The socialist regime may have strengthened its political control, but until US sanctions are unwound economic disaster will persist

It has been a strong year politically for Venezuelan president Nicolas Maduro. Notwith­standing the near collapse of the oil sector and the wider economy, he has routed the hardline opposition and reinforced the power of his radical left-wing regime.

But his latest domestic success, in the National Assembly election on 6 December, is a rather hollow victory that leaves him with a weakened hand on the international stage. The West will certainly not recognise the ballot. And Maduro’s hope of getting to 2021 in a stronger negotiating position with external stakeholders—including the US under a new Biden administration—is not likely to come to fruition.

Without external recognition of the new National Assembly by either the EU or the US, sanctions will remain in place, heavily limiting what Maduro can achieve in 2021. The government desperately needs the array of punishing US restrictions to be lifted to resuscitate the devastated oil sector, enable debt restructuring, and spark the private investment needed to restart the economy and maintain the support of domestic stakeholders.

But by cementing his political power at home, Maduro has ensured that the sanctions—the removal of which remain contingent upon free and fair elections—will stay in place. The president has not budged an inch on any of the US and EU demands, preferring to retain his iron grip on power, backed by the military leadership.

Little room for manoeuvre

The regime’s domestic political focus is likely to shift to early local and regional elections in 2021, with the ruling coalition moving to reconsolidate its control at the local level. On the economic front, top of the agenda are legal changes to the existing oil framework in support of the struggling NOC, Pdvsa.

Maduro must bring in much-needed capital to resuscitate the hydrocarbons sector, with production now running dangerously low. On the face of it, with a more pliant legislature, he can begin the process of bringing forward much-needed reforms.

Unless highly restrictive US measures on the oil sector are removed, investor interest may be limited to Russia, China and Iran

But unless highly restrictive US measures on the oil sector are removed, investor interest may be limited to Russia, China and Iran.  There are some indications that Chinese investment is being lined up for the electricity sector, also in dire straits and crucial to the rehabilitation of the oil industry.

US sanctions also prevent a restructuring of Venezuela’s defaulted debt. It is now three years since the finance ministry suspended external bond payments worth some $65bn and announced a debt restructuring process. In Q3 2020, US sanctions put paid to a ‘conditional offer’ to sovereign, Pdvsa and electric utility Electricidad de Caracas bondholders put forward by vice president Delcy Rodriguez.

Rodriguez said that, in exchange for waiving the statutes of limitation on bond repayments, bondholders would have to agree not to sue for non-payment or to suspend ongoing legal action. The offer was valid upon creditors holding more than 75pc of existing debt accepting it. But the initial deadline of 13 October came and went without response, with creditors unable to contemplate the offer under existing conditions.

Biden constrained

In terms of US foreign policy, Biden is likewise limited as to how much he can move the needle on Venezuela. Like Cuba, Venezuela has become a US domestic policy issue. And Biden’s hands are tied to a sizeable degree by Florida, which he lost in November in no small part thanks to the Republicans’ successful effort to cast him as a dyed-in-the-wool socialist who would ‘Cubanise’ the US.

To get around this domestic handicap, Biden will have to make Venezuela much more of a multilateral issue, most obviously with the EU and Latin America. This would see Biden shift gears from the current aggressive US use of sanctions as a (blunt) tool with which to try to force regime change upon Venezuela. Instead, he would move towards a more tactical use of sanctions relief as a carrot with which to coax the regime and other Venezuelan parties back to the negotiating table.

An equally pressing issue for the Maduro inner circle is the prospect of International Criminal Court (ICC) indictments of senior political and military officials on human rights grounds. After two years of preliminary investigations and a damning September 2020 report from the UN Human Rights Council report accusing Maduro and others of crimes against humanity, the ICC’s chief prosecutor, Fatou Bensouda, in November indicated that a decision on whether to launch a formal investigation would be announced by year-end.

Risky business

Realistically, such is the depth of the political, economic, social and security crisis now in Venezuela, and such is the risk of the country becoming a failed narco-criminal state, that the situation may ultimately require much bigger thinking to reach a solution. Indeed, we consider a broader peace process, along the lines of those in Colombia or Northern Ireland, in which Biden, as an Irish-American, took an active interest, a likely proposal.

And the clock is ticking fast, with the next presidential election provisionally slated for 2024. We expect that in the run-up to that ballot an international coalition on Venezuela—led not by the US but by a neutral mediator (such as Norway) and involving Western allies, Cuba, Russia and China—will attempt to find a way out. Such negotiation may be a matter of when, not if.

Eileen Gavin is principal Latin America analyst at Verisk Maplecroft

Source: Petroleum Economist