Authored by The Cohen Group

  • On July 26, the Department of Treasury’s Office of Foreign Assets Control (OFAC) designated 13 current and former Venezuelan government officials, including: Elias Jaua, former foreign minister; Tibisay Lucena, president of the National Electoral Council; and Simon Zerpa, vice president of finance of state oil producer PDVSA. The sanctions are part of increased pressure by the United States to stop the Venezuelan government from holding elections on July 30 for a “constituent assembly” that would re-write the country’s constitution. We expect the Venezuelan government will move forward with the vote, prompting the United States to escalate with possible sectoral sanctions.

More implications of the current crisis, please read below.

  •  The most likely targets of sectoral sanctions are debt markets and the oil and gas sector, both of which would have a significant negative impact on the Venezuelan economy, but could be calibrated to limit the impact on U.S. companies. Sectoral sanctions would also increase the chances of a Venezuelan sovereign default, which is already having implications in the bond market: for example, PDVSA bonds have dropped 7.6 percent to their lowest levels since December.On July 18, a senior U.S. administration official said the White House was considering moving beyond its current strategy of targeting sanctions against Venezuelan individuals and companies to include potential sectoral sanctions. Since January, the Trump Administration has focused on individual sanctions through OFAC, including those targeting Vice President Tareck El Aissami on February 13. Consideration of broader sanctions by the United States were prompted by the government’s planned July 30 election for a constituent assembly, which has been widely condemned by the international community as the final step toward autocratic rule in Venezuela. U.S. officials have said the Administration is considering its options in a deliberate manner, thinking through the repercussions to Venezuela, but also to the United States. Were the Administration to move forward on sectoral sanctions after July 30, there are two possible options:
    • Debt Markets: Similarly to the Russia sanctions program, the United States could prohibit U.S. persons from trading in Venezuelan sovereign debt either on primary or secondary markets, which could include debt issued prior to the date in which the sanctions come into effect, as well as any debt transactions in U.S. currency. Such an approach would not be particularly painful for most U.S. companies, but it would make it significantly harder for Venezuela to secure additional capital on debt markets. Venezuela would then be forced to turn to Europe, or Russia and China, which may be unwilling to incur additional exposure to Venezuelan debt.
    • Oil and Gas: In targeting the oil and gas markets, it would be difficult to shield U.S. companies. The United States could limit U.S. persons from providing debt, equity, or other forms of investment to PDVSA, which would allow the United States to continue importing Venezuelan crude for refining, while still impacting the Venezuelan energy sector. The United States could also include a specific exemption for CITGO to allow U.S. companies to continue providing services to the company, providing that no capital flow directly to PDVSA or any other Venezuelan entities, but there would likely still be negative impact on U.S. companies and financial institutions doing business in Venezuelan energy markets.The U.S. Congress is divided on the questions of sectoral sanctions and will be receptive to industry views on the impact to U.S. business. TCG is also actively monitoring developments in Venezuela and will provide additional updates as they unfold.

For more information:

Thomas R. Goodman, Esq.| The Cohen Group
Associate Vice President

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