FORO CUBANO Vol 3, No. 23 – TEMA: BLOQUEO ECONÓMICO –
The menu of strategies used by Maduro to mitigate the effects of sanctions
Por: Adriana Boersner*
*Profesora Asistente de Ciencia Política, University of South Carolina-Aiken;Adriana.Boersner@usca.edu
Scholars have warned about the potential deleterious consequences of economic sanctions on other countries, including an increase in the levels of repression, negative effects on women, threats to political freedom, and further dependence on informal economies (e.g., Peksen and Drury 2009; Drury and Peksen 2014; Bull and Rosales 2020; Liou, Murdie and Peksen 2020). However, today more than ever, states use sanctions as a tool to deter certain behaviors from governments, companies, and individuals involved in corruption, human right violations, terrorism, and the undermining of democracy.
Since 2013, countries like Canada, members of the European Union, some countries in Latin America, and especially the United States have imposed sanctions on various individuals and companies tied to the Venezuelan government. The aim of these economic and financial measures has been to alter the behavior of members of Nicolás Maduro regime, which is accused of corruption, human rights abuses, and destroying Venezuelan democracy. Beyond the effects of these sanctions on the Venezuelan economy and members of the regime, how Maduro has managed to bypass these sanctions is less explored.
Sanctions on Venezuela
In 2006, the United States imposed a prohibition on arms sales to Venezuela as a result of Hugo Chávez’s (1999-2013) lack of willingness to cooperate in the US fight against terrorism. Despite the diplomatic tensions, the countries still shared a good commercial partnership. Yet, in 2011, the United States imposed sanctions on the national Venezuelan oil company, Petróleos de Venezuela (PDVSA), in addition to seven other international companies, because PDVSA was selling fuel to Iran. Likewise, the United States sanctioned members of the Venezuelan government for their connections with the Revolutionary Armed Forces of Colombia (FARC).
After Chávez’s death, economic sanctions on Venezuela have been more frequent. In 2014, Barack Obama signed the Law for the Defense of Human Rights and Civil Society of Venezuela, which established sanctions against Venezuelan individuals involved in human rights violations. The Donald Trump administration has issued an additional seven executive orders to expand sanctions on Venezuela and the United States has sanctioned five times more individuals connected to the Venezuelan regime than the European Union (Gratius and Ayuso Pozo 2020). Most of these sanctions include bans to purchase debt, access to financial markets, sanctions against Venezuelan oil and gold sectors, companies, and people who assist the Maduro government. Particularly after 2017, Maduro and members of his regime have seen a significant ramping up of sanctions against them. As figure 1 shows, most sanctions on Venezuela have been imposed by the United States against members of the regime or people connected to the regime.
Figure 1: Percentage of sanctions on Venezuela per sender (2006-mid April 2020)
Note: Besides Colombia, Argentina, Brazil, and Peru have also imposed travel bans on individuals connected to the Venezuelan regime.
Although Venezuela is in a vulnerable economic situation, making it difficult to impose counter-sanctions and restrict imports from senders like the United States, the Maduro regime has been able to develop strategies to bypass these sanctions. Understanding these strategies and adaptability of Maduro’s regime is vital to designing sanctions toward Venezuela if the real purpose of these sanctions is to change the behavior of members of the Venezuelan regime.
The menu of strategies to divert the effect of sanctions
The list below is a number of strategies that the Venezuelan regime has used to maintain sources of income and retain power amidst the sanctions. Restrictions include an arms embargo, asset freezes, and visa and/or travel bans to individuals working for or connected to Maduro. The list is not as exhaustive as it could be, particularly for a regime like the Venezuelan that has proven its adaptability. To mitigate the effects of sanctions, the Venezuelan government has pursued the following strategies:
Diversion of crude exports to other buyers. Venezuela is a rentier economy that bases 95% of its exports on oil. U.S sanctions prohibit companies from importing Venezuelan oil and prevent U.S companies to have deals with PDVSA. Given the sanctions regime, the U.S has stopped importing around 500,000 barrels per day from Venezuela. To overcome these restrictions, the Venezuelan regime has looked for other buyers including China, India, and Russia. It was reported that in 2019, China replaced the United States as the top buyer of Venezuelan oil (Cohen and Parraga 2020). In the case of Russia, the state-owned company, Rosneft, has bought crude from Venezuela through an “oil-for-loan contract” and redirected it to other markets. However, these transactions have had progressively negative consequences for countries like India and Russia. In 2019 and 2020, for example, the United States pushed for so-called secondary sanctions to press countries to stop buying Venezuelan oil. Also, the United States sanctioned Rosneft Trading SA, which pushed the TNK Trading International S.A company, a Rosneft subsidiary, to transport and sell Venezuelan crude (Mohsin and Millard 2020).
Getting gasoline from alternative markets. Refineries have collapsed in Venezuela and given the sanctions regime, Venezuela has boosted its cooperation with allies, such as Iran and China to rebuild its refineries (Guanipa and Buitrago 2020). Given the state of Venezuelan refineries, the oil industry in Venezuela, and the decreasing levels of volume of US petroleum exports to Venezuela including gasoline, propane, and oils (Verrastro and Stanley 2019), allies like Iran have shipped gasoline to Venezuela. Although these deliveries have not been enough to cover internal demand, this has led the United States to apply secondary sanctions to those involved (Vyas and Faucon 2020).
Diversification of trade partners. Even though trade with the US private sector and companies from countries that have imposed sanctions on Venezuela continue, the Maduro regime has further diversified trade partnerships in areas like food. Turkey, for instance, provides 69% of the food that is included in the boxes distributed by the government via the local committees for supply and production (CLAP) (El Nacional 2018). Also, in 2020, Iran opened a chain of supermarkets in Venezuela, Megasis, and shipped food to the country.
Changes to the banking system. Venezuela has had a system of currency controls or an exchange regime in place since 2004. Beginning in 2019, however, the government modified this exchange regime due to rising inflation and the need for US dollars as a partial consequence of sanctions. Particularly, the government introduced changes to allow local banks and exchange houses to perform operations with foreign currencies. This has resulted in millions of Dollars and Euros to be stored in Venezuelan banks (Al Jazeera 2020). These changes have benefited firms, companies, and individuals with long-term accounts to have access to foreign currency that can pay monthly commissions. Although the total volume of these financial transfers is not clear, they may have totaled as much as US$3.7 billion in 2019 (Orozco and Klaas 2020, p. 9).
Illegal mining. Besides oil, Venezuela has reserves of gold, diamonds, and nickel. Decreases in oil production and exports have exacerbated illegal activities and trade. Armed groups including the National Liberation Army (ELN) and dissident members of the FARC have operated in the border states with Brazil, generating profits based on illegal mining. This activity has not only provided income to those armed groups but also members of the regime and state security forces (Human Rights Watch 2020; International Crisis Group 2019; Rendon et al. 2020).
Illegal narcotics trade. Venezuela is a transit country for illegal narcotics, although only about 7% of Colombian cocaine is trafficked through the country (Ramsey and Smilde 2020). Nonetheless, members of Maduro’s regime involved in drug trafficking include the Minister of Internal Relations, Néstor Reverol, and the Minister of Petroleum, Tareck El Aissami, who have been sanctioned by the United States, while relatives of Maduro and First Lady Cilia Flores have been implicated in drug trafficking (Insight Crime 2018).
Shell companies. These companies are entities that usually employ few or no workers, allowing actual beneficiaries to reroute money or hide money from tax authorities and law enforcement. The identities of these beneficiaries are anonymous since companies can be registered under someone else name or law firm. Because of the secrecy of these shell companies, individuals can freely engage in corruption, money laundering via real estate contracts, and other activities including organized crime. In the case of Venezuela, for example, Alex Saab, a Colombian businessman connected to Maduro, utilized a network of various shell companies to hide profits from overvalued contracts obtained through bribes and kickbacks to sell food in Venezuela (Insight Crime 2020a).
Money Laundering. Over time, various individuals connected to the Venezuelan regime and members of the Maduro’s family have been involved in money laundering. In 2019, a scandal that included a professor and expert on corruption and illegal activities from the University of Miami showed how he helped to launder money from accounts in Switzerland and the United Arab Emirates. This money proceeded from Venezuela (Reuters 2019). Other illegal schemes involve well connected Venezuelan businessmen doing business in the United States and still hiding from justice (Insight Crime 2020b).
Digital Currency. Since 2018, airlines are required to pay for operational services, i.e. airport taxes, via an application called Jetman Pay. These payments are converted into Bitcoin, allowing taxes to be transferred to accounts held by the Venezuelan government in countries including China and Russia (Insight Crime 2019). The number of airlines and flights to and from Venezuela have decreased after 2014 (EFE 2017) and little is known about the extent of the use of Bitcoin for other operations to obtain dollars.
Why does this matter?
Given the menu of strategies already used by Maduro and members of the Venezuelan regime to mitigate the effect of sanctions, there are various issues to consider regarding the sanctions’ effects and how sanctions are implemented. The first relates to how economic sanctions imposed on Venezuela have not encouraged Maduro or members of the regime to change their behavior. Although most sanctions have been imposed on individuals, there are two interconnected issues that are important to evaluate. First, it seems that bringing about long-term change is not as important as penalizing specific individuals for immediate issues (e.g. rigged elections, corruption, human rights violations). This in turn, has created a challenge for senders to create a sanctions regime that would induce some sort of change in behavior within the Venezuelan government.
There are also important differences in the objectives of these sanctions. While the United States uses sanctions as a way to protect its national security, the European Union and Canada use them to promote democracy and human rights abroad. This difference is important because it speaks to the type of approach each sender is using to apply the sanction’s regime and how it has not been possible to create better international coordination. The United States has used a unilateral approach, creating more friction with Maduro and members of his regime. The European Union has supported multilateral initiatives and bilateral cooperation with Russia and China to induce (although unsuccessfully) a democratic transition.
Second, sanctions are not going to be effective if individuals that are sanctioned do not attribute a significant weight to the damage done to them or their country. In other words, those that have been sanctioned are not going to take sanctions as a real punishment unless the targeted company or individual cannot find reliable alternatives to divert the effects of these sanctions. Thus far, Maduro has been adaptable and able to find ways to sell and receive gasoline, import food, and receive humanitarian aid, even on a small scale.
Third, all senders have imposed sanctions mostly on individuals within the Venezuelan regime granting a minor role to Maduro’s external support network. Around 75% of sanctions imposed on individuals working in or connected to the Venezuelan regime between 2006 and mid-2020 are inside Venezuela. What senders have not done effectively is target individuals and entities (e.g. banks) outside Venezuela that help sustain Maduro and his cronies. A question to ask is why it is more important to sanction a Venezuelan minister that found or sought cooperation from a bank outside Venezuela that has a number of accounts from members of the Venezuelan elite?
The existing prohibitions from the United States on negotiating with more than 100 government officials and entities do not include persons who may be linked to the government but are not on the sanctioned list. The same applies to companies. Financial institutions, as well as trading companies want to keep operating. When the time comes, they will have a choice to make: support the Venezuelan regime or retain an important relationship with senders such as the United States or some European countries. For this reason, secondary sanctions are vital to deterring foreign companies and individuals outside Venezuela from doing business with or transactions with the Venezuelan government. Disrupting illicit funding sources and non-state actors that help Maduro should also be a priority.
The fourth is that the success of sanctions might vary in accordance with how many senders are involved or how cooperative countries and entities are. There is consensus that multilateral sanctions imposed for a specific and short-term objective are more effective than unilateral and long-term sanctions (Drezner 2011). The more economic sanctions are applied and the longer they remain in force, the more the propaganda Maduro will use to blame others, particularly the United States, for Venezuela’s domestic problems.
Al Jazeera. (2020). “Venezuela’s Banks Store Millions in Dollars and Euros.” Retrieved on 5 August, 2020 from https://www.aljazeera.com/ajimpact/venezuela-banks-store-millions-dollars-euros-reuters-200204205158239.html
Bull, B., Rosales, A. (2020). “Into the Shadows: Sanctions, Rentierism, and Economic Informalization in Venezuela.” European Review of Latin American and Caribbean Studies 109: 107-133.
Cohen, L., Parraga, M. (2020). “Special Report: How China Got Shipments of Venezuelan Oil Despite U.S. Sanctions.” Retrieved on 27 July, 2020 from https://www.reuters.com/article/us-venezuela-oil-deals-specialreport/special-report-how-china-got-shipments-of-venezuelan-oil-despite-u-s-sanctions-idUSKBN23J1N1
Drezner, D. (2011) "Sanctions Sometimes Smart: Targeted Sanctions in Theory and Practice." International Studies Review 13(1): 96-108.
Drury, A. (2014). "Women and Economic Statecraft: The Negative Impact International Economic Sanctions Visit on Women." European Journal of International Relations 20(2): 463-490.
Early, B. (2019). “Searching in the Shadows: The Impact of Economic Sanctions on Informal Economies.” Political Research Quarterly 72(4): 821-834.
EFE. (2017). “La IATA Descarta que Venezuela Pague Pronto Su Deuda De 3,800 Millones a las Aerolíneas.” Retrieved on 30 July 2020 from https://www.efe.com/efe/america/economia/la-iata-descarta-que-venezuela-pague-pronto-su-deuda-de-3-800-millones-a-las-aerolineas/20000011-3399255
El Nacional. (2018). “69% de Los Alimentos CLAP Provienen de Turquía.” Retrieved on 1 August, 2020 from https://www.elnacional.com/economia/los-alimentos-clap-provienen-turquia_251966/
Gratius, S,. Ayuso, A. (2020). "Sanciones como instrumento de coerción:¿ cuán similares son las políticas de Estados Unidos y la Unión Europea hacia Venezuela?" América Latina Hoy: 1-23.
Guanipa, M., Buitrago, D. (2020). “Venezuela Receives Material from Iran to Help Restart Refinery.” Retrieved on 29 July, 2020 from https://www.reuters.com/article/us-venezuela-oil-iran/venezuela-receives-material-from-iran-to-help-restart-refinery-official-idUSKCN2253FX
Human Rights Watch. (2020). “Venezuela: Violent Abuses in Illegal Gold Mines. Retrieved on 30 July 2020 from https://www.hrw.org/news/2020/02/04/venezuela-violent-abuses-illegal-gold-mines
Insight Crime. (2018). “Venezuelan Regime: The Cartel of the Suns.” Retrieved on 28 July 2020 from https://www.insightcrime.org/investigations/drug-trafficking-venezuelan-regime-cartel-of-the-sun/
Insight Crime. (2019). “Have Cryptocurrencies Really Helped Venezuela Sidestep US Sanctions?” Retrieved on 1 August 2020 from https://www.insightcrime.org/news/brief/have-cryptocurrencies-helped-venezuela-sidestep-us-sanctions/
Insight Crime. (2020). “Venezuelan Regime’s Trusted Money Man.” Retrieved on 31 July, 2020 from https://www.insightcrime.org/news/brief/fall-alex-saab-venezuela/
Insight Crime. (2020)b. “Venezuelan Money Laundering Schemes Continue to Thrive in US.” Retrieved on 5 August 2020 from https://www.insightcrime.org/news/analysis/venezuelan-money-laundering-schemes-continue-to-thrive-in-us/
International Crisis Group. (2019). “Gold and Grief in Venezuela´s Violent South.” Report nº 73. Retrieved on 31 July 2020 from https://www.crisisgroup.org/latin-america-caribbean/andes/venezuela/073-gold-and-grief-venezuelas-violent-south
Liou, R., Murdie. A., Peksen, D. (2020). “Revisiting the Causal Links Between Economic Sanctions and Human Rights Violations.” Political Research Quarterly.
Mohsin, S., Millard, P. (2020). “U.S Sanctions Second Rosneft Subsidiary for Shipping Venezuelan Crude.” World Oil. Retrieved on 2 August, 2020 from https://www.worldoil.com/news/2020/3/12/us-sanctions-second-rosneft-subsidiary-for-shipping-venezuelan-crude
Orozco, M., Klaas, K. (2020). “Money Transfers to Venezuela. Remittance Flows Amidst Evolving Foreign Exchange.” The Dialogue. Retrieved on 28 July, 2020 from https://www.thedialogue.org/analysis/money-transfers-to-venezuela-remittance-flows-amidst-evolving-foreign-exchange/
Peksen., Dursun., Cooper, D. (2009). “Economic Sanctions and Political Repression: Assessing the Impact of Coercive Diplomacy on Political Freedoms.” Human Rights Review 10(3): 393-411.
Polga-Hecimovich,,J. (2019). “Las Nuevas Sanciones Económicas de Los Estados Unidos Contra Venezuela.” Foro Cubano 2 (10).
Reuters. (2019). “U.S. Charges Miami Professor in Venezuela Money Laundering Scheme.” Retrieved on 30 July 2020 from https://www.reuters.com/article/venezuela-corruption-idINL2N27Y0ZC
Verrastro, F., Stanley, A. (2019). “What Comes Next For Venezuela’s Oil Industry?” Center for Strategic & International Studies. Retrieved on 3 August, 2020 from https://www.csis.org/analysis/what-comes-next-venezuelas-oil-industry
Vyas, K., Faucon, B. (2020). “Second Fuel Tanker from Iran Arrives in Venezuela.” The Wall Street Journal. Retrieved on 3 August, 2020 from: https://www.wsj.com/articles/second-fuel-tanker-from-iran-arrives-in-venezuela-11590447706