The US imposed sweeping financial sanctions on Venezuela on Friday, which were angrily denounced by Caracas and dramatically ratcheted up tensions between the two countries.
The sanctions, which US President Donald Trump signed by executive order, prohibit American financial institutions from providing new money to the government or the state oil company, PDVSA, and could make it harder for embattled Venezuelan President Nicolas Maduro to raise badly needed cash to prevent a debt default.
They also restrict the Venezuelan oil giant’s US subsidiary, Citgo, from sending dividends back to Venezuela and ban trading in two bonds the government recently issued to circumvent its increasing isolation from Western financial markets.
“Maduro may no longer take advantage of the American financial system to facilitate the wholesale looting of the Venezuelan economy at the expense of the Venezuelan people,” US Treasury Secretary Steven Mnuchin said at the White House.
The financial sanctions drew quick rebuke from Venezuela’s government, with Foreign Minister Jorge Arreaza calling them the “worst aggression” against the country in two centuries.
He said his government would fight the measures with all of its diplomatic and economic strength, but also blamed members of the opposition – some of whom expressed satisfaction with the US action – for conspiring to bring further hardships on the Venezuelan economy.
Maduro in a short video shot on Friday from a meeting with top aides at the presidential palace promised to respond with “strength and dignity”.
“We’ll have to endure sacrifices but we must safeguard the country and sovereign motherland in order to break the blockade,” he said.
He later added that the sanctions were designed to “asphyxiate” Venezuela and put it to default.
A senior Trump administration official – speaking to The Associated Press on condition of anonymity – said additional sanctions would be imposed if Maduro does not reverse course and meet opposition demands that he roll back plans to rewrite the constitution, free dozens of political prisoners, and hold fair and transparent elections.
Friday’s action stopped short of cutting off US imports of Venezuelan oil that are crucial both to both Venezuela’s economy and to Gulf refiners. The executive order also allows debt financing for exports of food, medicine and other humanitarian goods.
A worsening crisis
The sanctions follow through on Trump’s threat last month that he would take strong economic actions if Maduro’s government – seen as increasingly authoritarian by the United States – went ahead with plans to create a constitutional assembly that is made up wholly of government loyalists. The opposition boycotted the vote to elect the body’s 545 delegates.
Since the assembly was seated, it has voted by acclamation to remove the nation’s outspoken chief prosecutor, take lawmaking powers from the opposition-controlled congress and create a “truth commission” that many fear will be used to silence the government’s political opponents. Several prominent opposition mayors have also been removed or ordered arrested by the government-stacked supreme court.
The sanctions are bound to worsen a crisis that has already seen Venezuela’s oil-dependent economy shrink by about 35 percent since 2014.
Maduro, who is among some 30 senior officials already barred from the US, has been warning for weeks that the Trump administration was readying a “commercial, oil and financial blockade” in the mould of the one that has punished Cuba for decades.
He found an opportunity to argue his case that he’s being unfairly targeted after Trump said earlier this month that he wouldn’t rule out a “military option” to resolve Venezuela’s crisis – comments that were roundly rejected throughout Latin America, even by some of Maduro’s toughest critics.
On Friday, journalists were invited to a shooting range at Caracas’ main military base to watch as troops taught a handful of civilian government supporters how to fire assault weapons. The event, attended by military officials from China, Belarus and Russia, was a prelude to military exercises Maduro called for this weekend as a deterrent to any US military intervention.
David Smilde, a Tulane University sociologist who has spent decades researching Venezuela, told AP that blanket sanctions that cut off the government’s cash flow and hurt the population are likely to strengthen Maduro in the short term.
“It will bolster his discourse that Venezuela is the target of an economic war,” said Smilde, who supports Friday’s more limited sanctions.
But Smilde claims that, with Venezuela’s streets calmer than they have been for months and the opposition reeling from its failure to prevent the constitutional assembly from going forward, action from the international community represents the best chance of reining in Maduro.
Risk of default
Maduro is already struggling to combat widespread shortages and triple-digit inflation as oil production has tumbled to its lowest level in more than two decades. Any economic sanctions, however mild, increase the risk of a default on Venezuela’s ballooning debt.
The government and state oil company have about $4bn in debt payments coming due before the end of the year but only $9.7bn in international reserves on hand, the vast majority consisting of gold ingots that are hard to trade immediately for cash.
Russia and its state oil company Rosneft have emerged as an increasingly important source of financing for state oil company PDVSA, according to a Reuters report.
On at least two occasions, the Venezuelan government has used Russian cash to avoid imminent defaults on payments to bondholders, a high-level PDVSA official told Reuters.
“At this point, our view is that the country can scrape by without defaulting this year, largely with the help of Chinese and Russian backing and by further squeezing imports. Next year is a toss-up,” said Raul Gallegos, an analyst with the consultancy Control Risks.