The Biden administration could be considering lifting sanctions on a new front: the secondary market for Venezuelan debt. These bonds were issued by the republic and by state-owned oil firm PDVSA, and were worth around $63bn. These had defaulted in 2017, after the Venezuelan state missed a payment of $200mn. These sanctions sit within a comprehensive list of measures against Venezuela. Specifically, they mean that US citizens cannot buy such bonds in the secondary market, and has also scared off large European institutional investors. They stand in the way of a possible debt restructuring deal between Venezuela and Western bondholders.
Sanctions for a moment that passed.
As President Nicolas Maduro headed towards an election in 2018, the Trump administration had plans for regime change. The White House was allegedly convinced there was going to be a military coup overthrowing the government in Caracas. The largest opposition alliance (the MUD) boycotted the 2018 vote calling fraud, alongside the US and European allies. Between 2017 and 2019, an array of sanctions were imposed targeting Venezuela’s finances and oil industry – the state’s main source of revenue. Foreign assets were frozen. Top members of the Venezuelan regime were targeted with sanctions and arrests warrants as well. The US swiftly recognized a certain Juan Guaidó as the “legitimate president”; allied governments followed suit. This was known as the “maximum pressure” strategy.
Perhaps the White House had the wrong intelligence, or it was just wishful thinking, but it believed and acted as if Maduro’s days were counted. A few years later, he still lives in the presidential palace of Miraflores. The next elections are around the corner, and the “maximum pressure” policy makes little sense. In retrospect, the only achievement has been worsening Venezuela’s economic and humanitarian crisis, indiscriminately inflicting further suffering on the general population. It is hard to know the exact scale of the effect of sanctions, though the Center for Economic and Policy Research has published reports on the matter.
Chris Sabatini, Senior Research Fellow for Latin America, has been warning about the problems that sanctions are creating for US foreign policy. “From the point of view of the Biden administration, sanctions have become difficult to manage for a more realistic, practical policy. Their original imposition as part of Trump’s maximum pressure policy failed to produce the collapse of the Maduro government, or massive popular demonstrations that would give members of the government second thoughts. And they have even failed to force the Maduro government back to the negotiating table.”
However, unilaterally lifting them or signaling flexibility without reciprocal steps by the Maduro government would be viewed as a sign of weakness or naivety, “and states, especially the US, don’t like to look weak” said Sabatini – sometimes it is necessary to state the obvious. Furthermore, “harsher sanctions are being pushed by certain US legislators such as Ted Cruz, Marco Rubio, Rick Scott and Robert Menendez. They are in touch with Venezuela’s hardline opposition, many of whom are in exile. Given their policy failure so far the only seeming justification at this point is just revenge—for those who have suffered political persecution or expropriation, and for US supporters such as Senators Rubio and Scott, a desire to virtue signal and grandstand.”
“Sanctions now have no objective; they just slap them on the bad guy and they say job done. They need to be nimble, dynamic, and support an aim” said a US bondholder, who did not wish to be named. In a Foreign Policy article, Sabatini argued that sanctions are a favoured policy in Washington DC. “Their application is easy, cheap, and less dangerous than the threat of military action.” Later, Sabatini elaborated in a call that “the problem is while sanctions appear cheap and easy they are fiendishly difficult to unwind for effective diplomatic leverage. So as in Venezuela governments find themselves at a dead end with no easy way out.” Additionally, a sector of foreign policy experts is increasingly wary that sanctions are so widespread they are bringing a larger number US enemies closer together. The list not only includes Venezuela, Iran, Cuba, North Korea and Myanmar, but now also Russia and China.
How sanctions can backfire.
Already, the US has rid itself of one of the more cumbersome sanctions for its own interests. In the wake of Russia’s attack on Ukraine and the subsequent Western sanctions, US Gulf Coast refiners lost access to their preferred heavy oil. In fact, Russian crude was ironically replacing Venezuela’s. Chevron
CVX
Following from this, the Biden administration could also be attempting to reverse another self-inflicted stab: the rule that forbids US citizens from buying Venezuelan bonds. At this stage, this could benefit Maduro’s position, as it has cheapened a potential a restructuring deal. Most importantly, the sanction has taken away Washington DC’s leverage over Venezuela’s future, and caused a geopolitical problem.
Non-Western funds have been piling up Venezuelan bonds, as North American and over-compliant European bondholders dump them. In 2019, US investors owned 60% of these bonds. Now the figure could be somewhere between 25% and 30%, according to a US-based bondholder. It is a question of time for the debt to be restructured, whether an opposition candidate wins or the current regime persists. Who will be sitting on the other end of the table? The State Department fears it could be Russia, China or Iran that are buying them through opaque structures.
Negotiation deadlock.
In October, negotiations in Mexico between the government and the opposition agreed on setting up a fund under the United Nations for humanitarian purposes, using Venezuela’s frozen assets abroad. An estimated $3bn would be invested on infrastructure, education and health. It must be said that, according to some sources, the 3bn is just a number and it is not clear how much would be available in practice. The US nonetheless has failed to execute the deal, justified by fears that creditors would try to seize these funds, even if though this is likely not possible. Caracas could be more focused on developments Europe instead. On July 31st, a Portuguese court ordered Novo Banco to reimburse around €1.35mn ($1.48mn) to nine entities controlled by the Venezuelan government. It is also attempting to regain access of its gold reserves stored in the Bank of England, which are worth around $2bn.
Some investors say they do not see an end in sight. Jorge Piedrahita, CEO of Gear Capital Partners, said that there are few reasons for the Biden administration to lift the ban on the secondary market. It would give the message that the White House is open to further sanctions relief. “The current stance on Venezuela has a lot of bipartisan support” he said, “and meanwhile Maduro has been taking a tougher stance. He has banned candidate Maria Corina Machado from running, overhauled the electoral commission, and denied the EU to send observers. Biden has been very cautious and has hardly changed the position that Trump left him”.
In the end, the Venezuelan government has not been offered any concessions to be lured into the negotiation table. In view of elections in 2024, President Maduro will do all it takes to win. Even on an individual level, to him and his administration to remain in power means survival. They are targeted with arrest warrants in the US, including a $15mn DEA bounty on Maduro himself. “If he loses, he’s likely going to prison” said Sabatini about Maduro’s outlook for the election “the US is only offering sticks, and no carrots”.
We had it good, please come back!
Historically, Venezuelan oil and US corporations had a strong symbiotic relationship. There is a potential to exploit vast reserves of resources; not just oil but also mining and now natural gas. For many investors now, sanctions are a cumbersome obstacle standing in their way. Insiders acknowledge this was a short-term strategy, and only made sense if Maduro’s government was overthrown. Had the “maximum pressure” succeeded, US bondholders would have been ready to restructure the debt. Now, the wait is being unnecessarily dragged on for investors who think it is only a matter of time before relations once again begin to normalise.
Likewise for Caracas, there are powerful incentives to return to commercial ties with the US, besides ending the harm that sanctions are inflicting on ordinary Venezuelans. “Beyond ideological differences, the oil relationship was always advantageous for both countries” said José Chalhoub, a political risk and oil consultant for Venergy. “This is due to their geographic proximity, the quality of heavy crude for US Gulf refiners, and for the presence of CITGO (a PDVSA subsidiary in North America). Venezuela exported 1.5 million bpd to the US alone before Hugo Chávez, we even exported petrol to Europe and the US”. This figure lasted well into Chavez’s presidency, though it gradually declined from around 2007. Chalhoub also worked at PDVSA until 2016. “Venezuela was paid with spot prices, and it was relatively cheaper with lower transport costs”.
Note from the author: In a previous article, I mistakenly made speculations that US special envoy Roger Carstens would be involved in talks about sanctions on the secondary bond market, arising from information published by HispanoPost, a Venezuelan digital newspaper. As I have learned speaking to different sources, his mandate is uniquely for hostage negotiation. The trading ban was put forward by Washington DC, but it was hardly given consideration in Caracas.
Read the full article here