The Real Cost of Reimposing Sanctions on Venezuela

Last month, the Biden administration announced that sanctions relief on Venezuela would not be renewed. Reinstating the sanctions that were temporarily lifted in October was a carefully crafted decision intended to maximize the United States’ leverage. But sanctions will never be effective so long as Venezuelan President Nicolás Maduro values his political survival above his country’s economic well-being.

Almost a decade after the Obama administration first levied individual sanctions against the Maduro government in 2015, sanctions on Venezuela have served mainly as symbolic measures. While moral signaling is important, using sectoral sanctions exclusively as signaling devices undermines both Venezuela’s path to democracy and broader U.S. strategic objectives. Maduro’s sanctions evasion and cooperation with Russia, Iran, and China reveal that the overuse of sanctions can drive affected actors to unite beyond the watchful eye of the dollar—thus fueling, rather than curbing, illicit economies.

The Barbados agreement, which was signed in October 2023 between Maduro’s government and the United States-backed opposition, effectively exchanged sanctions relief on Venezuela’s oil and gas sector for electoral guarantees. It was hailed as a diplomatic success. The agreement set an April deadline for Maduro to comply with electoral guarantees or face reimposed sanctions.

While there have been some subsequent wins for Venezuela’s opposition, including a decision to allow international electoral observation for the upcoming presidential elections, Maduro’s government only partially fulfilled other commitments. In addition to upholding a 15-year ban on María Corina Machado, the candidate who won the opposition’s primary, Maduro’s government prevented her chosen substitute from even registering in the elections. An increase in repression resulted in the arbitrary detention of high-profile human rights activist Rocío San Miguel and Machado’s campaign staff as well as the expulsion of a U.N. human rights agency. Facing insufficient electoral progress and a belligerent Maduro, the White House felt compelled to take a harder stance.

However, the Biden administration is unwilling to return to the “maximum pressure” policies introduced by former President Donald Trump. It has only partially reimposed sanctions. While the U.S. Treasury Department discontinued General License 44, which authorized investment in and trade with Venezuela’s oil and gas sector, it preserved General License 41, which permits Chevron’s activities in Venezuela. Companies can even apply for specific, case-by-case licenses, allowing the Biden administration flexibility to drip feed investment into Venezuela and signaling to the Maduro government that Washington remains engaged and open to talks. Francisco Palmieri, the chief of mission of the U.S. Venezuelan Affairs Unit, said last week that “License 44 should not be seen as a final decision,” underlining the White House’s hopes that ongoing talks will continue to progress.

This move also allows President Joe Biden to secure energy access for the United States and its allies. Chevron is not the only U.S. company approved for operations in Venezuela; the authorizations that the Treasury Department previously issued to Repsol and Eni have not yet been withdrawn. This means that Venezuelan oil will continue to flow to the United States and Europe even as those exports are cut off from the rest of the global market.

Economically, this is a pretty elegant solution. But in geopolitical terms, even these limited sanctions will likely carry acute costs. Venezuelan democracy will suffer as Caracas seeks to improve its bargaining posture vis-à-vis both the United States and the opposition. And, perhaps of greater significance to the White House, the reinstated sanctions could also hurt Washington’s long-term goals by pushing Venezuela to resume its cooperation with Iran and China as it looks to reroute oil into illicit markets.

For Maduro, U.S. sanctions are good politics. Under Chavismo—the populist-nationalist ideology of Maduro’s idolized predecessor, Hugo Chávez—sanctions are viewed as financial imperialism. They play directly into Chavismo’s narrative of an “economic war,” allowing the Maduro government to blame all of the country’s economic ills on sanctions, rather than Chavismo’s kleptocracy, further weaponizing this narrative as a campaign tool.

The reimposition of sanctions comes at a particularly precarious moment for Venezuela’s opposition. The Maduro government aims to fragment the opposition, which is currently unified under the Unitary Platform. Should the platform fail to mobilize behind a single candidate or revert to an election boycott, Maduro could dominate electorally.

After much scrambling and intense internal negotiations, the opposition officially nominated former diplomat Edmundo González Urrutia as its presidential nominee. But analysts fear that the Supreme Judicial Tribunal will find a reason to bar González from running, just as the Electoral Council previously did with Corina Yoris, Machado’s chosen substitute. The Maduro government’s reaction so far has been more muted than expected, indicating that negotiations are ongoing with González, who appears open to exchanging security and even amnesty guarantees with the incumbent government in exchange for a peaceful transition.

Venezuelans are waiting for the other shoe to drop. Now that the looming threat of sanctions has already been realized, Maduro’s reaction is not only unpredictable, but unrestrained.

Similarly, for anti-West adversaries, Washington’s sanctions are an opportunity. After the Treasury Department escalated sanctions on Venezuela’s state-owned oil company PDVSA in 2019 and again in 2020, Russia, Iran, and China filled the gap created by the withdrawal of large-scale U.S. and European trade and investment.

Russian state-controlled energy company Rosneft served as a crucial lifeline for PDVSA in the immediate aftermath of the U.S. sanctions imposed in 2019, comprising nearly two-thirds of its oil trade. After the U.S. Treasury severed this lifeline with secondary sanctions in 2020, Venezuela pursued a marriage of convenience with Iran.

In 2020, Iran shipped fuel tankers to Venezuela to ease severe gas shortages and delivered the diluents and equipment that PDVSA needed to process and sell its heavy crude. Iran also served as an instrumental intermediary between PDVSA and China’s black market. Shipping oil through Iran’s “ghost fleet” and mislabeling its origin helped the Maduro government reap the rewards of the post-COVID-19 oil price windfall. Until the U.S. Treasury lifted its sanctions last fall, China’s black market was Venezuela’s largest buyer.

Staring down the barrel of renewed sanctions, Maduro’s government has quickly reengaged these three partners. Although Russia can provide limited economic support amid war with Ukraine and its own severe global sanctions, the Kremlin last month announced plans for Maduro to visit, shoring up its ideological support for Chavismo. PDVSA quickly resumed crude shipments to Iran, catching up on a 2021 oil swap deal that had fallen to the wayside. Chinese demand for Venezuelan crude increased as Caracas offered Beijing a discount of almost 30 percent following the reimposition of sanctions.

PDVSA is also employing new measures to strengthen illicit exports by transitioning to cryptocurrency payments. The U.S. Treasury has repeatedly expressed concerns that malign actors use digital assets to launder illicit funds and evade sanctions. Despite several major cases toppling crypto giants in the past year, PDVSA is eager to attract additional illicit customers with the promise of anonymity that comes with using a digital currency.

Proponents of the sanctions argue that Maduro would cooperate with Russia, Iran, and China regardless. But PDVSA was earning significantly higher profits while sanctions relief lasted and it was trading in dollars. The corrupt structure of PDVSA meant that its executives had significant profit incentive to at least partially forgo illicit trade to pocket higher profits.

More importantly, PDVSA needs aboveboard investment and buyers to keep crude production high. Since 2020, there have been no active oil rigs in Venezuela, and PDVSA has drained its spare capacity by catering to the Chinese illicit market at a heavily discounted rate. Only dollar economy actors can invest at the level required to drill new wells and repair damaged rigs. Under the U.S. Treasury’s General License 44, Maduro’s government has been able to court licit contractors to export at a four-year peak.

Now facing renewed sanctions, PDVSA is incentivized to play both sides. It will aim to attract investment from Treasury-approved companies and at the same time aim to increase oil trade with Iran and China.

Venezuela’s evasion cooperation with U.S. adversaries is a microcosm of a broader ongoing debate about the effectiveness and overuse of sanctions. As the number of sanctioned actors grows, so does the incentive for sanctions-busting cooperation. Washington’s economic statecraft relies on the idea that its rivals need U.S. dollar reserves to trade. But when rivals are sanctioned, they seek to defy the U.S.-led international economic system. The more sanctioned actors that the United States creates, the bigger and more self-sufficient illicit economies become, rendering U.S. sanctions impotent.

Yet, U.S. policymakers continue to instinctively fall back on sanctions as low-cost tools that signal outrage and reward lawmakers at the polls. This current maximalist approach is counterproductive. It encourages heavyweight anti-Western adversaries to build coalitions with smaller, sanctioned states to organize and expand illicit trade networks. This is exactly what is happening in Venezuela—Russia, China, and Iran view the distortions in Venezuela’s economy as an opportunity to build economic and ideological leverage.

In Venezuela, sectoral sanctions are not just economically ineffective—they are actively hurting the country’s democratic transition and pushing Caracas closer to anti-U.S. adversaries. Thus, there is no reason that they should remain baked into Washington’s Venezuela policy. Sectoral sanctions should not serve the symbolic purpose that individual sanctions perform, both in Venezuela’s case and in the broader landscape of U.S. foreign policy.

Correction, May 2, 2024:  An earlier version of this article misstated which Venezuelan governmental body barred Corina Yoris from running for office.