Trump can avoid military force by targeting Venezuela's debt crisis
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President Trump said Friday that he would not rule out a “military option” to stop Venezuela’s slide into dictatorship. But before turning to threats of military force, the Trump administration should target one of Venezuelan President Nicolas Maduro’s greatest economic vulnerabilities: Venezuela’s debts.

Over the last few weeks, the Trump administration has imposed targeted financial sanctions on Maduro and several of his key allies. These sanctions, however, have likely imposed few real-world costs on Maduro, who probably liquidated any assets he owned in the U.S. well before the sanctions hit.

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Instead, the Trump administration should target the more than $100 billion that Venezuela and its state-owned oil company, PDVSA, owe in outstanding public debt, much of it issued under U.S. law. Venezuela has continued to sell debt to U.S. investors even as the political situation has deteriorated in recent months.

 

For example, in May of this year Goldman Sachs purchased $2.8 billion in Venezuelan debt. Venezuela has also borrowed heavily from China and Russia in recent years. Just this month, Rosneft, the Russian state owned oil company, disclosed that it had loaned Venezuela a total of $6 billion against future oil deliveries.

These debts present a massive vulnerability for the Maduro regime. Although Venezuela has made regular payments on its debts in recent years despite hyperinflation and a collapsing domestic economy, Venezuela’s debt payments are rapidly becoming unsustainable absent a debt restructuring or new borrowing to “roll over” existing debts.

Last year, Venezuela had to ship more than $1 billion of gold reserves from Caracas to Switzerland just to meet its obligations. Today, Venezuela has just $10 billion left in its total national reserves, and billions are due to repay international investors over the next five months alone. This looming fiscal crisis has already prompted market rumors that Maduro will approach creditors in a bid restructure Venezuela’s debts.

Maduro is likely to seek relief from near-term payment obligations in exchange for offering higher payments down the road. New U.S. sanctions could prohibit Maduro from restructuring these loans or otherwise borrowing on international markets. Unable to borrow, Maduro would see his finances crippled and be unable to continue paying off the cronies he relies on to prop up his regime in Caracas.

The U.S. has successfully used debt sanctions in the past. In 2014, U.S. sanctions prohibiting lending to big Russian state owned banks and energy companies helped put pressure on Russia in response to its annexation of Crimea and invasion of Eastern Ukraine. Frozen out of global capital markets and unable to issue new bonds to refinance old bonds as they came due, the sanctioned Russian companies required billions of dollars from the Russian government to stay solvent. A ban on lending to Venezuela would have even greater relative impact since Venezuela’s financial reserves are today too small to bail the country out.

While U.S. officials can and should replicate the debt sanctions the U.S. imposed on Russia in 2014 and impose them on Venezuela, an announcement this week by the foreign ministers of Canada, Mexico, Brazil, Chile, Argentina, Peru and six other countries in the Western Hemisphere offers an additional and even broader tool to use Venezuela’s debts to cripple Maduro’s regime.

The 12 countries announced that they would henceforth not recognize any new debts or contracts issued by the Maduro government that, under Venezuela’s constitution, require approval by Venezuela’s democratically-elected National Assembly that Maduro replaced through a rigged July 30 national referendum. This includes most major debt issuances, as well as major new oil concessions.

In issuing this declaration, the foreign ministers sent a powerful message that not only should citizens of their countries not lend to Maduro, but that other countries, like Russia and China, should expect to have a hard time collecting on any money that they loan Maduro going forward. This is likely to deter lending by sharply increasing the odds that even Chinese or Russian creditors will be unable to collect when their loans come due. The declaration also makes clear that the governments do not view the Venezuelan people as responsible for debts that Maduro incurs going forward.

However, while the sanctions on Venezuelan borrowing imposed by a dozen of the U.S.’s hemispheric partners represent a valuable start, the reality is that similar sanctions imposed by the U.S. — the world’s largest economy and one of Venezuela’s largest creditors — would have far more economic bite. Rather than threatening military force, the Trump administration can simply act to close off lending to Venezuela to pressure Maduro before he further entrenches his dictatorship.

Peter Harrell is an adjunct senior fellow at the Center for a New American Security. He previously served as deputy assistant secretary for counter threat finance and sanctions at the U.S. Department of State during the Obama administration.


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