A Policy Option for Venezuela: Oil-for-Food

29

For all the news of fresh sanctions against Venezuelan regime-linked individuals, it’s the prospect of sectoral sanctions on the Venezuelan oil industry that should really worry Nicolás Maduro. Luckily, for him, many in the U.S. see this as an extreme option. Partly, this is because cutting off the flow of Venezuelan oil would jack up prices at the pump, which is politically difficult in the U.S. But it’s also due to humanitarian concerns: a longtime net food importer, Venezuela depends on revenue from oil exports to feed its people. Sanctions that disrupt food imports would deepen an already severe humanitarian crisis.

Taking control of the flow of dollars away from the regime in Caracas would put a hard stop to the main reason enchufados support the regime.

And yet, the U.S. is badly in need of better policy options for Venezuela. So far, it has relied on sanctioning specific regime power players, but this has proven ineffective. This has narrowed down the U.S. policy menu to  “continue something that doesn’t work” and “set off a famine.”

A more nuanced approach is called for.  

During the years between the two Gulf wars, the U.N. administered an Oil-for-Food program for Iraq. Export revenue was controlled by the U.N., which guaranteed the money could only be spent on humanitarian priorities like food and medicine. In retrospect, the program was successful: it kept the Saddam Hussein regime from investing proceeds from oil on military capabilities.

It’s time the U.S. tried something similar for Venezuela: buying Venezuelan oil only if the proceeds are turned over to an escrow account that can be used only on food and medicine for the country.

Taking control of the flow of dollars away from the regime in Caracas would put a hard stop to the main reason regime supporters (enchufados) continue to have for supporting it: getting their hands on some of the oil money, through currency arbitrage or straight-up corruption.

Nowhere is it written down that an oil-for-food program has to be administered by the United Nations.

The flow of Venezuelan oil to U.S. refiners could continue as would the flow of food to Caracas, the distribution of which would need some monitoring.  PDVSA, the state oil company and the Bolivarian Republic of Venezuela would necessarily default on their debts, an outcome already expected and priced into the market, and the money put to far better use.

Right now, it may seem utopian to imagine a resolution like this making it through the U.N. Security Council. The regime still has two veto-wielding allies in the UNSC —Russia and China— and both have continued to voice support for Maduro even after the Constituent Assembly was convened. It would take a dramatic reversal for them to turn on Maduro now, though in the wake of a unanimous sanctions resolution against North Korea, maybe impossible things aren’t as impossible as they once were.

One phone call between Donald Trump and Indian Prime Minister Narendra Modi would be enough to set this up.

But nowhere is it written down that an oil-for-food program has to be administered by the U.N. In fact, some aspects of Venezuela’s oil industry make it imaginable that it could work even without the U.N. approval.  

Venezuela’s customer base for oil is strange: virtually the only ones of its clients that pay cash-up-front are the U.S. and India. One phone call between Donald Trump and Indian Prime Minister Narendra Modi would be enough to set this up. And if Venezuela doesn’t like it and wants to sell its oil elsewhere…well, good luck finding customers! There just isn’t any refinery capacity outside the U.S. and India for Venezuela’s extra-heavy crudes.

An Oil-for-Food Program for Venezuela could redraw the strategic picture in Caracas without either jacking-up the price Americans pay at the pump or starving the Venezuelan people. In a world where we tend to assume the U.S. has no good policy options, maybe some creativity is in order.

29 COMMENTS

  1. “In retrospect, the [Oil-for-Food] program was successful: it kept the Saddam Hussein regime from investing proceeds from oil on military capabilities.”

    The Iraq Oil-for-Food program became seriously corrupted, with billions of $ diverted to Saddam’s arms purchases, secret police operations, and crony payoffs.

    • Very good point. And why don’t we also talk about the elephant in the room? How did the situation end in Iraq? Anal-ysts and the like are great at coming up with solutions to “fix” things. The problem is that they don’t fix anything and things end up worse than they were (problems of second order that they triggered with their actions)…sigh, never learn…

      Going into the details of the proposition: do you really not think that China or Russia can begin to pay cash for oil in case the sanctions go through? Why couldn’t they? Or you are going to tell me that it makes more sense for them to lose the equity shares in the JV’s they now co-own because PDVSA will be tied up dealing with a default while their investments go south?

      • Hi Venny, yes, skepticism is good.

        However we need to remember that Venezulan oil needs to be refined first and not many places in the world are set up for this, not even in Venezuela are they self sufficient in this.

        If you actually live in Venezuela, you know that the MUD is worthless. Who knows if Oscar Perez and the resistance are for real. We need something to break the deadlock now.

        If you live in Venezuela, an oil for food program–despite any corruption that would occur (and we know it would because Venezuelans are some of the most corrupt people on the planet) is something that would really make this regime shit their pants. Heck the dollar dropped back to 10,000 today. The Chavistas are celbrating over that (and please, somebody write an article about that!!!)

        Even if the USA will not do it, I welcome the gunboat diplomacy because that will dominate the narrative. The MUD is pathetic and we need a boost right now.

        • Guacharaca,

          1) Regarding the capacity to refine oil, there are alternatives that PDVSA can take. For example, they can begin with getting their act together with the local refineries (which are operating at ~40% capacity). The fact that there are things broken now doesn’t mean that they can’t be fixed. And people will say that the operators are incompetent and what not. If there is a strong incentive for it to get fixed, then it will. They can also increase shipments to Curacao, for instance.

          Even the anal community is saying that CITGO’s ability won’t be disrupted too much by sanctions: “While Citgo depends on Venezuela for about 28% of its crude supply, it buys heavily from other markets, and could re-balance its crude mix to an optimal profit level, although in several months. Meanwhile, fuel prices in the US could increase as well, helping offset the negative effect of higher crude costs, says Nymia Almeida, a VP- Senior Credit Officer at Moody’s.”

          2) Again, you have no idea what the consequences of implementing gunboat diplomacy will be. What we do have is an idea of how it has worked out in the past: the situation in every single one of the countries where it has been implemented has worsened. Syria, Libya, Iraq, Afghanistan…Do I need to say more?

          MUD has always been worthless but every time I mention this, all I get is silly accusations and la-la land excuses. As I have always said it (you can look at my old posts): mediocre politicians = mediocre outcomes. But somehow people are surprised when MUD puts their political agenda above everything else (as most recently illustrated by their decision to go to the State elections). They have always done the same thing so why is it that people are somehow surprised by their actions?! Naivety at the most basic level.

  2. ” One phone call between Donald Trump and Indian Prime Minister Narendra Modi would be enough to set this up. ”

    That would be nice, but landing back on planet earth, this would happen:

    1/ Serious corruption of the program, as RR here points out,, only even worse than in Iraq: The corrupt Kleptozuelan military already knows how to trade food and get very rich.., as do the PDVSA crooks.

    2/ Dealing with India… the kick-backs and murky Mega-Guisos would flourish in no time. Perhaps it would be even easier to steal the food proceeds than stealing Indian cash..

    3/ The Chavistoide Criminal Narco-Kleptocracy would use this oil-for-food restrictions as yet another excuse to blame everything on the “Yankee Imperialists” and the “Guerra Economica de la Ultra-Derecha Fascista”, (even throwing in “el pelucon mayor” Lorenzo Mendoza and Polar in the mix) to tighten-up the dictatorship’s repression and expropriations another notch.

    In the end ‘el pueblo’ wouldn’t see much of the food, and at high prices.. while the Kleptocracy would continue to laugh, getting richer and stronger.

    Still, it’s would be a decent initiative, certainly better than all the useless Lima or Almagro talk..

  3. “a longtime net food importer, Venezuela depends on revenue from oil exports to feed its people”

    Ugh! there is no reason beyond regime policy for Venezuela not to be a net exporter of food (coffee, corn, rice, etc). Self inflicted wounds, lazy reporting

    • Ugh! there is no reason beyond regime policy for Venezuela not to be a net exporter of food (coffee, corn, rice, etc)

      Maybe so, but the Petrostate of Venezuela has long been a net food importer. Yes, under Chavismo food imports skyrocketed and food exports crashed, but before Chavismo Venezuela was a net food importer.
      FAO Food Balance Sheets has a lot of data.
      http://www.fao.org/faostat/en/#data/FBS

      • There is no reason for that – other than very bad policy which has now come home to roost … oh … wait ….

        Really … when you have one of the richest geographies in the world, plenty of water, grazing land, farmland, fisheries … and you have to import food to avoid starvation … what are you going to do? Blame the geography? Just say that it’s too nerdy a subject to cultivate?

  4. Not a bad idea.
    Other could be to apply a gradual sanction, instead of an all-or-nothing approach. The U.S. could reduce purchases in half for instance, instead of all oil purchases.
    That would be the equivalent of Maduro having an income similar to what it was when oil reached $20 per barrel and that was started many of his problems.
    Together with other pressure tactics could work.

    BUT !!!
    One issue I see is that the entire regime is rotten so it wouldn’t be enough to get rid of Maduro but a very long list of people in government, top brass of FANB, GNB, SEBIN, etc

    So if all these people are gone, who are going to replace them and how long that process would take?

    Can the security and armed forces be trusted to support a new democratic government short and medium term?
    Lets bear in mind that 17 years of military recruiting under chavismo could have harvested their most loyal supporters given that they never raised up to defend the people and the constitution.

    Which takes me back, again and again to the US Military Intervention as a long term, faster, effective solution with a short period of occupation (6 months?) to guarantee a stable transition to Democracy and the best part is that no sanctions are needed.

  5. I wonder if extending sanctions to immediate family members of the regime holders would be possible?
    I know it sounds barbaric but lets think about it.
    Obviously it wouldn’t be fair to their family to pay for the fault of others but is not also fair that millions of people’s lives are being destroyed by this regime.

    If we could have many countries to do just that they won’t have other places to live or visit other than Venezuela, Bolivia, Cuba and Zimbabwe. 🙂
    Once they surrender power, their family could have reinstated their rights.

    Wouldn’t this make more sense?
    These are the ultimate target sanctions and pale in comparison as a punishment to the people that lost their lives fighting for freedom.

      • Indeed. Very little of the money stolen by Chavez and later by Maduro et al remains inside the country. Lean on governments around the world (few of them consider this regime a friend) to freeze those assets. You don’t have to confiscate the funds, just freeze them and a shit storm will ensue, all of which puts more pressure from within on the regime.

        • Very little remains in personal names, or even in easily traceable accounts. It can be found, however, by due diligence/for a fee by specialized firms, usually contracted by affected Govts./parties, but very unlikely to be searched for by foreign govts. on their own volition.

    • We need to sanction over 5000 people (or more) to make targeted sanctions work. Confiscate their houses in Miami, Madrid, Paris. Freeze all of their accounts. 8 more to me seems pretty weak. I am sure all of the Venezuelans living in South Florida could put together a pretty good list.

  6. A simple foreign aid grant to the VE armed forces. If they excercise their duty to remove Maduro and his cronies. Valid say for about ten years. Also set up democratic elections within six months. Probably a few other considerations. The military have to know the golden goose is dying. Could be paid for with a VE oil tax?

  7. Dear Julian,

    While I consider your policy proposal to be consistent and I essentially agree with the intentions (ie. Cutting off the supply of petrodollars to the enchufados would definitely bring an end to the status quo and lead to the end of the current regime), I can’t envision a scenario on which such a proposal might be imposed without some sort of direct foreign intervention in the country.

    Given that US meddling in VZ’s affairs is the proverbial Wolf the government has been crying about for over 18 years now , and taking into consideration the potential for corruption and other potential ills associated with this plan (another one that comes to mind: what does it do to fix the underlying macroeconomic mess of controls and over-regulation?), The world powers might as well engineer a full-blown intervention, send here the UN peacekeepers and orchestrate a government transition. I’d say that Responsibility to Protect would cover this option similarly to your proposal, don’t you think?

  8. Henry Ramos Allup Conspiracy Theory:

    HRA is doing what he is doing because he needs to make it till 2018.

    By 2018 LL, Capriles, Maria Violencia, Marijuanita and many other opposition leaders by that time will be under house arrest or not eligible to run for president.

    Following: who else can be elected President in 2018 by the opposition and thus give legitimacy to the ANC in a farce election??

    I think we all know the answer to this question.

    If this conspiracy theory is true, I think these guys might have a long term strategy…

  9. In past comments I mentioned the possibility of putting some surcharge on exports of US crude and products to Venezuela and using the funds from such surcharge to fund the purchase of humanitarian supplies channeled thru the church or some other credible NGO , the ban on imports can hurt but is difficult to handle, replacing US exports by sending them to China or Russia even if possible will pose logistical and commercial problems for Pdvsa and hurt their financial situation…..big time …..!!, Oil is not that fungible when you look at optimizing their yield on a very competitive market.

  10. Taking control of the flow of dollars away from the regime in Caracas would put a hard stop to the main reason regime supporters (enchufados) continue to have for supporting it: getting their hands on some of the oil money, through currency arbitrage or straight-up corruption.
    —————

    That’s the crux of it right there. The question is: How?

  11. The author’s memory of oil-for-food is a bit rosy, but this is still a decent idea. It would show that the US is willing to put some sanctions on oil exports, and that will create a momentum of its own. Maduro and co. will steal and blame the US, but they always do that, and this sanction is just enough not to give such accusation any real credibility amongst others.

  12. Fixing the serious problems afflicting run down local refineries to restore their lost production so as to replace expensive offshore imports , requires a lot of money and time and reliable expertise ……none of which Pdvsa has available ,, Curacao refinery is on a lease which scheduled to end next year , the Govt of Curacao last I heard had decided not to renew Pdvsa lease and instead was leasing the refinery to a Chinese company . Bringing products from Curacao to Venezuela will carry a different cost and will have to compete commercially with other alternative outlets. Sanctions hitting on Venezuelan imports of US light crude oil and refined products to cover Venezuelan oil industry production deficiencies can have a big adverse impact …….regardless of whether by themselves they are enough to help achieve a regime change…….., financiallly and operationally Pdvsa has never known a worse situation than that which it is experiencing now.Pdvsa is currently very vulnerable ….!!

Leave a Reply