Presidential standoff may worsen Venezuelans’ misery

Economists agree that the longer the standoff between the U.S.-backed Guaido and Maduro drags on, the more regular Venezuelans are likely to suffer.

Maduro, who so far appears to have the backing of the decisive military, has dug in, accusing the U.S. of orchestrating a coup by encouraging Guaido to declare himself interim president and then leading a chorus of nations that immediately recognized his rule.

The high-risk and seldom-used strategy of recognizing an alternative government that doesn’t already have de facto power carry enormous legal and financial entanglements.

On Monday, the White House said it was imposing sanctions on state-own oil giant PDVSA, a potentially crippling move that the U.S. estimates will cut off more than $11 billion in export revenue over the next year. Also at risk is $1.2 billion in gold reserves — 15 per cent of Venezuela’s foreign currency reserves — stored in the vaults of the Bank of England.

“We have continued to expose the corruption of Maduro and his cronies, and today’s action ensures they can no longer loot the assets of the Venezuelan people,” national security adviser John Bolton said at a news conference to announce the sanctions.

If the Trump administration’s confrontational approach is adopted by the European Union, some of whose members have threatened to recognize Guaido if Maduro doesn’t announce new elections in eight days, it could bring oil production to a standstill, heaping more hardships on the 29 million Venezuelans already struggling with hyperinflation, widespread food shortages and anemic economic activity.

“If Maduro stays in power, Venezuela could suffer a humanitarian catastrophe,” said Francisco Rodriguez, chief economist of New York-based Torino Capital.

Rodriguez said the outlook is similar to what happened to Libya in 2011, after the Obama administration froze the government’s assets in retaliation for Moammar Gadhafi’s crackdown on protesters during the Arab Spring. In response, oil output in the North African country dropped more than 70 per cent.

But unlike that asset freeze and the one imposed on Iraq after Saddam Hussein’s invasion of Kuwait, which were done in concert with the international community, Maduro still has important backers, most notably China and Russia, which would serve as a likely veto of any international sanctions at the U.N. Security Council.

If he’s not getting paid, Maduro will surely divert the roughly 500,000 barrels per day of oil currently being sold to Gulf Coast refineries in the U.S. to more friendly markets, like creditors Russia or China, as well as India, Malaysia and Thailand.

But processing international financial transactions is very hard without going through the U.S. or European banks. Transport costs would also jump because Venezuela’s ports aren’t well-equipped to load supertankers for transporting oil to such distant markets, said Russ Dallen, managing partner of Caracas Capital, a brokerage.

That means the country, which depends almost entirely on oil exports for hard currency, will be able to purchase even less food and other imports, exacerbating a severe recession that is already deeper than the U.S. economic contraction during the Great Depression.

Then there’s the $65 billion in Venezuela’s and state oil company PDVSA’s outstanding bonds, almost none of which are being paid and whose prices rallied 25 per cent on news of Guaido’s challenge to Maduro’s authority.

If the U.S. were to hand control of PDVSA subsidiary Citgo to people selected by Guaido, as is expected, Maduro would almost certainly stop paying back loans to Russia’s Rosneft, which in turn would execute a lien giving it 49.9 per cent control of the Texas oil company.

Treasury Secretary Steven Mnuchin said Citgo assets in the United States will be allowed to continue to operate under the new sanctions — provided any funds that would otherwise go to the state-owned oil company in Venezuela be sent to a blocked account in the United States

“Maduro was already facing an incredibly complex situation,” Dallen said. “But the loss of fast cash from Citgo and the U.S. market will further crush the country’s decimated oil production and cash flows, meaning more starvation and more people fleeing the country.”

To be sure, oil production — the lifeblood of the economy — has been collapsing for years. The OPEC nation currently pumps just a third of the 3.5 million barrels a day it did when the late Hugo Chavez took power in 1999, despite sitting atop the world’s largest reserves.

Rodriguez, who tried to persuade the government to moderate its policies as part of a failed Vatican-sponsored mediation between Maduro and the opposition in 2016, said that if the showdown between Guaido and Maduro continues the economy would contract around 30 per cent in 2019. He forecasts inflation will reach around 23 million per cent from the 1.6 million it was in 2018.

Should the opposition prevail, there will be numerous benefits from an improved investment outlook — although perhaps not immediately.

Orlando Ochoa, a Caracas-based economist, said the U.S. will have to play a major role marshalling the support of international financial institutions, lifting sanctions and providing a debt shield to protect Venezuela from creditor lawsuits while the country gets back on its financial feet.

Such concepts of high finance make little sense to Pineda, who nonetheless said she is willing to eke out a meagre existence if that is what it takes to get rid of Maduro.

“We’re ready to eat bread and water if we have to,” she said. “Getting out of this will be our reward.”

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Joshua Goodman on Twitter: https://twitter.com/APjoshgoodman

Joshua Goodman And Scott Smith, The Associated Press

by Canadian Press

Presidential standoff may worsen Venezuelans’ misery

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