Trump must stop Venezuela from sliding toward total dictatorship

The Trump administration’s sanctions on Venezuela have succeeded in creating a cash crunch in Caracas. But with Venezuelan President Nicolás Maduro getting close to defaulting on Venezuela’s $150 billion in foreign debt, the Trump administration needs to take steps to protect the United States from the fallout of a default while keeping up the economic pressure against Maduro’s increasingly autocratic government.

Venezuela’s dire fiscal situation represents a success of U.S. sanctions, which deny Maduro the ability to borrow from U.S. investors to prop up his government. But a Venezuelan default could also create unintended consequences for the United States. Venezuela’s state oil company, PDVSA, sells more than 500,000 barrels a day to U.S. refiners, and those sales could be disrupted if Venezuela’s creditors try to seize oil payments to satisfy Venezuela’s debts. In addition, Maduro could try to sell PDVSA’s single biggest asset in the United States, the oil refiner CITGO, as a way of raising cash. The risk to the United States is heightened by the fact that last year Venezuela pledged 49 percent of CITGO as collateral for a Russian loan, raising the specter that Russia could try to take ownership of a large stake in CITGO if Venezuela defaults.

{mosads}Against this backdrop, the Trump administration should take two major actions to address the potential impact of a Venezuelan default on the United States while further escalating pressure on Maduro’s government to restore democracy. First, the Trump administration should use U.S. sanctions laws to place CITGO and Venezuela’s other assets in the United States under protective orders that insulate them from both creditors and Maduro’s control. Last month, Maduro arrested several of CITGO’s managers and appointed a cousin of former Venezuelan President Hugo Chavez as CITGO’s head.

The Trump administration should prevent the new leadership from exercising control of the company by using a protective order to require U.S. government approval for major decisions about corporate management, transfers of corporate ownership, or other strategic corporate decisions. The protective orders should also block CITGO from being attacked by Venezuela’s creditors until a future, democratic Venezuelan government is able to reach a global settlement on Venezuela’s debts.

Placing CITGO under a protective order would be a dramatic step, but contemporary U.S. economic sanctions actually originated with a similar action. The Treasury Department’s current sanctions office, the Office of Foreign Assets Control is the successor to an office that President Roosevelt established in 1940 to administer the U.S. assets of European countries conquered by Nazi Germany so that the Nazis could not use the assets to support their war effort. At its height, the Treasury Department managed billions of dollars of companies and other assets owned by countries under Nazi occupation. A more recent precedent comes from Europe, where governments used sanctions tools to prevent Libyan dictator Muammar Gaddafi from looting European companies that were owned by Libya’s sovereign wealth fund during the 2011 Libyan civil war.

The second step that Trump should take is to use U.S. sanctions laws to require that payments for Venezuelan-origin crude imports be placed into escrow accounts subject to U.S. government supervision. In 2017, the United States imported at least 500,000 barrels per day from Venezuela, worth more than $25 million dollars a day at current prices. The bulk of these revenues flow straight to Caracas, despite the widespread and well-documented graft in Venezuela’s oil sector (estimated at $300 billion over the past decade) and the fact that Maduro has been dispensing money to allies even as ordinary Venezuelans deal with shortages of food and basic goods.

Escrowing oil payments would let the crude keep flowing into the United States, avoiding disruptions to U.S. refineries, while ensuring that Maduro could no longer use the revenues to prop up his government. Escrow accounts could also be protected from Venezuela’s creditors, ensuring that a Venezuelan default would not inadvertently disrupt oil imports if creditors tried to seize payments. The Trump administration should authorize the escrow accounts to be used to purchase basic humanitarian imports for Venezuela, and could also consider allowing reimbursements to PDVSA and international oil companies for agreed-on expenses necessary to continue producing Venezuelan oil.

Of course, Venezuela would try to circumvent U.S. restrictions by seeking other markets for its oil. But the United States could encourage allies such as Japan, Korea, and the European Union to insist on similar escrow arrangements. China and Russia would almost certainly keep paying cash, but it is not clear that China and Russia have the capacity to absorb the full volume of Venezuelan crude currently bought by the United States. Furthermore, both countries would likely demand steep discounts on any increases in purchases of Venezuelan oil, increasing the pressure on Maduro by cutting into the revenue that Maduro actually receives from Venezuela’s oil sales.

Maduro’s continuing consolidation of power in recent months suggests that Venezuela’s slide towards dictatorship has continued despite the pressure the United States has brought to bear this year. Placing Venezuela’s U.S. assets under federal protection and escrowing payments for U.S. oil imports would help protect the United States from the unintended consequences of a default while increasing pressure on Maduro to start restoring democracy in 2018.

Peter Harrell is an adjunct senior fellow at the Center for a New American Security. He previously served as deputy assistant secretary for counter threat finance and sanctions at the U.S. Department of State during the Obama administration.