What is the U.S. Government’s Strategy in Venezuela?

Mark Weidemaier and Mitu Gulati

Even by the eccentric standards of its ongoing debt crisis, weird things are afoot in Venezuela. Opposition leader Juan Guaidó has declared himself president and been recognized by the U.S. and other governments. That’s not especially weird. What’s odd is that the political convulsions in Venezuela are manifesting in part as a battle over control of the CITGO board. Guaidó has said he plans to appoint a new board. Rumors are circulating that this is part of a plan, assisted by the U.S. government, not just to cut off the flow of oil revenues to the Maduro regime but to redirect that flow towards opposition coffers. As the Wall Street Journal previously reported: “U.S. officials say they want to divert oil money--as well as control over other assets like gold reserves--away from Mr. Maduro to the new interim president without stopping crude exports from the country.” That’s also consistent with a recent statement recently put out by the U.S. Treasury.

Since these reports, the U.S. administration announced new sanctions, which don’t direct funds to opposition coffers but which do appear intended to prevent CITGO from remitting oil-related payments to Venezuela. Instead, the funds must be held in blocked accounts in the U.S. Here’s Bloomberg on the sanctions, and the Wall Street Journal, and Reuters, and the New York Times.

What’s going on here?

We are skeptical that this is a first step towards putting any significant money in opposition coffers. To be sure, there would be historical precedent for an effort to pair an asset freeze with an attempt to fund opposition parties. In 2011, for instance, after freezing assets belonging to Qaddafi government, the Obama administration tried to divert some of these assets to fund the main opposition party. (Here are contemporary articles in the New York Times and on the Council on Foreign Relations website.) There are other historical examples of this, too. The problem is that we aren’t aware of significant U.S. assets controlled by Maduro and his cronies—except, that is, for oil receivables. And if U.S. buyers cannot remit payment to Venezuela, the government will likely cause the company to stop oil shipments. Perhaps buyers are in arrears, and the amounts currently due will flow to the blocked accounts rather than to the government. But if PDVSA stops selling, these funds will quickly dry up. Moreover, the sanctions may also cause PDVSA to default on its 2020 bonds—the only ones it is currently paying—which are collateralized by shares in CITGO’s holding company. If this happens, the sanctions may cause Venezuela to lose control over CITGO.

In addition, if the U.S. government attempted to force CITGO to pay its earnings to the interim government, we wonder what impact this would have on contractual triggers in the CITGO bonds (we have not checked the details). Might the U.S. create a basis for triggering an acceleration of debt?

It’s worth stepping back to acknowledge the larger stakes here. It seems to us that current events pose some fundamental questions. One important question is, Who owns assets that, at the moment, nominally belong to the Venezuelan government and its corrupt officials? The question has political, moral, and legal dimensions. We suspect many readers would answer--somewhat abstractly--“the Venezuelan people.” We would give that answer, too. The problem, however, is that the international law of sovereignty—which, when the smoke clears, will decide who bears the costs of this debacle—isn’t very good at translating that intuition into reality. For instance, when a lender extends credit to a corrupt dictator who then absconds with the money, the doctrine of odious debt might, in theory, impose the loss on the lender. In reality, however, this is rarely the outcome; the country’s citizens and residents bear the loss. The best way to prevent this distributional inequity is to prevent corrupt leaders from dissipating or stealing assets in the first place. One benefit of the sanctions regime is that it will prevent the government from extracting further value from Venezuelan oil reserves, while possibly hastening its downfall. On the other hand, the new sanctions may also cause some lasting harm. If the sanctions cause Venezuela to lose control over CITGO, one might reasonably question whether this will help or hurt a future, democratically-elected government. We hope the administration has clear objectives here, other than scoring a political win.

Longer-term, much more will be needed from the U.S. and other governments. Once a stable, new Venezuelan government is in place, it will desperately need to restructure its mountain of debt. The debt stock is bewilderingly complex, consisting of bonds (both the government’s and PDVSA’s), trade debts, promissory notes issued to trade creditors, arbitration claimants, bilateral official debts, etc. Imagine you are a bond creditor and that the government has presented you with a restructuring proposal that seems, on its face, to be reasonable. You are willing to accept, but not if some arbitration claimant is likely to come along and seize the government’s oil receivables—getting paid in full while disrupting the government’s ability to sell the oil necessary to pay you. A similar dilemma is present in every restructuring but is dramatically magnified for Venezuela, because of the diversity of its creditor base and its dependence on oil exports to generate foreign currency. The solution to this problem is to immunize a new government’s assets from seizure by creditors. Again, there is precedent. This is exactly what the U.S. and other countries did to facilitate restructuring of Iraq’s debt. Unless something similar happens here, any attempt to restructure Venezuela’s debt faces a serious threat from holdout creditors.

Long story short, we aren’t sure what the U.S. government’s strategy is here. In the short term, it will put pressure on the Maduro regime and hopefully speed a transition to a new government. Longer-term, we hope the administration is willing to take additional steps to ensure an orderly restructuring.