Almost two weeks after a military operation to extract Venezuelan President Nicolás Maduro to face legal proceedings, the United States has laid out an aggressive and ambitious plan to restart the country’s energy production and its economy, under significant US coercion. The plan, which leaves in place key leaders of the Maduro regime, has the potential to reconnect Venezuela with the global economy, but has some significant risks, many of which require consultation with and involvement of the Venezuelan people.
In the near-term, the world should monitor closely the cohesion of the Venezuelan government and its military and whether proceeds from the new US-led fuel marketing begin to flow into Venezuela, as well as any re-engagement with multilateral institutions. Whether this change at the very top and new US-led financial intermediation leads to much-needed economic and political stabilization will depend on significant institutional and regulatory change in Venezuela. So far, the relative quiet from Venezuela’s military and intelligence leaders raises concerns, as does the limited role for opposition voices.
Ambitious US Plan Revolves Around Oil
The US government’s plan for Venezuela is “oil first, America first,” and aims at control of Venezuela’s economy in the stabilization phase. Although there may be some early wins — such as clamping down on illicit trade of weapons, gold and energy — longer-term governance, stability and inclusion issues are more difficult to tackle. Without new frameworks and policy predictability, Venezuela will struggle to recover and stabilize its economy. True success would require sufficient growth to allow a portion of the exiled Venezuelans to return home and deploy their human capital.
The US government has set out ambitious plans to revive Venezuela’s economy by developing its oil sector. In the near term, this means that US approved intermediaries will be the only legal approved sellers of Venezuelan fuel, and placing any proceeds in bank accounts that the United States controls. In practice, this means the US government (via approved intermediaries such as Vitol and Trafigura) will set the terms and price of sales. Separately, they will determine what, if anything, Venezuelan actors will be able to buy with the proceeds of the funds. The United States has also indicated its food, equipment and materials should dominate Venezuelan trade, risking a new form of barter trade where the United States sets the term of value. Moreover, the reliance on private, specific licences to implement sanctions relief reduces transparency and could complicate investment.
Short-term energy trading will be attractive for some companies. Intermittent buyers such as India (Reliance), Spain (Repsol) and Italy (Eni) are among those who might be interested — all were approved buyers in the brief period of partial sanctions relief in the Biden administration. Buying Venezuelan oil could be a part of ongoing US-India diplomacy to reduce coercive tariffs related to purchases of Russian oil. China though may be less interested in buying, as the “teapot” refineries that sustained Venezuela’s sanctioned energy industry prefer highly discounted fuel prices, still available from Russia and Iran.
That said, getting investors to plough new capital to expand production will be more difficult and require regulatory and revenue predictability. Chevron, already on the spot, could stay and expand, cautiously. Any long-term projects require not just US assurances and perhaps financial de-risking, via entities such as the Development Finance Corporation and US Exim bank, but also regulatory commitments from the Venezuelan government. Vague “security guarantees” are unlikely to assuage these concerns, especially as the bill to ramp up production could be well over $100 billion. Significant equipment must be imported and engineers recruited, as Petróleos de Venezuela S.A. (PDVSA) shed their expertise and underinvested over the past decade. Meanwhile, the joint ventures with China and Russia must be addressed. The US might be wise to find a place for Chinese operators to operate through legal means while dismantling illicit networks.
The Issue of Governance
Similarly, there are questions about the future of PDVSA and whether the US government will look to replace it or to push the country out of the Organization of the Petroleum Exporting Countries. Investments won’t be large if the government remains able to shutter production to stabilize prices without consulting private partners. Even as the US government is increasingly willing to take government equity in a growing number of domestic resource companies, it is unlikely to relish the persistence of a struggling national oil company linked to a cartel it publicly dislikes. Investors want assurances that another round of Venezuelan nationalization will not occur, and that royalties and regulations remain stable.
The energy sector has long been the driver of the Venezuelan economy, supporting the non-oil economy and the country’s infrastructure. Other parts of the economy will also have to be rebuilt after a period when arrears and hyperinflation crippled parts of the private sector. This rebuild includes abandoned hydroelectric power and other infrastructure. Fuel revenue could be reinvested in other basic needs.
There are also climate change and environmental considerations that matter. Capturing Venezuela’s flared gas and methane leakage could be a way to earn funds and stop dangerous emissions. Meanwhile, even if the US government ignores the energy transition, some buyers, including in Europe, continue to look for sustainable fuel and the lowest life cycle emissions. Venezuela also has gold and perhaps critical minerals that could be exported, again if a strong governance framework is implemented.
Re-engaging with the IMF
The US government, led by US Treasury secretary Scott Bessent, is wisely planning to encourage International Monetary Fund (IMF) and multilateral involvement in Venezuela. The IMF’s Venezuela team-in-waiting is ready to act but would still need some time to begin collecting data and assessing the state of the economy. In the short term, emergency funding is possible, but a longer-term program would require buy-in from Venezuelan government and depend on a political transition. Being part of this process is the best bet to avoid past debts crippling future growth.
That said, there is precedent for major global and regional pressure to incentivize larger IMF packages. The IMF counts several strategic countries as major borrowers, including Egypt and Argentina, both of which have important regional financial backstops — the United Arab Emirates for Egypt and, most recently, the United States for Argentina. Those in the Venezuelan government hoping for a quick win or effort to settle their debts would benefit from waiting. The IMF is likely to have a more realistic view of the country’s ability to pay than the creditors.
Overhanging all these issues is that of Venezuela’s debt and arrears. When it comes, if it comes at all, Venezuela’s debt workout is set to be one of the most complicated the market has seen. Indeed, such legal proceedings have been complicated during the years of limbo when sanctions first contributed to the regime’s final decision to default and have kept any negotiations on hold. Currently, Venezuela’s debt is estimated at around $200 billion, including the principal and interest on the bonds of PDVSA and the government, as well as the many arrears from companies. The US government has signalled — wisely — that debt should take a back seat to stabilization and new investment.
Looking ahead, the United States’ attempts to set all the terms in Venezuela, maintaining leverage on military and civilian leaders, has its risks in Venezuela as well as in the precedent elsewhere. Delays in providing basic needs or cash would burden economic outcomes and create rifts.
The United States’ desire to move fast, break things may not be consistent with the kind of long-term institution building required. Given that, recent attempts to work with the Delcy Rodriguez government are important to move away from a purely unilateral effort. There are also signs that the United States is open to some regional and G7 players public and private having a role in Venezuela, which is a positive sign, given the rebuilding needed. Venezuela’s population has the chance to reset its relationship with a range of global players in the coming months and years, but it will need good governance and a predictable economic framework to do so.
