Background

Venezuela. How did a once prosperous country in the midst of central America with the world’s largest oil reserves and booming economy transform into a nation with severe debts amounting to $60 billion to solely bondholders as of 2017 [1]. Economic instability and political tensions within the region alongside depreciating oil prices have not aided the recovery of the ‘petrostate’ with prices falling from over $100 per barrel to under $30 dollars between 2014-2016 [2]. Venezuela is an OPEC [Organisation of the Petroleum Exporting Countries] member where oil accounts for approximately 98% of exports [2]. It appears that due to lack of faith and dispute amongst the presidential role between Nicolas Maduro and Juan Guaido (both internationally and within) has led to large masses of immigration, financial debt and severe shortages of basic supplies [2]. A soaring annual inflation rate standing at 1,000,000% has meant many Venezuelans have suffered with the difference in income and cost of goods increasing dramatically (see figure 1), with many fleeing the social and economic turmoil [4].

What’s the link?

The oil sector was nationalized and the state-run Petroleos de Venezuela, S.A. (PdVSA) was formed in 1976 by former President Carlos Andres Perez [2]. The 2014 decline of oil prices meant the value of the bolivar decreased, hence increasing cost of imports which has led to increased inflation due to the country’s reliance on imported goods [5].

With extortionate amounts of debt and predicted the lowest GDP per capita by 2020 (see figure 2) amongst major Latin American powers, President Maduro has reportedly struck oil for cash deals with China who have reportedly ploughed $70 billion into Venezuela in return for mainly oil to power its growing industry [6]. However, with China engaged in a trade war with the US, these transactions between the two nations have not gone down well in Washington with President Trump identifying President Maduro’s opposite Juan Guaido as the official President of Venezuela in an attempt to push for an end to Maduro’s seven-year tenure in office.

Tensions between the US and Venezuelan government have risen with the US treasury secretary Steve Mnuchin stating ‘PdVSA has long been a vehicle for embezzlement, for corruption for Venezuelan officials and businessmen. Today’s designation of PdVSA will help prevent further diversion of Venezuela’s assets by Maduro, and will preserve these assets for the people of Venezuela where they belong[7].’ In retaliation of the sanctions, Maduro has cut off all ties with the US, shutting down its embassy in Washington and ordering the removal of US diplomats from Caracas [8]. The sanctions could be a devastating blow to Venezuela and PdVSA who own a subsidiary company in the US, Citgo Oil, as it prevents any trade or transactions between the two nations and will reportedly block $11 billion in assets [7]. Alongside, a decline in the working force within Venezuela due to mass immigration the oil dependent nation has suffered a rapid decline in production of oil barrels (see figure 3). This long term fall in investment has meant that economy has spiralled out of control with the nation being declared default in 2017, with investment banks such as Goldman Sachs being owed $187 million [1].

Conclusion:

Economic mismanagement of funds and large scale corruption within firms such as PdVSA has meant that the country is running out of funds in its reserves. An already dire political crisis has only been made worse with external influences on the nation, with US sanctions now placing PdVSA in a stranglehold. With oil accounting for approximately 25% of the country’s GDP and a worrying decline in production for exports has meant that now the one natural resource that is available in abundance within the country can no longer be exploited to its full potential [10].  Alongside, long term lack of investment and hyperinflation has meant that oil companies are struggling to deal with high costs of production due to the nature of Venezuelan crude oil having to be mixed with ‘lighter’ crude oil from countries such as the US [11]. However, this may no longer be possible due to the US sanctions meaning that PdVSA will no longer be permitted access to funds from their US subsidiaries such as Citgo. Nevertheless, with PdVSA exports to US amounting to approximately 450,000 barrels per day which is a little less than 50% of their total output the sanctions would free Venezuela of the exportation duties to the US [12]. With this oil now being available to heavy cash lenders such as China, it could be a chance for Maduro and PdVSA in the long run to raise more revenue to cut down on their fiscal deficit as this share of the US oil market will now be open to other OPEC countries such as Saudi Arabia and Iraq [12]. It may not all be bad news for Caracas with Russian Oil Company, Rosneft holding a 49% stake in Citgo oil it could take control of the PdVSA subsidiary if the situation in Caracas gets worse which would be a huge blow to the US as it would result in Russians holding a stake within the US, which could be seen as the sanctions backfiring by Washington [12]. Overall, even though the main aim of the sanctions is to force a transfer power to Juan Guaido, it will be the people of Venezuela that suffer the brunt of the backlash that the sanctions may bring to the economy. As a result, it is possible it may create an anti-US sentiment within the nation if the sanctions make the condition of Venezuela take a turn for the worst. Therefore, it is important that the US tread with caution as it could only strengthen Maduros foothold on governmental power.

References:     [1] [2] [3] [4] [5]  [6] [7] [8] [9] [10] [11] [12]