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US oil embargo will see Venezuela turn to China, Russia for salvation

Saturday April 27 2019

Venezuelan President Nicolas Maduro

Venezuelan President Nicolas Maduro leaves after offering a press conference in Caracas, on January 25, 2019. PHOTO | YURI CORTEZ | AFP 

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The US oil embargo on Venezuela that comes into effect on Sunday will deepen the South American country's economic crisis without necessarily forcing President Nicolas Maduro from power and force Caracas to turn to China and Russia for salvation.

Until now, US sanctions directly targeted the upper echelons of Mr Maduro's regime in the hope of weakening his grip on power in favour of a transition to opposition leader Juan Guaido, who in January declared himself acting president.

Then, Washington led more than 50 countries in endorsing his claim.

But these new sanctions will bite hard in a country that has suffered five years of recession marked by shortages of basic necessities such as food and medicines.

Venezuela is almost entirely reliant on oil revenue, with 96 per cent of its income from crude and the US its single largest customer.



Michael Shifter from Inter-American Dialogue says "there is certainly no guarantee that the petroleum embargo will result in the end of Mr Maduro's rule."

But he added: "It may contribute to the desperation that fuels street protests and that ultimately leads to the regime's collapse."

Caracas is exporting 500,000 barrels a day to US companies, which accounted for three-quarters of its liquidity by the end of 2018.

The new sanctions not only ban US companies from buying Venezuelan crude but also all foreign entities from using the American banking system to purchase the black gold from Caracas.


It means China and Russia may have to be Venezuela's "lifesavers," specialist Luis Oliveros told AFP.

US-based consultancy Rapidan Energy Group says Venezuela's state oil company PDVSA's production could temporarily fall by 200,000 barrels a day.

That would be a grave loss in production that has already crashed from a high of 3.2 million in 2008 to just 840,000 in March.

"It will get even harder" for the government to keep supplying heavily discounted fuel to its people, says Gorka Lalaguna, from consultants Ecoanalitica, which could lead to rising discontent.

In a bid to circumvent the sanctions, Caracas has turned to Chinese and Russian companies to act as intermediaries.

"It's using (Russians) Rosneft and other companies to place its crude," said Oliveros. Rosneft denies the claims.


Venezuela had its eyes on India to try to make up its shortfall.

After the US measure was announced in January, PDVSA president Manuel Quevedo travelled to India with the goal of doubling the 300,000 barrels a day Venezuela sells to companies such as Reliance Industries and Nayara Energy, which is part owned by Rosneft.

India has emerged as the "largest cash flow generating market" for Venezuela, according to the Washington-based Wilson Center.

Indian companies bought 22 percent of Venezuela's crude in 2017, behind only US (41 per cent) and Chinese (25 per cent) firms, according to the US Energy Information Administration.

However, Reliance told AFP last week it was reducing its imports of Venezuelan crude and suspending the export of diluents -- which Caracas needs to refine its oil -- due to the new sanctions.

India backing off leaves China and Russia as Venezuela's main customers.

But crude supplies to those two countries are mostly to pay off loans amounting to a fifth of Venezuela's $150 billion in foreign debt. It won't bring in desperately needed liquidity.


Mr Maduro has hung onto power thanks to the armed forces, one of the main beneficiaries from PDVSA's revenue.

If the purse strings tighten, his government "will use what resources it has coming in to prioritise the military," says David Smilde, the Venezuela expert at the Washington Office on Latin America.

While the latest sanctions will crank up the pressure on Mr Maduro, Shifter says Mr Guaido will not be immune to criticism.

"Guaido runs a big risk if the embargo fails to bring down the government and only exacerbates a profound humanitarian crisis. As interim president, he could well get a share of the blame."

But Hakim says the added pressure could turn the military against Maduro -- something Mr Guaido has failed to achieve -- although that won't necessarily benefit the opposition leader.

He says the economic collapse itself may not force out the socialist president but rather lead "to a military action to replace Mr Maduro -- perhaps with a military leader."

In any case, Hakim says, history shows that US sanctions rarely work.

"Maduro may just end up with the staying power of the Kims of North Korea, (Bashar al-) Assad in Syria or the Iranian supreme power."