Crowd in a shopping center in Caracas for the 2022 Black Friday sales. Photo: Informe Confidencial.
By Misión Verdad – Nov 28, 2024
Donald Trump’s arrival to the presidency of the United States suggests the possibility that his government team, with Marco Rubio as Secretary of State, will once again launch the “maximum pressure” strategy against Venezuela and its economy. This policy is yet to be defined.
On some occasions, Trump questioned the Biden administration’s relaxation of some pressure measures against Venezuela, due to the US dependence on crude oil. He also added that in 2020, when he left the White House, Venezuela “was about to collapse, we would have taken it over. We would have taken all its oil, which we have right next door.”
The now president-elect questioned in June 2023 that the Biden government “bought Venezuela’s oil,” as according to him, “it makes a dictator very rich.”
During his campaign, Trump refrained from making any comment on his approach towards the Venezuelan government or whether there would be any policy change on his return to the White House. He has not referred to any concrete actions regarding Venezuela following his election.
However, it is worth considering possible scenarios under the relaunch of “maximum pressure,” and how the Venezuelan economy could react to [asimilar] those measures.
Current situation of the Venezuelan economy
The severe impact of the unilateral coercive measures issued by Washington in the 2017-2020 period, especially by blocking Venezuela’s oil activities, was significantly amplified by the high dependence of the Venezuelan economy on the foreign currency earned by crude oil exports, in addition to the exchange control and the dependence of the private sector on the flow of oil revenue.
Under the exchange system previous to 2019, nearly 100% of the foreign currency was granted by the public sector within the framework of exchange control. That equation has been modified.
In October, Vice President Delcy Rodríguez reported that currently the exchange system is based on 33% of the foreign currency contributions provided by the State, and 77% contributed by the private sector in multiple ways.
During 2017-2020, Venezuela did not have an open and floating currency exchange system, as it exists today. This is fueled by certain economic measures such as the placements by the Central Bank of Venezuela (BCV), exchange centers, and thousands of retail operations carried out daily between individuals.
Although new coercive measures against Venezuela will surely generate meaningful effects, it does not seem likely that those effects will impact like those years of “maximum pressure.”
In 2018 and 2019, Venezuela’s Gross Domestic Product (GDP) fell 25.5% and 30%, respectively, depicting a severe blow to the economy, due to its structural weaknesses of dependence on oil income.
On the other hand, the new economic war would take place in a context where the State’s influence in the exchange system is much lower. It is worth considering the relationship that it has on the exchange rate of the bolivar with the US dollar and inflation.
In addition, Venezuela’s private economy has also been transformed. Sources of income have been altered, as the rentier model has undergone significant transformation.
According to BCV data released in the January 2023 publication Venezuela in Figures by the Ministry of Planning, the GDP of the interannual manufacturing sector dropped 56.3% in the first quarter of 2019. Meanwhile, the Trade and Services sector contracted 39.2% in the same period.
These sectors experienced catastrophic contractions during those years, considering that both were closely related to oil revenue process and the mediation of foreign currency by the State within the framework of exchange control.
According to data from the private industrial employers’ association Conindustria, until September 2024, industrial activity grew 7.6% compared to September 2023.
Most of the secondary sector activity is concentrated in agro-industry and food processing, which contributes to achieving the 100% domestic food supply goal, according to the government.
The commercial sector is expected to grow 2.5-3% this year, according to Consecomercio president Gustavo Valecillos.
The growth of these sectors is not linked to the State budget. It is instead a dynamic result of President Maduro’s economic policy. Increasing the amounts authorized for credit activity is part of that policy.
In September, Venezuelan banks’ interannual credits grew 103.9%. This boost allows for a greater flow of working capital for investments, and the specific consumption of goods that explains the upturn in industrial and commercial activities.
The current composition of the Venezuelan economy suggests that, in a scenario of a worsening of the blockade, its impacts could be considerably less significant compared to the 2017-2020 period.
In 2024, the Venezuelan economy has been supported by other financing measures while national production is depending much less on the State-produced foreign exchange market.
State budget
The basis of the State budget previous to the 2017-2020 cycle was significantly supported by oil exports, an evident feature of the rentier model as a central pillar of public planning.
In 2020, the Venezuelan State collected taxes equivalent to about $1.571 billion.
President Nicolás Maduro recently highlighted that tax collection in the first eight months of 2024 increased by 147%, compared to the same period in 2023.
The Venezuelan government could exceed the tax collection goal of $10 billion.
These data refer to a lowring of the weightage of oil income in the public budget now, which implies a greater margin of maneuver than the government had in the previous cycle.
However, oil and its derivatives remain important budget-based components, as shown in the next section.
US Sanctions Against Venezuela and Associated Political Dilemmas
Oil exports
In 2019, Venezuela experienced a severe collapse in crude oil production. That happened due to the blocking of the country from the international markets, in a scenario of abrupt loss of any possibility of financial relations, direct prohibitions on the Venezuelan crude oil purchase, and over-compliance with illegal sanctions.
By then, crude oil production reached a low of 392,000 barrels per day (bpd), according to Organization of Petroleum Exporting Countries (OPEC) data corresponding to secondary sources, as published by the Venezuelan Ministry of Planning.
Crude oil is a fast-dispatch product, implying that without clients or any destination, its production will be paused.
Currently, Venezuelan crude oil production is approaching the threshold of 1 million bpd. However, production has fluctuated between 750,000 and 950,000 bpd in the last 3 years, a period of growth.
As for exports, in October they reached their maximum in four years, reaching 950,000 bpd.
The eventual intensification of coercive measures will surely impact production and, as a consequence of it, exports. But the uncertainty lies in how much production could fall, or if it would fall to a level that would be difficult to deal with.
At this point, the fate of Venezuelan exports and Venezuela’s capacity to evade the blockade, put into practice in recent years, seem to have a promising future.
In early November, it was reported that Venezuela remained for the second consecutive month the third largest supplier of crude oil to the United States, with some 261,000 bpd sent to that country. Considering that Venezuela exports more than 900,000 bpd, it is clear that its production does not go only to the US. Part of the exports is going to India, where the private company Reliance Industries enjoys a US license to purchase Venezuelan crude oil.
Most significantly, the major part of Venezuelan crude oil exports goes into a framework of evasion of the blockade through discretionary sales, whose destination is China.
These elements suggest that, in case of the cancellation of licenses by the Trump administration, the level of vulnerability of the Venezuelan oil sector in 2024 is lower than it was in 2019 due to the placement of crude oil in the “secondary” or sanctions-evading market, which has been a practice of other countries under similar pressure, such as Iran and Russia.
In 2019, Venezuela had to build, starting from scratch, a scheme to evade sanctions that was developed with greater emphasis since the Constitutional Anti-Blockade Law was enacted in 2020.
In a scenario of the relaunch of “maximum pressure,” Venezuela would have to make alternative trade agreements with allies such as Russia and Iran, to access diluents and marketing platforms.
In the possible context of a new decline in crude oil production due to illegal sanctions, the Venezuelan economy has proven resilient, with crude oil production of around 700,000 bpd. This refutes the claim that, under current conditions, Venezuela would be subject to a “collapse” if certain licenses were canceled.
Translation: Edu Montesanti for Orinoco Tribune
OT/EM/JRE/SC
Misión Verdad
Misión Verdad is a Venezuelan investigative journalism website with a socialist perspective in defense of the Bolivarian Revolution
