Venezuela Sanctions Not Expected To Impact Global Oil Supply

New sanctions have come down on Venezuela and the government of current president Nicolas Maduro as the country continues its downward spiral under his leadership. The measures, announced late August, are the latest “salvo against Venezuela” following the government’s decision to shutter the elected legislature and replace it with a Constitutional Assembly.

The new sanctions limit the finance that US individuals can provide to Venezuela’s government, mostly by shortening the duration of allowed debt financing to 90 days for the national oil company (PDVSA) and 30 days for other government entities. In comparison, the measures are reminiscent of the funding restrictions imposed on selected Russian banks and energy companies in the early rounds of Russian sanctions in 2014.

However, Venezuela is much more reliant than Russia on foreign financing and the risks of financial contagion to other emerging market assets are less extensive. “Most notably, there seem to be significant loopholes in how the sanctions are likely to be enforced,” Rachel Ziemba, managing director of emerging market research with 4CAST-RGE said. “While these may be intended to cushion US actors from losses and maintain New York’s key role in dollar debt trading, they also seem to reflect some domestic pressure, including from the few Citgo-owned refineries that still buy Venezuelan crude” Citgo was exempted from the new US sanctions,

Right now, the bulk of existing PDVSA and government bonds seem to be sheltered from trading restrictions, thus suggesting that the sanctions’ primary impact will be on new debt.

Still, the text of the executive order provides significant scope for further sanctions going forward should the government want to close these loopholes.

The accompanying FAQ from the Office of Foreign Assets Control (OFAC) provides useful context for what are undoubtedly going to be complicated legal proceedings surrounding debt issues.

The new measures seem to be part of a recent US trend of relying heavily on sanctions to try to meet foreign policy goals. In an environment where the Trump administration is struggling to pass domestic policy agenda items (and will likely be preoccupied with budget measures when Congress returns from recess), economic sanctions stand out as a rare area of bipartisan support.

“We expect sanctions on both Venezuela and North Korea to proliferate.”