February 19, 2020

VENEZUELA: New sanctions not game-changing but more squeeze to come

BY Nicholas Watson

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Yesterday, 18 February, the US government announced sanctions against Rosneft Trading, a brokerage unit of Russian firm Rosneft. The entity is thought to handle at least 50% of Venezuela’s crude exports under deliberately opaque arrangements designed to bypass wider sanctions; typically, state oil company PDVSA sells oil at a discount to Rosneft Trading, which then sells the crude on to end-users in China and India. Below we examine the key takeaways stemming from the development.

The Rosneft sanctions do not leave PDVSA isolated (yet). Rosneft can adapt trading arrangements to circumvent these restrictions; Moscow was given advance warning and there is a three-month wind-down period before the sanctions take full effect. Not only that, but other international companies including Spain’s Repsol and Italy’s ENI continue to trade with PDVSA in compliance with sanctions, while special waivers for Chevron and some US oil service companies remain in place. The rationale behind the Chevron exemption is in large part to prevent extra-hemispheric entities (e.g. Rosneft) from taking control of Chevron’s JV stakes, which is why future US measures could well leave Chevron’s operations untouched.

The new measures do, however, raise PDVSA’s cost of doing business since any entity now carrying out intermediary selling will surely demand a higher price given tighter legal restrictions and greater logistical complexities. The amount of cash PDVSA sees from its crude exports – already reduced by the need to pay off debts – is therefore likely to undergo a squeeze that the company will find difficult to offset with increased production. In parallel, the supply of finished fuels to Venezuela could undergo further disruption since Rosneft Trading has been involved in that side of the business too, while the abject state of the downstream sector precludes a turnaround in domestic refining capacity.

The sanctions are unlikely to significantly alter Venezuelan-Russian relations. Russia’s interest in playing a “spoiler” role in the US’s own “backyard” persists, while President Nicolas Maduro needs Russian economic and military support – even if it comes at a high price.

As ever, the efficacy of sanctions to bring about political change is open to debate. Reducing the regime’s cashflow could create new strains in the military and make it more difficult for Maduro to buy political loyalty. Yet sanctions have also provided authoritarian regimes with an excuse for their own mismanagement, incompetence, and corruption; in this case, Maduro can pin the blame for fuel and food shortages, power outages, and the myriad other problems facing the economy on sanctions, while playing up the external threat facing the country.

New sanctions are also double-edged for opposition leader Juan Guaido. Coming on the back of his recent international tour, the latest measures clearly reinforce Guaido’s close links to President Donald Trump’s administration; this gives Guaido a certain legitimacy among the existing opposition constituency but also lays him open to regime accusations that he is a US stooge. In other words, it is difficult to see sanctions like those announced yesterday fundamentally altering domestic political fault-lines.

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