On February 20, the Secretary General of the Organization of American States (OAS), Luis Almagro, called for more and harsher sanctions on Venezuela. Almagro proposed broader sanctions on the country in addition to the current financial and individually-targeted sanctions. This includes the country’s oil industry.
In addition to Almagro, U.S. Secretary of State Rex Tillerson has said the United States is contemplating sanctioning Venezuela’s oil industry with possible import and export restrictions on state-owned Petróleos de Venezuela (PdVSA). Because many countries in Central America and the Caribbean have long benefitted from subsidized oil from Venezuela, any such sanctions would affect other governments in the region. Tillerson reportedly believes this could lead to a “new kind of relationship” that will help Caribbean nations achieve energy independence and reduce Venezuela’s political capital in the region.
On the same day the OAS Secretary called for more sanctions, the Government of Venezuela (GoV) announced the pre-sale of petro. The petro is Venezuela’s new digital cryptocurrency backed by PdVSA produced oil—one petro is the equivalent of one Venezuelan oil barrel. The new currency has generated controversy both in Venezuela and around the world. The Venezuelan opposition-led National Assembly considers the project illegal because it was not approved legislatively. Commentators also have warned that reliance on the petro is risky because of PdVSA’s current low production rate. According to recent reports, PdVSA’s oil production has fallen to its lowest level in almost 30 years.
The U.S. Treasury’s Office of Foreign Assets Control (OFAC) has already stated that purchasing petros could be seen as a credit extension to the GoV, and thus may be exposed to U.S. sanctions risk.
For more on OFAC and the petro cryptocurrency, please see Crowell’s previous blog post.
The GoV recently announced that it raised $735 million from petro cryptocurrency sales on the first day. If successful, the petro could set a precedent for other sanctioned countries, although it is likely to be closely monitored by the U.S. Government and other key stakeholders in the region.
In addition, on February 12, the Department of Justice unsealed an indictment targeting five former GoV officials relating to their scheme to process outstanding invoices PdVSA owed to its suppliers. The indictment illustrates the potential corruption exposure suppliers to PdVSA may face in trying to collect on over-due invoices. The scheme involved using front companies and promises to expedite payments for overdue invoices.
The combination of the corruption risk companies face when engaging in even pre-sanctions transactions with PdVSA and other GoV state-owned enterprises and the sanctions exposure makes doing business in Venezuela extremely risky from a sanctions, money laundering, and corruption perspective.