When the Trump Administration designated Venezuelan state-owned oil producer Petreoleos de Venezuela (“PdVSA”) on January 28, 2019, pursuant to preexisting sanctions relating to the political situation created by the Maduro regime, it sent a significant but not unanticipated ripple through the global petroleum markets. The impact of the sanctions for commodities traders and petroleum refiners—particularly in the U.S. Gulf Coast, where PdVSA’s steady supply of heavy crude has long been a sizable staple feedstock—was fairly immediate, and appears to have had the intended effect of isolating PdVSA, impairing its production capabilities and reducing its cash revenues. According to industry reports, many of the larger commodity traders around the world have largely if not entirely backed away from trading in PdVSA crude, and PdVSA has been cut off from its primary sources of naphtha and other diluents it needs to move its heavy crude through pipelines. Whether the sanctions will have the intended political effect of forcing regime change in Venezuela remains to be seen.
Although at a high level the PdVSA sanctions are not functionally different from other OFAC sanctions designations, their political contours, the immediacy of the underlying humanitarian crisis in Venezuela, and the proximity and entanglement of PdVSA in U.S. markets—including the fact that one of PdVSA’s most valuable assets is the U.S.-based Citgo—makes them appear like a different creature. So, what can the Venezuela sanctions, as imposed against PdVSA, tell us about the future of U.S. sanctions?
All sanctions regimes, export controls, import controls and other forms of trade restriction are reflections of foreign policy. In the case of sanctions, their form and function tends to be highly particularized to the political situation at issue. The Venezuela sanctions appear unique in part because of the specific circumstances in which they are imposed: Maduro’s government is in crisis, Venezuela is a significant crude producer and exporter for the international oil market, and PdVSA is a critical element of the Venezuelan economy and of great symbolic importance to the Venezuelan people. Combine that with Venezuela’s physical proximity to the United States and the fact that the imposition of sanctions against PdVSA is cutting that company off from its biggest export market and cutting U.S. refiners off from one of their largest sources of feedstock, and you have a uniquely impactful sanctions action that is unlikely to be repeated.
Sanctions can be a blunt instrument, but they can also be a precise tool, as they appear to be here. The Venezuela sanctions continue a trend of applying incremental pressure to targeted sectors of an economy or particular operators in that sector, without going so far as to impose a comprehensive embargo against an entire country. Unlike the Russia/Ukraine sectoral sanctions, the Venezuela sanctions, through the PdVSA designation, went from incremental to exponential in the pressure being applied. But like the sectoral sanctions, the Venezuela sanctions are more complex in design and application. It is reasonable to expect that future sanctions programs will probably look more like the Venezuela sanctions and Russia/Ukraine sectoral sanctions than the Cuba embargo.
Sanctions to the Front
As of this writing, the Maduro regime remains in place and it is unclear whether the regime change being sought by the Trump Administration will occur—at least in a reasonably orderly fashion. Regardless of that outcome, the PdVSA designation has certainly impacted the political conversation, and moved Venezuela’s political and humanitarian crisis more to the forefront in terms of U.S. and international awareness and attention. As a result, it is possible that the current and future administrations will feel emboldened to consider the use of sanctions more liberally, particularly if Maduro does step aside without internal armed conflict or outside military intervention. On that point, we can’t ignore that the Trump administration has not shied away from applying sanctions and appears ready and willing to do so to further its foreign policy agenda.
For now, we remain relatively early in the life cycle of the PdVSA designation, with the first wind-down deadlines set to pass and the global commodities markets remaining in a wait-and-see posture. More time needs to pass before we will have a clear understanding of the likely political and economic trajectory of the situation in Venezuela, and that clarity may remain elusive. For now, we have to view the posture of the Venezuela sanctions as dynamic and subject to significant change with limited notice.