The perfect storm in Venezuela

The perfect storm in Venezuela
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The dictatorship of Nicolas Maduro in Venezuela is about to face a perfect storm. After several days of denial, the regime has acknowledged the first cases of the coronavirus in the country. Venezuela also faces cratering oil prices stemming from the faceoff between Russia and Saudi Arabia and a slumping global economy. Consequently, the conditions have never been more auspicious for the United States to strangle the regime and achieve its foreign policy goals in Venezuela. The dial has been set to overdrive in the “maximum pressure” American campaign against the regime.

Maduro will confront a growing pandemic with a health system ranked by the Johns Hopkins Center for Health Security as one of the most fragile in the world. Those countless doctors and other medical professionals who have fled the country in recent years compound the problem. Although the pandemic may act in favor of Maduro in the short term, providing a convenient public health cover for the tough quarantine measures that prohibit street protests and large congregations, the breakdown of the vulnerable health system impacted by dire shortages of medicine and protective equipment could provoke new rounds of social unrest.

Further, the stability of the regime in Venezuela is greatly imperiled by the impending global collapse in oil prices from the spat between Russia and Saudi Arabia. After the two oil competitors were at loggerheads over an agreement to cut production, a price war caused a tailspin across world markets. A global slowdown caused by the pandemic will not help.

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The Venezuelan oil industry, which is under heavy American sanctions and suffering from such kleptocracy and mismanagement, already sells oil at a heavy discount. On average, the Venezuelan national oil company, PDVSA, had been selling its flagship crude product at a rate of at least $18 below the Brent crude benchmark, before Brent crude prices fell below $30 per barrel. Such rate cuts were necessary in order to attract buyers and offset the considerable risk associated with doing business with Venezuela.

Prior to the collapse in oil prices, there was still a small profit margin for companies that were willing to risk moving Venezuelan oil. Now, however, rising shipping costs have erased profit margins. Any production recovery will now be sluggish, prices will be slow to rebound, and Venezuela must overcome the supply chain bottlenecks and bloated storage facilities.

The American sanctions on the Russian subsidiary in Switzerland, Rosneft Trading, removed the most important intermediary for Maduro to get his oil to market. By the end of last year, Rosneft exported about 70 percent of Venezuelan crude. After sanctions were imposed on Rosneft Trading, Russia proceeded to test the American government and replaced its role with TNK Trading, another subsidiary in Switzerland. The United States promptly sanctioned TNK Trading and added it to the same wind down schedule as Rosneft Trading. These types of sanctions have served to deter the other potential partners from touching Venezuelan crude.

PDVSA, which is not exactly a wellspring of industry competence, cannot step in to replace sanctioned or deterred partners. In response to flagging production, Maduro declared an “energy emergency” and then ordered a sanctioned former vice president, Tareck Aissami, to lead a commission to restructure the organization. Since taking over, however, he has presided over a purge of top officials. With Aissami at the helm of the organization, Maduro and the regime continue to ransack the coffers of PDVSA.

These dynamics will make next month challenging for the Venezuelan oil industry. Although some shipments remain scheduled for the next couple weeks, contracts next month will be hard to come by. Besides the crude it ships to Cuba as remuneration for internal security expertise, Venezuelan oil production could end up entirely in storage facilities next month.

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In a world awash with oil and major players such as Saudi Arabia capable and willing to supply India and much of Asia with its oil needs, who would risk touching Venezuelan crude? Rosneft Trading is a major tool of Russian foreign policy that has allowed Vladimir Putin to risk further sanctions on subsidiaries. Yet the unfavorable economics of getting the oil out of the ground and shipping it to market applies all the same. If Putin were not distracted enough developing his plan to rule Russia for life, his foreign policy faces headwinds elsewhere, like a dangerous standoff with Turkey in Syria. Under these circumstances, it is unlikely that his risk appetite is large enough to come and rescue the sinking Venezuelan oil industry.

The dual problem of the coronavirus pandemic and the collapse in oil prices have managed to create in two short weeks what a concerted American sanctions campaign could not achieve, which is a potential knockout blow to the Venezuelan legal economy. The illicit economy in illegal gold and drug trafficking, of course, will continue to grow at an alarming rate. Maduro will be forced to shut in wells as Venezuelan oil production trickles to a near standstill. The United States needs to stay vigilant against the regime and trust the external conditions improve its odds of success. Under these conditions, if the American government fails to achieve its goals of deposing Maduro and imposing democratic elections in Venezuela, then it might never achieve them in the end.

Ryan Berg is a research fellow focused on Latin American government and security studies at the American Enterprise Institute based in Washington.