Venezuela’s Circuitous Sanctions Cycle
Following Venezuela’s removal from benchmark bond indices after US sanctions as rival international coalitions line up to remove and support the Maduro government, investors stuck with exposure have joined Latin American researchers in questioning the endgame of commercial pariah status. The Lima Group and EU also imposed curbs, as Cuba, China and Russia continue to support Caracas as well as opposition talks with National Assembly head Guiado forty countries recognize as the accepted President. Washington’s crackdown began in the Obama Administration with top official asset and visa confiscation, and President Trump added hundreds of individuals and companies and entire sectors before a recent blanket ban. The specific order against state oil monopoly PDVSA went into effect in June as creditors scramble to lay claim to Citgo and other holdings to collect overdue payment. The central bank is on the list as well as Russian banks involved in the petroleum industry, and all US dollar and crypto-currency transactions are taboo. Sanctions are not to blame for the economic, social and humanitarian catastrophe, as hyperinflation, hunger and mass exodus preceded the ramp-up, according to a September Center for Strategic and International Studies note. Oil production accounting for almost all export revenue fell millions of barrels, and a two-decade record of socialist mismanagement and corruption provoked widespread output and institutional collapse. Even when cash was available to import food and medicine, the regime and military tightly controlled distribution, and they never allowed free and fair elections in independent observers’ view. An oil-for-food program as the UN coordinated during the Saddam era in Iraq would require unlikely external access and oversight, amid evidence staple subsidies routinely exclude political enemies. Direct aid through churches and community centers outside government interference is unrealistic and unwieldy, even as citizens demand help though additional channels.
CSIS cites a financial and diplomatic vise on Maduro’s inner circle, but calls for a greater chokehold on criminal enterprise including drug dealing and money laundering. It recommends repurposing of internationally-garnered assets for humanitarian needs, as an estimated 4 million refugees are spread throughout the Andean region. It remarks that Chevron still operates in the country lacking a clear framework, and US banks should identify sound untainted counterparts for future transition. Sanctions have not succeeded in restoring democracy or hastening incumbent exit, and both objectives await a separate design from the expanded global community. Russia’s behavior in Ukraine has not changed from the version there, as the civil war in the east leaves tens of thousands displaced and killed. Washington may soon outlaw bond-buying, as the foreign investor share of ruble issuance stands at one-fifth the total. The fiscal and current account outlooks have worsened for 2020, as regular Moscow demonstrations mobilize anti-Putin sentiment. Overtures toward the new President in Kiev may bring a thaw such as prisoner exchange, but his focus is on restoring the IMF program to bolster the currency and reserves. With legislative curbs on Russian paper US fixed income investors could diversify into domestic 15% yields with the Fund’s sanctioned approval of budget and energy sector reforms.