Unintended Consequences: Lessons From Sanctions in Venezuela

Sanctions are a tool to achieve political outcomes, not an end in themselves. Make sure to subscribe to Frank's Substack, it's pretty awesome

For the past decade, the US and Europe have applied economic sanctions on Venezuela. I’ve been writing about them for years. Similar to Iran and now Russia, Venezuela’s sanctions include asset freezes and visa bans on cronies, state-owned enterprises, etc, a blanket ban on Venezuela’s ability to issue and restructure US debt, and a blanket ban on purchases of Venezuelan oil (and gold) for all US persons.

By and large, sanctions failed to promote good governance or regime change. They did little to stop the largest non-war collapse in modern economic history. Venezuela’s GDP contracted by a staggering 77% (in 2013-20) and six million people have emigrated amid hyperinflation and 90%+ income poverty. But despite the domestic and external pressure, Nicolas Maduro remains comfortably in control even though his presidential term expired three years ago. 

Venezuela is not a nuclear power and has laughable military capabilities, so there aren’t close parallels with Russia and Putin’s war in Ukraine. Still, important lessons can be drawn from the US and EU’s failed attempts to strong-arm the autocrat sitting on the world’s largest oil reserves.

All sticks no carrots… can backfire

Over the years, the US and EU sanctioned hundreds of individuals in Venezuela’s elite with asset freezes and visa bans for aiding and abetting Maduro’s regime. Occasionally, the US would also unseal an indictment and arrest corrupt elites by surprise when they were on vacation abroad. All sorts of officials were sanctioned, from military generals and narcotics traffickers to big-league crooks with appointments at ministries and state-owned enterprises.

Venezuelans (including me) would rejoice whenever the US/EU hammered a new group of pro-regime thugs, sharing pictures on social media of the ill-gotten fortunes, yachts and jets they would never again enjoy. The policy was morally justified and cathartic but probably also counterproductive. Rather than weakening elite support for Maduro and destabilizing his governing coalition, personal sanctions may have strengthened the regime’s grip over Venezuela.

Targeted sanctions in Venezuela largely didn’t have clear off-ramps or conditions or timelines. There was no theory of change attached to them. They were just blind applications of “maximum pressure” from the US/EU, egged on by the domestic political opposition.

As a result, sanctioned elites could do nothing other than dig their heels in and support Maduro, their only source of protection. If the US/EU and Maduro’s political opposition are happy to seize assets, ban visas, and put all of Venezuela’s corrupt elites behind bars, Maduro is the only place these corrupt elites can turn. Punishing the kleptocrats made them more loyal to the regime. 

What does this mean for Russia’s oligarchs? The US/EU should think carefully about what they want from oligarchs and what threats or sanctions, specifically, can produce those outcomes. The central logic of actual or threatened asset freezes, visa bans and embarrassing corruption revelations should be to extract concessions, to extract anti-war statements, and to lay the groundwork for peace talks (among other things).

Personal sanctions should not be a tool of arbitrary catharsis. If too much pressure is applied on oligarchs, they’ll just go home and double down on Putin. I’m not saying that’s what’s happening or that it’s in the plans, but I am concerned that the discourse is heading in this direction. Cracking down on oligarchs just because we can could be very counterproductive.

Broad sanctions… can be ineffective

Oil sanctions hit Venezuela hard in 2019, even if the exact size of the effect is unclear. Crude production had already halved to a million barrels per day in 2016-19 due to mismanagement, underinvestment and hyperinflation. Plus, sanctions coincided with nationwide electric outages. In any case, oil production fell a staggering 25% to 750 thousand barrels the month after oil sanctions went live and then the oil industry declined for a year, when production hit a low of 350 thousand barrels per day.

However, since mid-2020, production has been rising and has recovered to almost 700 thousand barrels per day. The national oil company PDVSA has found new ways to transact with (shady) intermediaries outside the US financial system and has found new ways to continue pumping crude and paying suppliers while cut off from the US. Venezuela’s oil industry adapted, and is now increasingly reliant on Iran, Russia and China for business. 

Economies under broad economic sanctions like the ones in Russia today can often absorb the pain, adapt and just keep going without major changes in political dynamics.

The decline in living standards in the short run can be dramatic and tax revenues, imports and exports can collapse. But then firms and households painfully adjust and life mostly goes on. Esfandyar Batmanghelidj recently made a similar argument about sanctions in Iran and the surprising resilience of its economy. 

A danger with broad sectoral sanctions is that they enable autocrats to scapegoat the West and deflect blame from their own errors. In regimes with tight control over information and sophisticated propaganda, it is easy to blame an economic crisis on external forces like sanctions rather than acknowledge domestic failures and own-goals like the egregious invasion of Ukraine. It’s what Cuba has done for decades. 

The Kremlin will certainly try to shape the narrative on sanctions and the collapsing value of the currency with its tight control over the media. Depending on how successful the propaganda is, sanctions could galvanize ordinary Russians against the West instead of uniting Russians against the war. Even if broad sanctions catalyze food riots and large anti-government protests, these are likely to end in repression and emigration. All in all, broad economic sanctions on non-democracies are considerably weaker than the headlines make them out to be.

Putin needs an off-ramp. Sanctions relief can encourage him to take one

It’s important to have clarity on what the international community’s objectives should be at this moment. The primary and overwhelming objective should be to end the war with an independent, sovereign Ukraine. A secondary and bonus objective should be to deter future invasions by Russia and other bad actors.

Crucially, the West should not use Putin’s war to push for regime change in Russia, not explicitly, not behind the scenes. Pushing for Putin’s ouster – or even appearing to – is catastrophically irresponsible and could lead to World War III and nuclear armageddon.

I would like new leadership in Russia as much as anyone, but not if it risks a dangerous escalation and great power war. Inciting a palace coup shouldn’t be an objective right now.  

Putin needs a face-saving off-ramp to pull back and end the war. He needs concessions – real or imagined – that allow him to go home with a “victory” that “justifies” the deaths, the destruction, the economic pain of sanctions and international isolation resulting from the war. Thankfully, national security and foreign policy elites on twitter seem to broadly agree with this view. With some exceptions (see Noah Smith’s recent piece), there aren’t many analysts talking about regime change.

The international community should encourage Putin to take the off-ramp with loud, public commitments to lift sanctions under specific conditions, such as the withdrawal of troops from parts of Ukraine, a ceasefire, a peace declaration, etc. I’m not going to suggest exactly what the concessions and timelines should be (I don’t know), but the West should be and appear eager to lift sanctions provided Putin stops doing horrible things. The conditions for sanctions relief should be loud, clear and unambiguous.  

If the Kremlin perceives that sanctions relief is politically untenable or impossible, that vastly reduces the attractiveness of negotiations, concessions and ending the war. The West should remember that sanctions are a flexible tool to achieve political outcomes, not an end in themselves.

Frank writes Common Sense, a Substack newsletter with “cold takes on hot topics in economics, finance and policy.” You can subscribe here. Imperdible, as they say.