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How Maduro Beat Sanctions

Trump’s “maximum pressure” policy only made Maduro stronger. Now, Biden has to chart a new course.

By , a Venezuelan economist, and , the CEO of Students For Liberty.
Venezuelan President Nicolás Maduro gestures at an anti-Trump demonstration.
Venezuelan President Nicolás Maduro gestures at an anti-Trump demonstration in Caracas on Aug. 10, 2019. Carolina Cabral/Getty Images

In August 2017, Venezuela was in the middle of its largest wave of protests in recent history, with a record-breaking 100 consecutive days of rallies. At the time, and alongside brutal acts of repression from Venezuela’s Nicolás Maduro regime (such as the killing of more than 100 protesters that year by security forces), there was a nationwide belief the country’s young people would not go home until democracy was restored.

It was against that background the Trump administration radically changed the United States’ approach to Venezuela’s economic and political crises. In an attempt to support the protesters, then-U.S. President Donald Trump began an aggressive policy of sanctions against the Maduro administration, believing such measures would accelerate a political transition in Venezuela by financially strangling the regime.

But four years later, Venezuela’s political situation could not be more discouraging. Today, the Maduro regime looks stronger than ever. Meanwhile, Venezuela’s civil society appears to be broken beyond repair after years of economic and political repression at the hands of a regime that pushed 8 out of 10 Venezuelans into extreme poverty, led to the flight of almost 6 million exiles, and left more than 7 million Venezuelans in need of humanitarian aid, including medical treatment, shelter, sanitation, and food.

In short, sanctions not only failed to produce regime change, but they also seemed to have coincided with a deepening of Maduro’s power. Here’s why.

Since 2006, the United States has been sanctioning the Venezuelan regime for its alleged human rights violations, money laundering schemes, and ties with irregular groups and other authoritarian states. During his administration, then-U.S. President George W. Bush also prohibited the selling of arms to Venezuela, arguing Maduro’s predecessor, Hugo Chávez, was not “cooperating fully with United States anti-terrorism efforts.”

Yet, it was not until Trump began his policy of “maximum pressure” against the Maduro regime that the explicit objective of U.S. Venezuela policy became regime change.

Maximum pressure consisted of using sanctions to implode the regime’s ruling coalition. Specifically, policymakers believed a lack of resources resulting from sanctions would cause Maduro to lose control over key interest groups, from domestic actors like the Venezuelan business and military elite to international allies like Russia and China. This is a standard argument for sanctions even though its validity is highly debated in academic circles. Nevertheless, the Trump administration believed it saw a window of opportunity to boost democracy in Venezuela, and it jumped through.

To oust Maduro from power, the Trump administration implemented or strengthened three different types of sanctions on Venezuela.

The first of these, broad sanctions, began in August 2017. With them, Trump prohibited the Venezuelan government from accessing the U.S. financial system—a decision that created an additional set of financial challenges for the already bankrupt Venezuelan state. Before the sanctions, the Venezuelan government and its state oil company, PDVSA, were able to access debt markets and other institutions. In 2017, for example, Goldman Sachs purchased $2.8 billion in PDVSA bonds, providing the firm with an infusion of cash. Under Trump’s new regulations, such options were gone. In 2019, Trump then made the decision to freeze the Venezuelan government’s bank accounts in the United States and prohibit all U.S. entities from engaging in transactions with the Maduro government without prior authorization from the Treasury Department’s Office of Foreign Assets Control.

The second type of sanction Trump levied on Venezuela was a series of industry-specific measures against PDVSA. These began in January 2019, when the U.S. Treasury Department blocked PDVSA’s access to its property in the United States, including CITGO, a subsidiary that owns the sixth-largest refinery network in the United States. The same month, the Treasury Department prohibited all U.S. entities from engaging in transactions with PDVSA. Later in 2019, it ultimately prohibited all companies (foreign or American) from doing any business with PDVSA. As a result of these sanctions, PDVSA’s oil exports collapsed to levels not seen in Venezuela in almost a century—from about 1.5 million barrels per day in December 2018 to around 390,000 barrels per day in June 2020.

The third type of sanction implemented by the Trump administration was prohibitions on individuals. These froze the bank accounts and assets of people connected to the Maduro regime. Although the United States had applied individual sanctions before, the Trump administration expanded their scope considerably. By the time Trump left office, the U.S. Treasury had imposed sanctions on more than 160 Venezuelan or Venezuelan-connected individuals, including generals, supreme court judges, and Maduro himself.

By and large, all these sanctions have been politically ineffective. The Maduro regime is not only still in power but also seems to be stronger than it was in 2017, when it was facing mass protests. That’s because Maduro has been able to adjust to each successive measure that hit him.

From the very beginning of Venezuela’s socialist revolution, the regime has tapped PDVSA’s revenues to maintain its control over the country’s key interest groups, including by financing social programs for the poor and discretionary economic subsidies for the upper class. In 2003, for example, Chavez introduced currency controls that led to wide discrepancies between official and black market exchange rates. The official exchange rate was subsidized using PDVSA’s revenues. As a result, PDVSA’s resources opened the way for corruption and currency flight of more than $20 billion per year from 2003 to 2011.

The collapse of Venezuela’s oil exports thus should have represented a serious threat to the Maduro regime’s survival. But it was able to adjust by finding alternative sources of income for its rent-seeking elite.

According to the U.S. Justice Department, one of Maduro’s methods is his government’s involvement in various illegal businesses, from illegal mining to drug trafficking. At the same time, Maduro has pursued what we call a “Soviet-styled” economic liberalization in Venezuela. That is, he has opened up some parts of the Venezuelan economy, from the service economy to the country’s oil sector with the intention of opening new business opportunities for the country’s elite. Meanwhile, the rest of the economy remains tightly controlled.

One example of this process is PDVSA itself. According to energy news source S&P Global Platts, the Maduro regime is now “calling for private national and international capital to open up the country’s oil business.”

The regime has also backed off enforcement of its extensive and suffocating web of market regulations, from production and trade quotas to arbitrary and universal price controls. In turn, the Venezuelan elite have been able to open businesses the Maduro regime either expropriated or bankrupted years ago, essentially giving them a free lunch.

Overall, one could argue Maduro loosening his grip on his controlled economy is a positive outcome from the sanctions. Although that is true, it was not the sanctions’ intended goal. Moreover, a real economic recovery that will lead to sustained economic health can only come from real market reform—from the bottom up—not via reforms that put Maduro’s cronies in charge of all the important sectors.

In addition to finding alternative sources of income, the Maduro regime has also strengthened its power by learning how to circumvent Trump’s efforts. That is, it learned how to operate outside the scope of the U.S. financial system and, specifically, how to overcome sanctions on PDVSA’s commercial activities.

To do so, the Maduro regime began leveraging and strengthening its ties with authoritarian regimes experienced at circumventing U.S. sanctions.

For example, the United States’ global prohibition on doing business with PDVSA both dried up Venezuela’s exports and starved Venezuela itself of fuel, creating a chronic and nationwide shortage. The already decimated Venezuelan economy was frozen.

Yet, the Maduro regime sought help from Tehran, which sent clandestine shipments of gasoline and blending agents to boost PDVSA’s collapsing oil and fuel output. The shipments were able to circumvent U.S. sanctions since they were sent to Venezuela around the Horn of Africa with the ships’ transponders switched off, making it impossible for tracking systems to detect their locations until they arrived at their destination. In return, Venezuela not only gave Iran control of key PDVSA refineries but also strengthened Iran’s involvement in the Venezuelan economy as a whole.

Maduro has also partnered with Beijing, which is now purchasing most of Venezuela’s oil, all of it through a series of “phantom companies”—that is, firms without any track record or clear ownership. These companies then hire anonymous tankers to carry the load through the Horn of Africa, similar to the Iranian plan.

Chinese shipping schemes only started during the second half of 2020, but internal PDVSA documents show China is already responsible for three-quarters of all of PDVSA exports. In February, for instance, Beijing bought about 500,000 barrels of oil per day from Venezuela, increasing the country’s oil exports to 700,000 barrels per day that month. This was its highest level in a year.

Given Maduro’s success so far, it stands to reason he will continue to circumvent U.S. sanctions, making them less effective by the day. This outcome should be familiar to people following the situation in Iran. Although Iran’s oil exports collapsed immediately after the United States sanctioned Tehran in May 2018, it is now selling considerably more, from 600,000 barrels per day in February 2020 to 1.7 million barrels per day in February of this year. And just as in the case of Venezuela, China is purchasing the majority of Iran’s exports; in this case, roughly 1 million barrels per day.

U.S. President Joe Biden faces a choice. The United States could continue with its current strategy, which will not lead to regime change but will provide Maduro a convenient propaganda opportunity and push Venezuela closer to other authoritarian regimes.

Alternatively, the Biden administration could start using the sanctions strategically. The Biden team must stop looking at the sanctions as an end in themselves but rather as leverage to negotiate with the Maduro regime on human rights and economic freedoms. If the Biden administration looks at them that way, sanctions could be used to improve the individual rights of the Venezuelan people.

If not, Biden should expect continued crises in Venezuela—and potentially broader instability in the region.

Jorge Jraissati is a Venezuelan economist and the executive director of Venezuelan Alliance, a policy group that specializes in Venezuela’s humanitarian crisis. He has guest lectured on the issue at universities like Harvard and Cambridge.

Wolf von Laer holds a doctorate in political economy and a masters in economics. Wolf is the CEO of Students For Liberty, an international libertarian nonprofit operating in more than 100 countries.