Thanks to US pressure, Maduro's reckoning is coming

Thanks to US pressure, Maduro's reckoning is coming
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As Venezuelan President Nicolas Maduro indulges in an empanada tucked away in a drawer while unknowingly on live television, the rest of his compatriots starve and eat out of garbage cans. In a recent televised appearance, Maduro announced his plan to “refinance and restructure” Venezuelan debt following his payment of $1.1 billion on bonds from state-oil company PDVSA. With less than $10 billion in reserves, Maduro proclaimed that this will be the last payment before beginning negotiations with creditors.

On Thursday, the U.S. used its latest round of sanctions on 10 current and former government officials to emphasize its commitment to denouncing fraudulent elections in Venezuela as well as promoting the human rights of those suffering under Maduro’s corrupt regime. By continuing to name-and-shame those in the regime responsible for such crimes, the U.S. has a unique opportunity to both help support a return to democracy and protect the Venezuelan economy from total collapse.

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Maduro has regularly blamed U.S. sanctions for Venezuela’s need to restructure its debt while ignoring his own government’s gross negligence, endemic corruption, and inept economic policies. Following months of protests, accusations of human rights abuses by the international community, and an increasingly dire humanitarian crisis, Venezuelans continue to suffer under Maduro’s socialist dictatorship. The financial downfall follows months of corrupt state-sponsored distribution networks leaving extreme food and medicine shortages. Deathly ill and starving citizens have led to a spike in asylum applications alongside an influx of migrants crossing into neighboring countries in search of food and work.

The U.S has used a steady regime of sanctions on high ranking government officials and judges including Maduro himself, in an attempt to force Venezuela back to some semblance of democracy. In August, an executive order signed by President Trump barred U.S. individuals and entities from trading new Venezuelan bonds. This move anticipated Maduro’s desperate need to restructure his crushing debt load, which is an order of magnitude larger than his hard currency reserves.

As Caracas reached the point that many investors have been wary of for months, Vice President Tareck El Aissami was named the head of bond restructuring. El Aissami was sanctioned earlier this year by the Trump administration for his support of international drug trafficking networks and his ties to terrorism. El Aissami’s status as well as the prohibition on the trade of bonds threatens negotiations before they even begin. Many investors are wary of the looming threat of prison time or massive fines if they conduct any business with sanctioned entities or illegal bond transactions.

Under the guise of pursuing justice, Venezuela has creatively found new forms of financing their corrupt regime. Maduro’s announcement of the restructuring follows a series of arrests of high ranking Venezuelan officials including Fransisco Jimenez, head of procurement at PDVSA subsidiary Bariven, and another executive, Joaquin Torres.

These arrests follow the 2015 arrest of two prominent oil businessmen being arrested in the U.S. for violating the Foreign Corruption Practices Act by bribing PDVSA officials to win lucrative contracts. Although Venezuela originally denounced the investigations as sabotage, PDVSA’s subsidiary has now claimed it was a victim of fraud and has asked a U.S. court to order compensation for Bariven’s $600 million losses.

Imposing debt payments scheduled for the coming months have pushed Venezuela to seek alternative forms of financing. Such attempts have also included offering leasing deals to Russian and Chinese companies which would transfer operational control of major refineries. Such deals are not ideal for foreign investors due to poor working condition of the oil fields matched with highly subsidized domestic markets offering poor returns.

Last year, Venezuela gave Rosneft, a Russian state owned oil company, 49.9 percent stake in PDVSA’s U.S. based subsidiary, CITGO as collateral for a $1.5 billion loan.  Twice now, Rosneft has helped Venezuela stave off default as it drowns in nearly $150 billion of debt.

The relationship between Maduro and Putin has already become an area of concern for U.S. policy makers with members of Congress warning the possibility of a Russian takeover of CITGO would threaten U.S. national security. Maduro’s announcement of restructuring has endangered the ability for Rosneft to see their loans returned, forcing the Russian oil giant to face a $6 billion risk. Such a financial calamity may damage the budding relationship between Putin and Maduro.

Venezuela is left with few options. Caracas still owes nearly $800 million in interest payments and has seen some government and PDVSA bonds sink. The International Monetary Fund has forecasted that the Venezuelan economy will continue to steadily shrink and face nearly 2300 percent inflation next year. Following up with Maduro’s decision earlier this year to create larger bills to curb inflation, the Venezuelan president also announced its new 100,000 bolivar note. Reports indicate that the new note is worth less than $2.50 in U.S. currency.

U.S. sanctions have successfully brought Maduro to the negotiating table. Without continued pressure, Venezuela will continue using alternative means to finance its socialist dictatorship. The U.S. can mitigate the risks of a Venezuelan default by providing conditional exceptions to Treasury’s ban on trading Venezuelan bonds. Closely monitored conditions can include allowing international organizations to take over food and medicine distribution as well as allowing the U.S. prosecution of criminal government officials.

Without outside help, Venezuela will collapse. Multilateral diplomacy and continued sanctions on criminals in Venezuela’s government have and will continue to force Maduro to address the problems that have brought him to the brink of default. The U.S. should continue to support such actions until democracy is restored.

Michaela Frai is a research associate for the Latin America Project at the Foundation for Defense of Democracies (FDD). Follow her on Twitter at @MichaelaFrai and FDD at @FDD.