The United States first imposed economic sanctions on Venezuela in 2017 when it blocked the government and its state-owned oil firm from access to financing and dividend payments. These actions, which initially came in response to the Maduro regime stripping of powers from the opposition-controlled legislature, were intensified as part of the Trump administration’s “maximum pressure” strategy that sought to trigger political change through external pressure. The U.S. government has barred oil trade with Venezuela, frozen the assets of state-owned firms and hundreds of individuals, transferred the control of state assets to the opposition-controlled legislature, and pressured non-U.S. firms to suspend transactions with Venezuela.
U.S. financial and trade sanctions have established an embargo on Venezuelan oil and impeded the government’s ability to restructure its debts in response to lost oil revenues. Many firms and international financial institutions have adopted risk-aversion strategies to avoid secondary sanctions, compromising the ability of even non-state actors to operate in Venezuela. Banks and multilateral bodies, including the International Monetary Fund (IMF), have barred Venezuela from accessing its currency holdings, as well as the concessional financing it would normally have access to.
The combination of economic mismanagement by Venezuelan leaders for over a decade and the devastating impact of U.S. sanctions have resulted in the country experiencing the largest economic contraction in recorded Latin American economic history, with its gross domestic product (GDP) contracting by 74.3% over the last eight years. This also ranks as the sixth largest contraction in world history. While sanctions were not the primary trigger of the country’s deep recession, they have made a substantial contribution to a record-setting decline of living standards.
Arguments that dispute the harmful effects of sanctions are either factually incorrect or premised on fallacious logic. The fact that economic conditions deteriorated in Venezuela prior to sanctions in no way negates the effect of sanctions. The regime’s counterproductive policies and widespread corruption contributed to the country’s crisis, but sanctions added additional harmful impacts. Economic research provides strong evidence that sanctions are a significant driver of plummeting oil production, leading to diminished import capacity and fueling the economic contraction.
The U.S. government claims to have attempted to respond to the growing humanitarian disaster and COVID crisis in Venezuela by providing sanctions licensing exceptions to streamline the financing of aid and the purchase of medical goods. Unfortunately, these measures – possibly by design – have been difficult to operationalize and have failed to bring relief to most Venezuelans.
More significant relief measures and policy reforms are needed, although given the interaction with other statecraft measures and a broader toxification of the country’s economic relations, reforming the sanctions regime will be a complex task.
Agreements are needed to enable humanitarian access to multilateral banks or capital markets to finance aid and restructure existing obligations. This should include support for negotiations, including but not limited to the recent Norway-mediated talks, between the Venezuelan government, opposition movements, and civil society organizations aimed at reaching humanitarian agreements.
The U.S. Treasury Office of Foreign Assets Control [OFAC] could facilitate this process by issuing clear guidance for sanctions relief to permit the financing of aid agencies, thus reducing the incentives for risk aversion and the general chilling effect of sanctions. OFAC could issue a list of selected aid organizations that are pre-cleared to carry out humanitarian programs so that banks can authorize their transactions.
Additionally, the U.S. should introduce an oil-for-essentials program, using the proceeds of permitted oil sales for the purchase of basic goods and inputs essential to addressing the country’s humanitarian crisis. An appropriately established oil-for-essentials program could administer the use of funds in blocked deposits, or those that can be obtained through international sources.
For the proposed OFAC action and oil-for-essentials program, the U.S. and Venezuela could establish a jointly staffed committee to monitor, evaluate, and report on the workings of these new mechanisms and their ability to mitigate the unintended humanitarian consequences of sanctions.
Reform is also needed to move beyond punitive sanctions to generate more engaged diplomacy with the Maduro regime. The U.S. should clearly differentiate between the strategic use of sanctions as a negotiation tool, and the non-strategic application of sanctions as a substitute for a functioning justice system in the target country. Strategic policy should include the incentive of sanctions relief in response to government commitments to take transformative political action.
A more nuanced approach to sanctions that combines threats of individual sanctions with potential sanctions relief at a later stage would strengthen their policy impact and efficacy. Economic sanctions need to be redesigned to protect vulnerable Venezuelans from their collateral effect. This would transform sanctions from a purely punitive pressure tool into a conflict transformation tool, providing incentives for leaders to negotiate political reforms.
Francisco Rodríguez is the 2021-22 International Affairs Fellow in International Economics at the Council for Foreign Relations and Director of Oil for Venezuela.