US sanctions leave Maduro with few options

With Monday's decision to impose sanctions on Venezuela's oil industry, the Trump administration has, after a two-decade stand-off between Washington and Caracas, finally gone for its rival's jugular.

The new measures require that any payment for Venezuelan crude imports into the US be lodged in bank accounts the regime in Caracas cannot access. By attacking one of Chavismo's last sources of hard currency, Washington has intensified its efforts to force Venezuela's president, Nicolás Maduro, to step down in favour of Juan Guaidó, the opposition leader who declared himself interim president last week, intensifying a political stand-off in the South American nation.

US treasury secretary Steven Mnuchin was explicit about the goal of the sanctions, saying their lifting would come only "through the expeditious transfer of control to the interim president or a subsequent democratically elected government" in Venezuela. Maduro responded by labelling the US move "illegal, unilateral, immoral, criminal", while Guaidó welcomed it as a means of protecting the country's patrimony from the administration's corruption.

During two decades of increasingly acrimonious relations, the US never moved against Venezuela’s oil industry before now. In finally doing so, it clearly hopes to use Caracas’s mismanagement of the sector against it and so help usher it out of power.

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Twenty years ago this Saturday, when Chavismo's founder Hugo Chávez was sworn in as Venezuela's president, he pledged to wean his nation off dependency on the volatile receipts from crude oil exports. "We cannot continue depending uniquely on this exogenous variable which is the price of a barrel of oil," he warned in his inauguration speech.

Failure to diversify

But Chavismo's failure to diversify the country's economy has been total and the country is more dependent on oil than ever as flawed centralised planning, catastrophic mismanagement, epic corruption and a long-running war with the business community have left the country' industrial and agricultural capacity devastated.

Now all that remains to pay for vital imports of foods and medicines are oil receipts. This model worked well in the golden middle years of Chavismo when the price of a barrel soared to as high as $160 and the administration lavished cash on the sort of social spending that made it a beacon for leftists around the world.

At the time, Venezuelan officials were not alone in believing the only price direction was up and so began to borrow heroic amounts of money against future oil shipments, principally from China. For a time these borrowings masked the regime's chronic fiscal profligacy, which was nevertheless vital for propping up its political support as evidence mounted that the so-called Bolivarian Revolution was failing.

But the subsequent collapse of prices to as low as $35 a barrel has left the Maduro administration desperately exposed. Despite defaulting on about $60 billion worth of bonds, the regime is unable to pay for sufficient imports of foods and medicines, leading to a breakdown in public health and widespread hunger. As a result an estimated three million people have fled the country.

Exacerbating the problem is a devastating collapse in oil production.

Cash for crude

A lack of investment and mismanagement have seen it fall by half since just 2016 to a meagre 1.2 million barrels a day, far off the 3.5 million a day the country pumped the year before Chávez assumed office. And much of that reduced production must be shipped to repay the long-since spent loans from China and Russia. In fact the US sanctions are so threatening to Caracas because US importers are among the last purchasers of Venezuelan crude who pay cash for it, accounting for an estimated 75 per cent of all cash payments.

With the US refineries now closing to its exports, Venezuela's options are limited. The only other refineries that can handle the sort of viscous crude it produces are in India and China but shipments there would be unlikely to generate much cash flow.

"Redirecting supplies does not help Venezuela because it was getting cash when it sent its crude to the US. It is not going to get cash if it sends it to India or China because it will be paying off debt. The sanctions will have an immediate cash-flow impact. They will hurt them," says James Davis, a director at London energy consultancy FGE.

During its 20 years in power, Chavismo has survived a series of grave crises. But following the US move on Monday, it is hard to see how it can escape its current financial predicament unless China and Russia cobble together some sort of financial support package to go with their vocal diplomatic backing of Maduro in his stand-off with Guaidó.