Venezuela’s National Assembly head Juan Guaidó declared himself the country’s interim president on January 23. As there are “two regimes” coexisting in Venezuela, the country is currently mired in political chaos. While the situation remains uncertain, the US imposed sanctions on Petroleos de Venezuela, S.A. (Petroleum of Venezuela), or PDVSA, with ulterior motives. By cutting off the Nicolas Maduro administration’s economic lifeline, Washington is trying to aggravate the division within the country, reshape the loyalty of Venezuela’s political and military forces, and thus hasten regime change.
Since Hugo Chavez became president in 1999, US-Venezuela relations have been souring because of the ideological divide. But trade relations haven’t been affected, with the US being the biggest market for Venezuelan crude oil. Venezuela’s proven oil reserves are recognized as largest in the world. Petroleum makes up more than 50 percent of the country’s GDP, and petroleum products account for about 95 percent of exports. PDVSA’s US refining subsidiary Citgo is Venezuela’s most important overseas asset. Citgo was valued at more than $10 billion, with three oil refineries in the US that employ about 4,000 people. Citgo would import heavy crude from Venezuela, refine and distribute it throughout the US. The two countries show interdependency in petroleum.
Venezuela’s oil industry has been troubled since Maduro became president in 2013. Because of mismanagement and fall in oil prices, oil exports slumped to a 28-year low in 2018. As a result, Citgo’s oil revenues are essential to keeping the government running. Although Venezuela exports crude oil to China and Russia, almost all of the income is used to pay off debts. Only Citgo’s revenues can provide the Venezuelan government precious cash flow.
Sanctions on PDVSA will block $7 billion in assets and could result in a loss of $11 billion in sales next year. US Treasury Secretary Steven Mnuchin said that Citgo assets in the US will be able to continue to operate, “provided that any funds that would otherwise go to PDVSA instead will go into a blocked account in the United States.” This is like handing the country’s economic lifeline to the opposition. Washington is mounting pressure on the Maduro administration to make it cede power.
Oil rents, defined as “the difference between the value of crude oil production at world prices and total cost of production,” serve as a strong bond for unity and loyalty within the Venezuelan ruling party, Washington believes.
Oil-rich countries usually develop their economies and ensure supplies depend on tremendous amounts of oil rents. This pattern of development is known as the “rentier state” model.
Therefore, the US deems that cutting off the oil lifeline of Maduro administration will disrupt the political and military setup under the rentier state model and shock Maduro’s ruling foundation.
In addition to imposing sanctions on PDVSA, the US recognized the opposition leader and self-proclaimed president Guaidó and announced $20 million in “humanitarian aid.” The UK has also blocked Maduro from withdrawing $1.2 billion worth of gold, Bloomberg reported.
Meanwhile, Guaidó said he is taking control of government bank accounts abroad, and appointing new boards of directors at PDVSA and Citgo.
Tensions between Washington and Caracas have soared in the past week since the US recognized Guaidó. US National Security Advisor John Bolton has warned against violence against Guiadó and American diplomats in Venezuela, according to the Guardian. But reporters noticed Bolton holding a legal pad Monday with the words “5,000 troops to Colombia” written on it, CBC News reported.
It is unclear whether these words have been intentionally leaked, but there are chances that the US intends to take military action against Maduro. In that case, US intervention in Latin America will be ratcheted up.
Undoubtedly, the US sanctions on Venezuelan oil may lead to a more turbulent situation in Venezuela and exacerbate the risk of political change.
Due to years of poor governance, any new government that succeeds Maduro’s will be unable to perform basic functions as it will run into inadequate public infrastructure and a crippled private sector.
Beijing is Caracas’ important economic partner and the largest creditor. China should learn from the crisis in Sudan and Libya and follow the principle of non-intervention in internal affairs to prevent geopolitical risks. China should maintain good contacts with both sides and seek a political solution to the Venezuelan crisis together with the international community.
Cui Shoujun is director of the Center for Latin America Studies and a research fellow of the National Academy of Development and Strategy, Renmin University of China