It’s Time to Ease Sanctions. Careful How You Do It.

A comment on The Atlantic Council Venezuela Working Group’s “Exploring Oil-Funded Humanitarian Frameworks for Venezuela”

Francisco Rodríguez.

Director, Oil for Venezuela

The Atlantic Council has just published a report, “Exploring Oil-Funded Humanitarian Frameworks for Venezuela,” that assesses competing oil-funded humanitarian program proposals for Venezuela and sets out a series of recommendations of general principles that should be followed in the design of such a program. The report contains a comprehensive evaluation of two program proposals, one of them authored by Oil for Venezuela, the organization that I head. Its lead authors are three of the most prominent and respected experts in Venezuelan oil and legal issues: Former Special Attorney General José Ignacio Hernández, Baker Institute Fellow Francisco Monaldi, and IPD Fellow Patricia Ventura. This is a stellar team, and their contribution is a welcome addition to the discussion on how to address Venezuela’s humanitarian emergency.

The topic is close to my heart. Over the past years, I have devoted a significant part of my professional life to advocating for programs such as this one. I have argued in favor of effective humanitarian exceptions in Venezuela sanctions programs since the adoption of the first financial sanctions in 2017. When oil commerce between the US and Venezuela was banned in January of 2019, I wrote that an oil-for-food program would be needed to avert the humanitarian catastrophe that was bound to occur. In late 2019, I left my employment in the financial sector to create Oil for Venezuela, a think-tank devoted to generating research on viable policy solutions to Venezuela’s humanitarian crisis, which has had at its centerpiece the Humanitarian Oil Agreement proposal discussed in this study. I am thrilled that the idea finally appears to be starting to be taken seriously in US policy circles and have high hopes that the Atlantic Group’s report could mark an important milestone in that process.

The report is in many senses commendable. The review of past experiences is thorough, its analysis of current proposals delivers important insights, and I share many of its recommendations on general principles. Yet I fear that at its essence lies a recommendation that is fatally flawed. In fact, I believe that if policymakers follow some of the report’s central recommendations, they run the risk of creating a program that will not contribute to effectively addressing Venezuela’s humanitarian emergency and could even end up directing additional unsupervised funds into the hands of the Maduro government. I caution that careful debate and discussion of these issues is needed before US authorities embrace some recommendations which could have serious adverse unintended consequences.

The key problem of the Atlantic Council report, in my view, lies in its explicit recommendation against creating a governance structure with full authority over the generation and use of the resources created under the program. In our 2019 report “A Humanitarian Oil Agreement for Venezuela,” we recommended that any oil-for-essentials program should be run by an Administrative Board born out of a political agreement that would have the authority to oversee the sale of oil, the procurement of goods in the international market and the distribution of these goods among Venezuelans. The reason was straightforward. If there were no sanctions, all of these functions would be carried out by the Venezuelan government (or by market actors subject to Venezuelan regulatory control). Therefore, it is only natural for a cooperative solution to create a governance structure in charge of these functions but operated cooperatively between the two forces that assert having a legitimate claim to being the government of Venezuela.

The Atlantic Council report discards this suggestion, which it sees as too ambitious and complex. It instead recommends that key dimensions of sales, procurement, distribution, and oversight be left in the hands of oil companies, the Maduro government, and OFAC[1]. In my view, this is exactly the wrong way to think about rebuilding Venezuelan state institutions. As I explain in more detail below, this misguided approach risks creating a virtual regulatory and operational Frankenstein that would open multiple doors for funneling funds away from humanitarian objectives and even inadvertently end up facilitating corruption.

WHY SIMPLER IS NOT ALWAYS SMARTER

There are four issues that any oil-based humanitarian program needs to address:

  1. Who sells the oil?
  2. Who buys the goods?
  3. Who distributes the goods?
  4. Who oversees the program?

In the Oil for Venezuela proposal, we argue that a new governance structure must be created to carry out all of these functions. We suggest that an Administrative Board appointed by consensus between the government and the opposition carry out the first three functions, while the international community does the fourth. 

While the Atlantic Council report claims that it is not presenting a new proposal but rather laying out some general principles, those principles convey some very specific recommendations on points 1-4. Concretely, they suggest that multinational oil companies sell the oil, that a governance structure appointed by political agreement allocates the funds to be used by international organizations and humanitarian groups, and that the program be completely governed by OFAC licenses, making the US Treasury Department its effective overseer.


Some of the Atlantic Council report’s central recommendations run the risk of creating a program that will not contribute to effectively addressing Venezuela’s humanitarian emergency.


The report claims that this is a simpler approach that will avoid the complex structure of the Oil for Venezuela proposal, which it says would invite comparisons with the Iraq Oil-For-Food program. Yet the authors ignore the fact that the Iraq Oil-For-Food program failed precisely because there were areas (such as oil sales and distribution) that were not subject to program oversight. The Iraqi oil for food program did not fail because it was too complex. It failed because it was poorly designed as a result of a misguided effort to keep it simple.

A reasonable and balanced discussion of alternative proposals should be organized by discussing the merits of alternative solutions to the four issues just highlighted. Laying these out more clearly would also help put in perspective the arguments for seeing one alternative as more complex than another. Once this is done, it becomes clear that the difference between the Oil for Venezuela proposal and the Boston Group or Atlantic Council proposals is not one of complexity. It is of who will be tasked with addressing these four issues and whether these solutions will be provided by national or international actors.

In other words, it is not “less complex” to decide that it is up to the compliance departments of international oil companies to protect against corruption. It is simply a different solution to the same, inherently complex problem.

Nor should complexity or simplicity be taken as the end goals of institutional design. Surely, simplicity is a virtue, but if it were the only relevant virtue of policy design, then we would all pay a flat income tax. The relevant question is how different proposals achieve key policy objectives. If there are two programs that achieve the same policy objective and one is simpler, then there is a rationale for going with the simpler one. If, on the other hand, simplicity is attained at the cost of leaving key problems unsolved, then it is not necessarily a good guiding principle.

OIL-FOR-FOOD OR OIL-FOR-MADURO?

Let us now discuss each of these issues in greater detail. What this discussion will serve to highlight is that trying to “simplify” the solution to the inherently complex problem by putting different actors in charge of solving the four issues identified above can generate significant coordination and principal-agent problems that significantly impair the program’s capacity to address the issues that it is designed to deal with.

Who sells the oil? It is worth recalling that the Iraqi program floundered primarily because the Hussein government maintained control over oil sales. Surely, this seemed to be a “simpler” solution than bringing oil contracting under the program’s oversight mechanism at the time, but it was clearly the wrong one. The Atlantic Council and the Boston Group proposals both share the view that this problem can be solved by letting foreign oil companies take the decision of who to sell the oil to.

I am personally skeptical that the internal compliance mechanisms of international oil companies operating in Venezuela are a fail-safe mechanism to ensure that funds from the program are not diverted. As the Extractive Industries Transparency Initiative recently showed, several large US oil companies continue to conceal taxes and payments to governments in which they operate, despite nominally signing on to voluntary global standards to promote open and accountable management of oil, gas, and mineral resources to prevent corruption in all resource-rich countries.

Nevertheless, even if we put aside this issue, there is an inherent problem with the idea that the cash generated by the program will be completely handled by partners in joint venture programs. This misconception arises from ignoring the fact that the only existing mechanism for participation of private oil companies in Venezuela’s oil sector is as joint-venture partners. This means that participation in the program will generate revenue flows for both PDVSA and the JV partner. Unless both flows are subject to program oversight, the program will be generating unmonitored additional cash flow for the Maduro administration. This is a serious and potentially very dangerous flaw that makes the design proposed in the Atlantic Council report inconsistent with the stated goals of the program.

This point is illustrated in Table 1, which illustrates the revenues of a hypothetical joint venture between PDVSA and a US company.    Let us assume that the JV is currently producing 100 thousand barrels. Of these, the net sales proceeds from 30 of these barrels go to the US company that owns a minority 30% stake in the JV, and 70 to PDVSA, which owns the remaining 70%. Currently, all that oil is sold outside of the US.

Table 1: Hypothetical distribution of oil revenue, Atlantic Council and Oil for Venezuela proposal

The idea of any oil-for-essentials program (or any easing of sanctions, for that matter) is that it would generate the potential for Venezuela (the joint venture, in this example) to sell more oil to the US and that this potential by itself would be enough to ensure higher production levels. Let us assume that the program thus opens up a market for the sale of 30 thousand additional barrels per day to the US market and that the JV is able to increase production (either because it has spare capacity or because program participation allows it to import necessary inputs and capital goods to increase that capacity). Then this means that the firm will be producing 130 thousand barrels per day, of which it will be placing 30 in the US market and the remaining 100 in the rest of the world.

In the Atlantic Council proposal, the US company sells those 30 thousand barrels in the US market, pays Venezuela its fiscal share, and gets to keep the rest. Since all the money goes through the US company, then it is subject to compliance standards that are seen as adequate, and there is no need for additional monitoring. None of the program’s money goes through PDVSA, so there is no need to oversee what PDVSA does, right?

Wrong. The US company’s stake in the JV has not increased. So if it is collecting revenue on 100 percent of the firm’s US sales, it follows that it must be collecting less than 30 percent of its non-US sales. In other words, the US company still has the right to receive the proceeds from the sales of 30 percent of the joint venture firm’s production, which is now 39 tbd (30% of 130 tbd). If it is selling 30 of those in the US, it is getting only nine from the rest of the world. The program has allowed PDVSA to increase its sales proceeds in non-US markets from 70 to 91 tbd.   In other words, the program has just allowed the Maduro regime to gain unfettered control over the revenue from an additional 21 tbd.


Leaving distribution to Maduro guarantees that access to the goods will be politically conditioned and ensures that part of the proceeds will end up lining the pockets of regime insiders.


It is important to stop to consider the implications of this. What the program is doing is to allow the US company to sell 30tbd that it was previously selling, say to China, in the US market. But this means that the JV can now sell an additional 30tbd to China. And Maduro, who owns 70% of the JV, will get the rents from 21 of those 30 tbd. In other words, because of its simplicity, this program is handing Maduro the rents from 21 thousand additional barrels, which he will spend under absolutely no monitoring. Once people understand that this is happening, I would not be surprised if this program ends up being not unfairly characterized as an Oil-For-Maduro program.

Because we were aware of this problem (which was shared with the Venezuela Working Group in my comments on a draft version of this report), we structured the Oil for Venezuela proposal by requiring that it be the Joint Venture, and not the US partner, that sells in the US market. Therefore, the 30 tbd additional would generate revenue flows for both PDVSA and the US company, and PDVSA would assume the obligation to devote its incremental share of 21 tbd to the program. The Oil for Venezuela proposal would also force PDVSA to devote the totality of its earnings from US sales to the program, thus impeding it from using those incremental proceeds for non-program expenditures.[2] 

Who buys the goods? In principle, the Atlantic Council appears to suggest that procurement and distribution should be in the hands of international entities. Thus, a governance structure born out of a political agreement would be able to allocate funds into broad categories but not select the specific humanitarian projects. However, here the devil is clearly in the details.

When the report sketches the types of programs that would be funded, it states that they would include “the COVAX facility and traditional immunization programs, the Humanitarian Response Plan (HRP) 2021 and programs directed to water sanitation and hospital infrastructure.” I agree with the idea that ongoing programs in which international humanitarian agencies are involved should be prioritized, and it is clear that in the case of some of those programs, procurement can be handled by the agencies. Yet the Atlantic Group recognizes that it makes sense for the funding to go to existing government programs, including traditional immunization programs, water sanitation, and hospital infrastructure. These are areas in which procurement is currently done by the Venezuelan government. 

Should the funds from the program only be directed at providing essentials in which international organisms currently involved in Venezuela carry out procurement of international goods? This would rule out some very basic purposes, such as, say, the purchase of specialized equipment for hospitals. Should the governance board then decide to exclude these purchases unless there is an active international agency bringing these goods into Venezuela? Or should it seek out to involve new agencies not yet involved in the country? What if such agencies cannot be found or cannot be persuaded to enter Venezuela? Should these expenditures be abandoned?

The Atlantic Council adds that these organizations “must work in tandem with independent and reputable civil-society groups to provide monitoring and evaluation that can be reported back to the governing body.”  This idea makes sense, though it can look a lot better on paper than in practice, where the job of identifying who is actually independent and reputable (much so if these local organizations are going to start receiving significant levels of government funding) is, to say the least, challenging.

This design is not inconsistent with the Oil for Venezuela proposal, where the procurement board can contract international organisms and humanitarian organizations for assistance in procurement and distribution, yet I see no good ex-ante reason to restrict all procurement to these agencies. In fact, I think that it is inevitable that there are many goods that the country will need to address its humanitarian emergency for which procurement cannot easily be farmed out. Furthermore, as I discuss below, I think that for the purposes of the objective of reinstitutionalization, it is preferable that these capacities be developed domestically rather than farmed out to external actors completely.

It is possible that when the Atlantic Group proposal was written several months ago, the authors had in mind a much smaller program. But in the current political context, it is clear that there is appetite for an agreement that allows Venezuela to significantly expand oil sales to the US. This makes it likely that many of the necessary tasks will outweigh the capacity of the established humanitarian agency infrastructure, so the governing board will have to take a more active role.

Who distributes the goods? I found the proposal somewhat silent on the issue of distribution. This is striking, as the politicization of access to essential goods is perhaps the central concern in the Maduro administration’s medical and food assistance programs. Perhaps this is because the program appears to assume that the distribution will be carried out by international humanitarian agencies. Yet the involvement of these agencies in distribution is often limited, and the proposal recognizes the need to fund programs administered through existing state institutions. 

In fact, while procurement by international agencies is common, distribution almost always is done through existing government networks. For example, COVAX – a prominent example cited in the report – does not distribute vaccines domestically, it simply hands them over to the government. So the question remains: who will distribute the goods bought under the program, and what can be done to avoid politicization of distribution?

This brings us back to the issue of complexity. Is it simpler to leave distribution completely in the Maduro administration’s hands, which is what the Atlantic Group proposal is, to a great extent, doing by default? Sure. But doing so essentially guarantees that access to the goods will be politically conditioned and that many of them will end up being sold in the black market and lining the pockets of regime insiders. I see no way out of this than to have the governing board explicitly involved in distribution decisions. Yes, this is more complex. It is also unavoidable if one wants these resources to reach vulnerable Venezuelans and not become an instrument of political domination.

One of the components of the Oil for Venezuela proposal, which the Atlantic Group ignores, is that of private sector involvement in the distribution of goods,  In our proposal, the dollars generated by the program would be made available for private sector imports, and the proceeds from these currency sales would be used to fund a voucher program. Involving the private sector would reduce the scope for political conditioning of access and have positive economic effects, gaining an important constituency in support of the program.

Who oversees the process? On page 11, the report states that “OFAC should serve as the oversight body to enforce standards of compliance and transparency across oil exports and sale transactions across the framework.“ If I understand this correctly (and I have read it about a dozen times to try to make sure), it means that the only institution with oversight of the program will be OFAC. OFAC would issue the licenses that set out the parameters of the acceptable humanitarian program, and violation of these rules would be punished by OFAC as a sanctions violation.

 I am frankly not sure OFAC would want to do this, nor that it will be acceptable to Venezuelan society. OFAC is an institution in charge of setting and enforcing restrictions on the use of foreign assets in the US, not for carrying out oversight of the budgetary processes of foreign governments. In the US financial system, it is financial institutions that have the primary responsibility for complying with OFAC rules, and an array of regulatory agencies, including DOJ, FINRA, and the SEC are in charge of the enforcement of these rules. I am hard-pressed to understand how this regulatory framework could end up governing the use of Venezuelan funds in Venezuela. 


When external actors try to build state institutions without the participation of local actors, the arrangements prove ultimately to be fragile and vulnerable.


When we talk about oversight, we can be talking about several things. One is ensuring that the funds are used for what they are intended. This includes controlling corruption but also simply deviation of funds to non-essential ends. Then there is ensuring compliance with the base agreement. For example, if the government politicizes access to the goods and thus violates the agreement, who is in charge of verifying that this has happened and taking actions, including possible suspension of the program, to correct or punish that violation? The Oil for Venezuela proposal is that the former be done by the two existing Comptroller General’s Offices and that disputes be decided by an Advisory Committee made up of representatives of the international community. This last point is crucial: it is unreasonable to expect a negotiated agreement between Maduro and the Unitary Platform to agree to let the US government be the ultimate arbiter of violations to the agreement because the US government clearly and openly supports one of these sides.

NATIONAL OWNERSHIP VS. A HUMANITARIAN BEHEMOTH?

There is much that I agree with in the Atlantic Council proposal, and which I believe echoes our proposal. For example, the idea that any agreement must involve both sides to the political conflict, including whatever body is recognized by the US as the government of Venezuela, is crucial. I would add that there’s much more to the Venezuelan opposition than the forces represented by the Unitary Platform and that a more plural representation of the forces that obtained relevant levels of voter support would be more in line with the basic principles of democratic pluralism. And I am also sympathetic to the idea that a pilot program would be useful in helping us identify the main constraints and drawbacks before unrolling a larger program. If I have emphasized the differences so far, it is because this is how I think I can be most useful at this stage.

Yet I do think there are some basic philosophical differences. One has to do with the adequate scope of the program, and the other one has to do with the role of national actors.

There is what I now consider overwhelming evidence that Venezuela’s humanitarian catastrophe is driven by the collapse of its oil exports, which have fallen by more than 90 percent in the last eight years. There is no way to address this crisis without reinserting Venezuela into the global economy, and this means recovering its access to oil and financial markets. To do this, the country will have to generate an amount of revenues that will be very large in comparison to the economy’s current size. If the international community wants to ensure that those resources are not at the discretion of the Maduro regime, then the only way to do so is by setting up a sizable oil-for-essentials program. This will require addressing the four issues that I pointed to (sales, procurement, distribution, and oversight) at a scale that necessarily exceeds the potential of the existing humanitarian agency infrastructure. 

Sure, I agree that a smaller and more limited program can be a first step that can help build confidence for a more complex design. On the other hand, I am also concerned that a small program that is designed to omit the inherent complexities of the ultimately necessary large-scale program could end up locking in an institutional structure that is not well designed to tackle these issues, and that this will either constrain the growth of the program or cause it to expand beyond what it is designed to do, sowing the seeds of its future failures.

I also have a strong bias in favor of locally-owned solutions that involve national actors at all levels. This is partly because I strongly believe that Venezuela will only find a way out of its governance crisis if the parts of its political conflict can find a way to coexist with each other, and this will require them to learn to cooperate in finding concrete solutions to the country’s problems. Of course, you will find resistance to cooperation on both sides of Venezuela’s political spectrum, and you may find the sides readier to farm out the problem of running a program like this to external actors than to consider the idea of joining a collaborative effort with their enemies. Yet as Daron Acemoglu and James Robinson argue in their brilliant work The Narrow Corridor, historical experience strongly shows that when external actors try to build state institutions from the top down without the participation of local actors, key stakeholders in society will either withdraw or rebel and these arrangements will prove ultimately fragile and vulnerable. 

The key question then is what role should the international community play in helping Venezuela find a way out of its economic and humanitarian catastrophe. All of the proposals in this discussion recognize that it must help rebuild one of the essential capabilities of the Venezuelan state: that of operating a sector vital to the economy’s capacity to generate hard currency revenue and to channel it into imports of goods and services essential for the life of Venezuelans. There are two ways to do this. One is by finding external actors – be they international organizations, humanitarian agencies, multinational oil firms, or the US Treasury Department – to do it for them. The second one is by encouraging and incentivizing actors from across Venezuela’s political divide to cooperate to rebuild these key state capabilities. I am a strong believer that only the second of these options will help put us on the road to the reconstruction of our country.


NOTES

[1] Even though the Atlantic Council report, of course, does not explicitly say that key parts of distribution will be left in the hands of the Maduro government, as we explain below, this is an inevitable consequence of its design.

[2] Note that there would not be an issue if the firm had zero earnings post-tax.  In that case, the program would be funded with the 50% tax take, and the remainder would cover the cost of production.  The Maduro government would get taxes on 21 additional PDVSA tbd, but on 21 less US company tbd.  The problem comes from the fact that under normal conditions, these firms generate substantial post-tax earnings.  Therefore, under the Atlantic Council proposal, PDVSA would get to keep its non-taxed earnings on the 21tbd.  In 2018, for example, PDVSA received $452 million dollars in untaxed earnings in its Petropiar operation with 126 tbd production average for the year.

2 thoughts on “It’s Time to Ease Sanctions. Careful How You Do It.

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