, particularly after Rosneft’s poor experience regarding joint investment ventures with PDVSA. According to a 2019 Reuters investigation, Russia’s largest oil producer Rosneft sank $9 billion into a variety of loans, asset purchase and joint ventures with PDVSA but failed to make a profit. In March 2020, the Kremlin acquired those assets from Rosneft, to prevent U.S. sanctions impacting the energy company. As part of that deal the Russian government reduced its ownership in the company to below a majority stake. China, Turkey and India are, according to the Wall Street Journal, also reputedly negotiating with Caracas about investing in various oil projects and have been making similar demands regarding legal protections. Maduro has made it clear that Venezuela’s energy sector is open for foreign investment, and taking control of the National Assembly was the final milestone required to start making the necessary changes for that investment to occur. 

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This poses a serious problem for Washington. Russia, China and Iran have not only shown a willingness to defy U.S. sanctions and prop-up Maduro’s pariah regime but a desire to extend their influence in Latin America contrary to U.S. interests, and secure control of Venezuela’s vast petroleum reserves. As Maduro pushes to privatize energy assets including vital refineries, oilfields and other energy infrastructure Russia, China and potentially Iran appear ready to acquire those assets. That will allow those countries to challenge U.S. hegemony more openly in Latin America, a region where Washington has been the dominant influence. It will also give Russia and China greater influence over crude oil prices because they will gain control of a significant proportion of global oil reserves and additional petroleum production. That will also bolster Russia’s influence within OPEC with it now a key partner to the OPEC Plus production cuts. Gaining control of global crude oil prices and additional petroleum assets has long been coveted by Moscow. For its involvement in Syria’s civil war Russia obtained favorable oil and gas agreements with the Syrian President Bashar al-Assad. Moscow’s considerable influence over crude oil prices and OPEC is underscored by the March 2020 oil price crash where a disagreement between the Kremlin and Riyadh on production caps caused oil prices to suffer their single largest one day fall since 1991.

The U.S. House Foreign Affairs Committee recognizes these problems and has been holding discussions on how to address them while maintaining pressure on Maduro and his autocratic regime. Director of the Wilson Center’s Latin American program Cynthis Arnson, believes that a key survival strategy for Maduro is the privatization of energy assets. If U.S. energy companies are blocked by Washington’s sanctions from participating in that process, then Russian and to a lesser extent Chinese companies and government entities will eagerly snap up whatever assets are made available. That will play into the hands of a Kremlin which for years has been seeking to not only extend its international influence but gain a significant foothold in Latin America, where it sees gaining greater influence as an important counterweight to NATO’s encroachment on its European borders. China will also be a significant beneficiary because Beijing is continuously seeking new supplies of cheap crude oil to power its economy and all-important manufacturing sector. Venezuela possesses the potential to provide a reliable and cheap source of crude oil to power China’s increasingly energy thirsty economy.

For these reasons, there is talk in Washington of taking a less hardline approach to Venezuela where even western oil companies will be permitted to operate in the oil rich nation with petroleum profits being held in escrow or in a similar manner, to prevent them from being accessed by the Maduro regime. What is increasingly clear, is that the harsh sanctions implemented by the Trump Whitehouse have not only failed to spark regime change but have strengthened Maduro’s position. Then there is the growing influence of Russia, China and Iran in Venezuela, which is another undesirable result of the current sanctions. Those developments, particularly if Moscow, Beijing and Teheran can strengthen their positions, make it even more difficult to depose the Maduro regime and ensure a return to democracy, making now the time for Washington to act.

By Matthew Smith for Oilprice.com

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Leave a comment
  • Hugh Williams on March 11 2021 said:
    What is especially shameful and insulting to me as an American citizen is that my government uses illegal sanctions to destroy the standard of living of whole nations with the objective of putting our choice of government into power. The comedy routine of elevating Juan Guaido´
    to president of Venezuela was a new step in shameless dishonesty. But our government has no shame nor does our news media.

    After our sanctions against Iraq caused the deaths of around 500,000 Iraqi children because we
    kept water purification chemicals from being imported our Secretary of State lady publicly stated
    that the deaths were justified since Saddam was removed.

    Meanwhile the infrastructure and society of the USA rots.
  • Robert Berke on March 11 2021 said:
    If the threat of inflation is the markets newest worry, then it makes sense to normalize relations with Venezuela and Iran. That should result in higher energy production, forcing prices lower, while helping to contain global inflation.

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