How Easing Sanctions On Venezuela Could Backfire

Russia's invasion of the former Soviet Republic Ukraine, Europe's second-largest country, triggered a watershed moment for President Joe Biden and his administration. It is forcing Washington to recognize the expansionist aims of President Vladimir Putin's Russia and reappraise U.S. foreign policy, particularly in Latin America. Russia's autocratic president has made no secret of his desire to rebuild the country's global superpower status, exert control over former Soviet republics and dominate global energy markets. A key element of that strategy focuses on strengthening ties with other authoritarian regimes opposed to the U.S., notably China and Iran. The Kremlin has demonstrated a willingness to use military force where diplomacy fails to achieve Russia's foreign policy goals. An important plank in Moscow's foreign policy is providing crucial support to a deeply embattled Venezuela led by authoritarian President Nicolas Maduro. In March 2022, after Putin's invasion of Ukraine, Biden, in an unexpected move, sent an official mission to Caracas with the goal of opening a dialogue with Maduro, the first such meeting after the U.S. severed diplomatic ties in early-2019. This formed part of what appeared to be an attempt to find alternate sources of crude oil sparking a backlash that forced the Whitehouse to deny it was seeking to ease sanctions in exchange for oil imports. Related: U.S. Oil Rig Count Rises But Production Lags Behind
The heavy burden created by strict U.S. sanctions against Venezuela, which have nearly bankrupted Caracas, saw former President Hugo Chavez and his successor President Nicolas Maduro seek support from countries opposed to Washington. It was Moscow, China, and Iran which emerged as key supporters of Venezuela with all three backing Maduro's nearly bankrupt autocratic regime and the OPEC member's severely corroded oil industry. Through loans, joint energy investments with national oil company Petróleos de Venezuela S.A., or PDVSA, and the provision of the military as well as civil aid the Kremlin-backed has propped up a broken Venezuelan state effectively preventing it from collapsing. This has allowed Moscow, in what can be described as a masterful to take control of Venezuela's once-mighty petroleum industry, enhancing the considerable leverage the Kremlin gained over crude oil prices through the OPEC Plus agreement, where Russia is a key participant. This forms part of Putin's strategy to boost Russia's global geopolitical influence by expanding influence in Latin America to challenge Washington's authority in a region where U.S. hegemony has long been recognized. It does this in part by giving Moscow leverage over Venezuela's vast petroleum reserves, which at 304 billion barrels are the world's largest. The close alliance with Venezuela also gives the Kremlin a notable counterweight to North Atlantic Treaty Organization's rising ascendancy in Eastern Europe, a region long considered by Moscow to be part of Russia's sphere of influence.

The additional 2019 sanctions imposed by then-President Donald Trump, aimed at toppling Maduro, despite accelerating Venezuela's economic collapse and magnifying the humanitarian crisis failed to achieve that goal. Those restrictions, which prevent Caracas from accessing global capital as well as energy markets, forced Maduro to seek support elsewhere, which he readily found with Putin's autocratic government. By 2015, when Obama declared a national emergency regarding Venezuela, Moscow had lent PDVSA roughly $6.5 billion through then state-controlled energy company Rosneft. It was subsidiaries of Rosneft which were actively investing in a series of joint ventures with PDVSA. Then after Washington imposed sanctions on Rosneft for its involvement with PDVSA the Kremlin sold its stake in the company while acquiring Rosneft's Venezuelan assets. That leaves the Kremlin, through wholly-owned company Roszarubezhneft, with a 40% stake in five joint ventures with PDVSA that pump around 120,000 barrels of crude oil per day, nearly 16% of Venezuela's total production. That has given Moscow access to a crucial alternate supply of crude oil reducing dependence on the Middle East.

Related: Could Putin Be Overthrown From Within?

These events highlight why the Whitehouse must pay closer attention to Latin America, particularly Venezuela, and focus on reducing the influence of authoritarian regimes in the region, particularly Russia and Iran. The surprise March 2022 U.S. mission to Caracas which had the goal of opening a dialogue with international pariah President Maduro was a positive step. This is because harsh U.S. sanctions, notably those implemented by Trump, despite accelerating Venezuela's economic collapse failed to initiate regime change. In fact, those significant restrictions, including denying Caracas access to global energy and capital markets which crushed Venezuela's economic backbone its oil industry, only strengthened Maduro's power. The sanctions also created an opportunity for Russia, China, and Iran to fortify their relationship with Caracas while gaining greater leverage in Latin America. There is a long history of U.S. economic sanctions failing to achieve foreign policy goals with some academics labeling them as a policy tool where the effectiveness deteriorates over time.

When easing the restrictions the Biden administration must avoid, however, appearing to act solely in U.S. interests by doing so to gain access to Venezuela's crude oil. Washington's recognized interim Venezuelan president, Juan Guaido, is effectively a spent force. During the December 2020 parliamentary election, Maduro took control of the National Assembly unseating Guaido and removing him from his role as speaker. In a further blow to Venezuela's opposition, they were pummeled by Maduro's ruling United Socialist Party in late-2021 regional ballots. That was the first-time opponents to Maduro's regime had participated in elections for three years. Those events underscore the strength of Maduro's position and the waning influence of what is an increasingly fractured domestic opposition.

Strict U.S. sanctions must be eased if Venezuela's economic backbone, its petroleum industry, is to be rebuilt. Even considerable support from Teheran, including providing a reliable supply of condensate has done little to sustain a sizeable increase in crude oil production. For December 2021, PDVSA pumped an average of 871,000 barrels per day, based on data provided to OPEC, which was nearly double a year earlier despite sanctions, although was well below pre-2015 output of 2.3 million barrels daily. January 2022 production dropped by 1.9% month over month to an average of 755,000 barrels, indicating that PDVSA is operating at capacity. That means Caracas is incapable of bolstering petroleum output any further without significant investment in Venezuela's energy infrastructure, which some analysts believe will require investment of between $110 billion and $200 billion over nearly a decade to return to over 2 million barrels per day. This highlights that Venezuela is incapable of providing a large supply of crude oil to the U.S. to make up for the shortfall triggered by Biden's ban on Russian petroleum imports. 

Venezuela's deep humanitarian and environmental crises, sparked by a failing economy and heavily corroded petroleum industry combined with the failure of sanctions to unseat Maduro, indicate that Washington must initiate a major policy shift. That has become more pressing because of the conflict in Ukraine and Russia's considerable influence in Venezuela. However, any move by Washington to ease sanctions in response to spiraling crude oil prices will trigger a major backlash. Despite Whitehouse officials denying this is the case, any such a move at this tie will be viewed cynically by many in Latin America where the U.S. has a long history of interfering in regional politics to secure policy objectives and access to resources. The easing of sanctions at this time will, at a critical moment, undermine the legitimacy of Venezuela's opposition to Maduro. The OPEC member's opposition, which was once popular with Venezuelans, for a variety of reasons, is becoming increasingly irrelevant in their eyes. Not only has the ruling socialist party successfully marginalized Guaido, but it now controls all facets of the Venezuelan state including the National Assembly and regional governments. The fact that Venezuela's economy has returned to growth after such a savage crash will bolster Maduro's reputation in the eyes of Venezuela's long-suffering population.

By Matthew Smith for Oilprice.com

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