Bonds in the South American nation of Venezuela are rising in value as rumours circulate about a possible rapprochement between Washington and Caracas. The US has shown its willingness to move, but will President Nicolás Maduro make concessions ahead of next year’s election?
Investors are reacting positively to speculation that the US is planning to ease sanctions on Venezuela’s oil industry.
At the beginning of September, bonds were trading at 10 to 11 cents on the dollar, up from 8 to 9 cents.
President Joe Biden’s national security advisor Jake Sullivan has addressed predictions about sanctions relief, confirming that Washington is “prepared to engage in discussions [...] in return for concrete steps”, notably a free and fair election in Venezuela.
A number of US sanctions on the South American nation date back over a decade but the Trump administration expanded these between 2017 and 2019 as part of a “maximum pressure” strategy against authoritarian President Nicolás Maduro.
Many Western nations contest the legitimacy of Venezuela’s 2018 presidential election and refuse to recognise its leader.
In an effort to topple Maduro, Washington froze Venezuelan foreign assets, banned oil from the country, and prohibited US citizens and companies from trading with state energy company PDVSA.
An unintended outcome and shifting alliances
Whilst seeking to oust Maduro, the Trump administration was also supporting replacement candidate Juan Guaidó, the then-leader of Venezuela’s opposition, interim government.
Yet despite this foreign backing, Venezuela's legislature voted to dissolve Guaidó’s government at the end of 2022, effectively ending his mandate.
“US sanctions had the objective of putting further pressure on Nicolas Maduro's government to assure government change,” said Amir Richani, energy and geopolitical analyst at Industrial Info Resources. “Now, that has not materialised. Instead, Maduro has instead cemented his position in power.”
Sanctions have also pushed Venezuela further towards Russia, China, and Iran, weakening Western leverage in the country.
Last week, China announced it was upgrading its diplomatic ties with Venezuela, and Maduro is also campaigning to join BRICS, an alliance between Brazil, Russia, India, China and South Africa.
So given the failures of the “maximum pressure” strategy, it looks like Washington could be softening its stance.
Last year, energy giant Chevron was given the green light to expand operations in Venezuela, and in January, the US granted a licence to Trinidad and Tobago to develop a major gas field in Venezuelan waters.
It’s likely that Russia’s invasion of Ukraine partially motivated these US concessions, as President Vladimir Putin’s weaponisation of fuel has underlined the importance of energy security.
Putin slashed gas supplies to Europe last winter in an attempt to cripple adversary nations, forcing the EU to rapidly diversify its sources of power.
But although the question of energy remains a global concern, Richani explains that lifting sanctions on Venezuela won’t have a substantial, immediate effect on the oil market.
“Over the short-term or mid-term, Venezuela cannot offer a significant boost of oil production or oil barrels to the market,” he said. “In the long term, the lifting of sanctions could improve US energy security [...] But again, this has to come hand in hand with considerable investments because Venezuela's energy industry is not adequate to return to previous production levels.”
Maduro weighs his options
The potential for sanctions to be lifted is also heavily dependent on Maduro’s willingness to cooperate with the Biden administration.
On one hand, the easing of sanctions could provide a much needed boost to Venezuela’s economy, which could help Maduro in next year’s presidential election.
Nevertheless, with inflation running at around 400%, it will be difficult for the sitting president to remain in power even if the economy improves slightly. This means Maduro is unlikely to agree to demands that will further weaken his position.
Francisco J Monaldi, a fellow in Latin American Energy Policy at Rice University’s Baker Institute, said: “I think Maduro is very cautious of giving any concessions that he might regret that would put him in a difficult position -- because he doesn't feel that he needs to.”
Washington hopes that Maduro will take more concrete steps to support the democratic process, but Venezuela’s head of congress recently rejected a proposal for EU observers to monitor the 2024 election.
Maduro’s government has also attempted to stifle political competition by banning opposition candidate María Corina Machado from holding public office.
Whilst it therefore seems that Venezuela is moving in the wrong direction, Monaldi argues that Washington still has some extra cards up its sleeve.
“The US knows that Maduro is aligned now with Iran, Russia and China, but Maduro is in a tough spot because some of these allies are not able to help him the way he wants, or they're unwilling,” he said.
Russia is currently bogged down with the war in Ukraine, and some commentators say that China is increasingly hesitant to inject cash into Venezuela because of the country’s track recording of defaulting on its debt.
Reuters recently estimated that the South American nation owes China over $10 billion (€9.4 billion).
Against this backdrop, it seems logical for Venezuela to maintain ties with a range of global players, but it's still unclear how much Maduro is willing to sacrifice.