Venezuelans go to the polls on Sunday in highly anticipated elections that are key to the country’s future, its impact on the region and to a lesser extent a key test of US sanctions policy. This piece highlights some areas to watch during the election, in the weeks and months of potential negotiation that follow, with a focus on my areas of expertise, potential impacts on global energy and debt markets.
Election results, turnout and potential protests: Unlike past elections, the opposition is united, behind a compromise candidate and is not boycotting the elections, something that contributed to Maduro regime victories to win in the past. Polls (good summary here) argue for a landslide victory and very high turnout, but given past efforts by Maduro and cronies to cling to power using all means necessary and only partial international election observation, that is far from clear. Moreover, after some enforced austerity, the Maduro regime has promised fiscal expansion and transfers.
An actual fair election seems impossible, but the high commitment of Venezuelans to vote is notable. After all opposition leaders like Maria Corina Machado are conducting their campaign from a foreign embassy in Caracas and many are in jail, exile or detained. We will be watching whether the election is competitive and what sort of power sharing agreement is under discussion in the weeks that follow. The terms of this election imply that the new president takes office only formally in 2025 leaving a long transition period for negotiations, potential amnesties, negotiations with creditors and potential time-buying efforts on the part of the regime.
Role of the military and defense: In case of an uncertain election, how will the Maduro government try to use the defense apparatus to protect his role? Will the military whose rank-and-file are underpaid remain united? What promises will have been made? This could have implications not just domestically but also with regional disputes (Essequibo).
International Responses to the Elections and Negotiations: The role of regional and global partners will be key, particularly given the transition and negotiation period. While EU observers were disinvited, Brazil scrambled to send some observers joining some foundations like the Carter Center. Russia too has sent observers, tho their interests clearly diverge from regional and global democracies and will undoubtedly be used to shore up regime interests. Will any observers actually be in a position to report on the quality of the vote.
Given the poll results and risk of protests, it is in even the regime’s interest to have some international observers, either to secure an attractive exit or a power sharing agreement. The US has not said much recently in public about what would constitute a good outcome, suggesting that the response of the opposition would be key. Aside from the scenario of a major electoral victory by the opposition, the more likely scenarios of a close election or attempt to steal the election could lead to a murkier outcome for the sanctions and economic trajectory. The current US government has no interest in further sanctions snapback given that they would undermine a few goals – increasing and cheapening oil supplies, reducing the flow of migrants (most important), and reducing the role of illicit finance/shipping in global markets. However, they may have little choice but to either do so or to strike some sort of agreement with the opposition.
The response of the opposition and government on economic and social policies: Maria Corinna Machado and other opposition leaders have been talking more publicly about priorities after the election (see a recent WPR interview). The opposition is very aware of the difficulties of rebuilding the country after decades of collapse and contraction and outward migration. They propose incentives to attract back skilled workers and professionals in education and health among other efforts to extend security and institutions. All of this will require both more revenues, deferral on the debt and likely development assistance as well as investment both in and out of the resource sector. It also argues for low or long deferred debt repayment terms. The outlook for the government would imply less change, it would have an interest in short-term capital flows and debt restructuring needed to get a sugar rush to pay off future partners.
The energy sector will likely continue to be a major source of revenue and growth despite the limitations and capital intensive nature of the industry. The question will be whether it continues to muddle along, inching up or sees a significant expansion or less likely in the near-term, if the recent modest expansions are trounced by another round of maximum pressure sanctions (I’ll explain later why that seems less likely. Broader economic development may be slow given new investments needed both in the sector and outside and extensive sanctions beyond the sector. Moreover, there will be questions about where Venezuela’s crude fits in at a time when global demand is sluggish and its environmental costs are high.
What about energy export volumes?: First some context. Energy production and exports inched up for the last year, even before the US partial sanctions relief of last year (October 2023 to April 2024) and continuing through the period of partial sanctions snapback. Back in April the overarching general license allowing many energy trades and potential future investment was removed and it was replaced by one-off special licenses granted to individual companies.
Source: Tanker trackers . Note that July number is incomplete and is more useful as a signal of the composition of trade rather than volume.
Since the spring of 2023, the average export volume of oil and oil products has been about 21 million barrels per day (rolling 3 month average), a significant increase from the pace in 2020-22. Rather than a major increase in current trade volumes, the sanctions relief has allowed Venezuela (and arguably some of its foreign joint venture partners) to sell to a wider array of partners and arguably at a higher price.
In the peak of maximum pressure sanctions under the Trump administration and early in the Biden administration, China was the dominant buyer, with Cuba buying a small portion. All trade was sold through illicit financial and shipping channels at a sizeable discount, intermediaries captured much of the revenues and Venezuela was reliant on vessels involved in the dark fleet, diluent from Iran among other trade. While US companies like Chevron continued to operate at baseline volumes benefiting from an exemption, trade volumes were low. Beginning in 2022 alongside negotiations that the opposition and regime had and prisoner swap discussions, oil exports have risen modestly and exports first to Europe, then the US and other countries followed. The temporary nature of the 2023 sanctions relief, persistence of other sanctions, did limit actual investment and privileged existing players. Overall the shift in who bought Venezuelan oil was a bigger factor.
Licenses, Investment and More: Looking ahead in the energy sector
Recent sanctions relief is likely to lead to modest increased in export volumes and revenues, in all scenarios but a sharp snapback. In recent months when it partly clawed back its admittedly limited sanctions relief, the US replaced a broader general license allowing many types of energy trade, with one-off company specific licensing regimes. These licenses, granted to European companies like Maurel and Co, BP/Trinidad for LNG will likely increase the energy production and export capacity in Venezuela, despite continued issues getting equipment and labor. The agreements unlike the general license grant two years of trade not 6 months and thus could encourage a longer-term investment potential. Not only have several companies received permission to continue projects started in the fall of 2023, but the long-standing licenses granted to Chevron remained in place. As a result the recent partial snapback arguably left oil investment condition easier than they had been in September 2023. This trend is likely to continue as companies seek to use their licenses.
More recently, India’s Reliance made public its new license to import oil. This agreement is unlikely to boost production in the near-term but reduces Venezuela’s reliance on illicit financial and shipping networks dominated by China where China can set the price and terms. This left them vulnerable to the whims of Chinese teapot refineries, the only ones willing to buy sanctioned crude. These refineries have been slowing their throughput and thus purchases and of course Venezuela competes with other sanctioned jurisdictions.
Migration elements and the US campaign: In its Venezuela policy, the Biden administration has been highly influenced by the migration challenges. While sanctions alone did not cause the economic situation that precipitated sharp migration flows and collapse, they arguably exacerbated and made it harder to alleviate. As a result, the Biden administration and likely a successor Harris administration would likely try to continue this policy of calibrating policies and might look to reward any viable powersharing agreement.
A Trump administration of course has a different perspective, being arguably less concerned by the human rights and democracy credentials. Still, the interests of US energy companies might also call for something well less than full enforcement. Depending on how the transition has evolved, we might see threats of more sanctions, restrictions on US allies and adversaries access in Venezuela especially if the timing of transition in the two countries evolves. Venezuela policy is but one of many foreign policy areas in which Republicans are still internally contesting.
What about the debt? Venezuela has a sizeable debt burden, both issued by the sovereign, by PDVSA, the national oil company and smaller amounts from other public sector companies and even private nationalized arrears. Estimates from half a decade ago pegged this debt level at over $150 billion with some lack of clarity about the amount owed to China and Russia, including how much of the Chinese debt has been repaid via oil trade. Some of the arrears to European energy companies too may have been partly repaid via oil transfers (a solution to get a few more barrels of oil to Europe in 2022 following Russia’s extended invasion of Ukraine). Either way, the debts are large for traded and untraded liabilities and debt holders are waiting for an agreement.
Any Venezuelan government would set a debt agreement as a high priority as new investment and debt is difficult without it. Neither side has signalled much yet, but some bond holders seem to be remembering the old days of the high willingness to pay days of the pre-max pressure Maduro regime. The risk is that debt holders might have over-optimistic views about the ability to pay, especially as rising resource revenues will also need to be used for economic development especially in case of an opposition victory. A long maturity extension with upsides for higher growth/higher revenues may be likely.
Related to these issues is the question of Citgo, PDVSA’s US subsidiary which has claims of much more than its value attached to its assets in US courts. Citgo from finalizing asset seizure has been protected at the request of opposition leaders to are loath to lose this major asset. With not only direct creditors but also others that received arrears judgment against the government, how the Venezuelan government navigates the US legal system on this issue will be key.
There are many moving parts both within Venezuela and outside especially given its links with other sanctioned economies and its role as a driver of the major and politically sensitive migration flows. This makes this election pivotal to watch.
Ziemba Insights 