Trump rightly condemns Venezuela, but that's just the beginning

Trump rightly condemns Venezuela, but that's just the beginning
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“We call for the full restoration of democracy and political freedoms in Venezuela,” announced President Trump Tuesday before the United Nations General Assembly.

Warning Venezuelan dictator Nicolas Maduro of “further actions” if his government doesn’t change course, Trump’s speech was an impassioned rallying cry before the international community. The Venezuelan population has suffered under the heavy weight of starvation, lack of medicines, and nearly five months of violent repression that have left nearly 125 dead and scores injured. To follow up on Tuesday's speech, more can be done to address the institutionalized corruption and authoritarianism of Maduro’s regime.

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Maduro’s first power was to stack the Venezuela’s Supreme Court in December 2015. The court attempted to seize legislative power from the democratically-elected legislature, and thousands of Venezuelans took to the streets in protest. Hundreds of civilians and opposition leaders were arrested. Maduro then endorsed a fraudulent election to create the new Constituent Assembly, a super-legislative body that intends to change the constitution. Within days of its creation, the assembly proclaimed itself superior to all other government bodies and established a “truth commission” to crack down on political dissidents.

The Venezuelan people have suffered as a result of Maduro’s authoritarianism. Inflation is projected to reach 2000 percent while thousands of Venezuelans are fleeing to the U.S. and neighboring states.  Maduro and his cronies have been accused of endemic corruption, supporting international drug trafficking, and facilitating terrorist financing. These actions have not only threatened the security of the Venezuelan people, but of the region as a whole.

In response, the U.S. Treasury Department has steadily ratcheted up sanctions on the regime’s corrupt elite, an effort that culminated with the sanctioning of Maduro himself after the Constituent Assembly elections took place. The Trump administration’s stated goal of these sanctions has been to restore democracy and protect human rights in Venezuela.

In late August, the Trump administration went one step farther by issuing an executive order that barred U.S. individuals and entities from trading new bonds issued by Venezuela or by the country’s state-run oil company, PDVSA. Treasury also issued general licenses, exceptions to the broader executive order, which authorize specific transactions including for debt related to humanitarian aid.

These new sanctions went after the weakest link in Maduro’s regime: his country’s heavy debt load. Maduro has prioritized debt payments to retain his country’s access to international capital markets. However, Venezuela owes approximately $97 billion to foreign creditors, and has less than $10 billion in cash on hand. Unsurprisingly, the Venezuelan debt trade “slowed to a trickle” after the latest round of sanctions, functionally freezing the existing market and impeding Venezuela’s ability to issue debt in the future.

This is doubly important because Trump’s executive order will prevent Venezuela from restructuring most of its existing debts. Maduro cannot simply print bolivars to pay this debt, as much of it is denominated in U.S. dollars. Maduro has already threatened to“free” Venezuela from the dollar by searching for currency alternatives like the euro.

The sanctions will also functionally prevent U.S. companies from buying Venezuelan bonds in secondary markets, which Goldman Sachs did to the tune of nearly $3 billion in May. These markets are critical for Caracas, as the government could indirectly raise billions of dollars from these transactions. Indeed, after Treasury’s actions, the odds of Venezuela or PDVSA defaulting in the next five years rose to 96 and 99 percent, respectively.

Without the ability to restructure debt, creditors are likely to seize foreign assets of PDVSA and Venezuela if a default occurs. Treasury’s actions may end up forcing Maduro’s regime to change course as it approaches default. Indeed, PDVSA has already moved away from transacting in dollars. As the country approaches prospective default, it has come to rely increasingly on predatory lending from Russia and China, which has bailed Maduro out in the past with credit extensions worth billions.

However, Treasury can do more to complement its earlier actions by targeting corruption in Venezuela, which unsurprisingly goes all the way to the top. Last month, Venezuela’s recently fired attorney general, Luisa Ortega, a former Maduro ally who has since fled the country, accused Maduro of stealing nearly $10 million from Venezuela’s national treasury. Ortega also announced that she has information connecting key Venezuelan officials to the region-wide Odebrecht and Petrobras bribery investigations.

Other government leaders have been linked to serious criminal activities, most notably the ruling party’s second in command, Diosdado Cabello, has long been investigated for his ties to a military-run drug cartel. Separately, the military has been implicated in a widespread food import scheme that has left nearly the whole country starving.

To punish such behavior, Treasury should expand its list of targets to include those corrupt Venezuelans who have thus far escaped sanctions. The U.S. can immediately include Cabello and numerous members of the Constituent Assembly, including its president, Delcy Rodriguez.

Further, Treasury should level a Global Magnitsky designation on those who have profited from “significant corruption” or “gross violations of internationally recognized human rights.” For these same reasons the Organization of American States and the United Nations have already launched investigations into crimes against humanity to be referred to the International Criminal Court. A Magnitsky designation alongside international investigations into Maduro’s dictatorship would send a strong signal to those doing business with the regime that doing so furthers human rights abuses. 

However, Washington should make clear that if Maduro backtracks on his increased authoritarianism and commits to a return to democracy — certified by international monitors — sanctions may be slowly lifted. Such a restoration would be welcome to Venezuelans, who overwhelmingly dislike Maduro and favor a return to full democracy. This would show Venezuelans the U.S. is not seeking the further impoverishment of the country but rather a commitment to the rights and democratic values enshrined in the existing Venezuelan constitution.

Michaela Frai is a research associate for the Latin America Project at the Foundation for Defense of Democracies (FDD). Alex Entz is a research analyst for FDD’s Center on Sanctions and Illicit Finance. Follow FDD on Twitter @FDD and Michaela at @MichaelaFrai.