Caracas Chronicles

The debate on the effect of sanctions on Venezuelans and the Venezuelan economy, and in particular on the oil industry, began before the package of economic sanctions of August 2019. And from the start, there were voices arguing that sanctions impact the economy and the living conditions of Venezuelans. Since then, a series of peer and non-peer reviewed papers, briefs and reports have been written about the impact of the 2017 financial sanctions, the 2019 sectoral sanctions and the 2020 secondary sanctions on the Venezuelan economy and oil industry. While the government tends to blame 2015 sanctions for the early recession, these sanctions were on individuals and had no effect on the economy. 

The discussion around these studies can be toxic and most of the researchers behind them have participated in advocacy or political campaigns. Francisco Rodríguez and Luis Oliveros, for example, signed a public letter asking president Joe Biden to lift the sanctions. Rodríguez, in fact, is currently the economic advisor of Antonio Ecarri: an anti-sanctions presidential candidate who is not a member of the Unitary Platform and refused to participate in the primaries. Ricardo Hausmann, on the other side, was named Venezuela’s representative in the Inter-American Development Bank by Juan Guaidó’s interim government – which was close to the Trump administration and supported its sanctions strategy. 

Nevertheless, we’ll try to take a holistic look at this years-long debate. 

The sanctions as culprits of PDVSA’s demise

One of the first reports on the impact of sanctions on Venezuelan oil production dates from June 2019, before the wider sanctions that OFAC issued later that year. Written by Francisco Rodríguez—a well-known Venezuelan economist who worked for the first National Assembly and advised Henri Falcón in the 2018 elections—for the US-based firm Torino Capital, the study claims “that financial sanctions were associated with a decline in production of 797,000 bpd [barrels per day], which at today’s oil prices would represent USD 16.9bn a year in foregone oil revenues” between August 2017 and December 2018. According to Rodríguez, “the alternative hypothesis that the decline in oil production was a result of the oil industry’s militarization is inconsistent with longer-run patterns in the data.” Similarly, he says, production fell in offshore subsidiaries affected by sanctions but rose in those that were sanctions-exempt. Nevertheless, his study does clarify that it is “a settled question that the economy’s collapse up until 2017 was due to the poor policy choices and mismanagement of the governments in power since 1999.”

In October 2020, Venezuelan economist Luis Oliveros wrote a report for the Washington-based NGO Washington Office for Latin America (WOLA) analyzing sanctions between August 2017 and July 2020. In this study, Oliveros estimates that sanctions generated a loss of around $11 billion per year. 

A contrasting view emerged in January 2021, when Caracas-based think tank Anova Policy Research—directed by economist Omar Zambrano—published a study on the 2017 financial sanctions rebutting both Rodríguez and Oliveros’ estimates. According to this study, Oliveros used “projections based on parameters taken arbitrarily,” while Rodríguez estimated a “figure that exceeds the effective fall in Venezuelan oil production in that period.” Instead, the Anova paper concludes that sanctions only had a “partial” effect over the decrease in production. “This report estimates that the immediate impact on oil production was a drop of 6.2%, while the change in trend that can be attributed to the sanctions was responsible for 45.2% of the total drop accumulated between 08/2017 and 12/2019.” Therefore, the industry ceased to produce a smaller amount of barrels (698,000 bpd) in a much longer period than the one estimated by Rodríguez. 

In October 2020, Venezuelan economist Luis Oliveros wrote a report for the Washington-based NGO Washington Office for Latin America (WOLA) analyzing sanctions between August 2017 and July 2020. In this study, Oliveros estimates that sanctions generated a loss of around $11 billion per year.

A year later, Rodríguez did a new estimation of the effect of sanctions on Venezuelan oil production. This time, Rodríguez used differential access to credit of oil firms in the Orinoco Basin as an indicator of the effects of financial and oil sanctions on firm output from 2008 to 2020, and concluded that firms that accessed international credit before sanctions were disproportionately affected by those measures and experienced losses, totalling around $6.2bn a year at 2022 oil prices. He also wrote that the effects accounted for at least 40% of the observed production decline in the Orinoco Basin.

Did sanctions kill 40,000 people?

In April of 2019, the Center for Economy Policy and Research, a progressive Washington D.C.-based think tank, published a report that claimed that “the sanctions are depriving Venezuelans of lifesaving medicines, medical equipment, food, and other essential imports.”

Written by superstar economist Jeffrey Sachs and the CEPR’s Co-Director Mark Weisbrot –who had been criticized before by opposition observers as having pro-Chavista bias, for example by mocking the possibility of hyperinflation in Venezuela back in 2013 or by reducing the 2014 protests to “a revolt of the well-off”–, the report also asserted that around 40,000 Venezuelans had died as a result of the sanctions.  

Two economists weren’t that sure. A month later, economist Frank Muci and professor Ricardo Hausmann—back then director of Harvard’s Center for International Development and Venezuela’s former Minister of Planning during the second Perez administration—published a rebuttal in Americas Quarterly. According to them, Weisbrot and Sachs used Colombia as a counterfactual for Venezuela to reach their conclusion by “conveniently re-scaling the axes and only looking at data from 2013 onwards.” Instead, Hausmann and Muci compared Venezuela to other OPEC countries, showing how the country’s oil production “started a sustained decline” after Chávez’s rise to power in 1999 which accelerated after he fired 18,000 PDVSA employees in 2003.

This paper also tackled CEPR’s claim of 40,000 deaths resulting after “the restructuring derailed and the government had to slash imports of food and medicine to pay PDVSA’s debt.” For Hausmann and Muci, the government ignored the necessity of a debt restructuring in 2014 and “opted to cut food and medicine imports, triggering the humanitarian crisis well in advance of the sanctions” and “by the time sanctions were imposed, Venezuela had already slashed imports of food and medicine by more than 80%,” creating one of the Western Hemisphere’s worst humanitarian catastrophes. “Years before defaulting on bondholders,” the rebuttal says, “Maduro chose to default on Venezuelan stomachs.” They mentioned the fact that “Venezuela was already shut out of capital markets months before the August 2017 sanctions” because of financial risk.

The main driver of 2019 collapse in oil production weren’t the sanctions, Hausmann and Muci affirm, but the couple of days-long electric blackouts that hit the country in March of that year and paralyzed the refineries.

Weisbrot and Sach’s conclusions were also rebutted by a policy brief for Brookings written by a team led by Venezuelan-Israeli economist and Brown University professor Dany Bahar. The team also included Harvard’s Growth Lab associate Miguel Ángel Santos, another Venezuelan economist. According to the brief, food imports had fallen by 71% from 2013 to 2016—the year before the first financial sanctions—and imports of medicine and medical equipment fell by 68% during the same period. Similarly, by August 2017, Venezuelans’ minimum wage could afford 92% fewer calories than it could in January 2010. “It is clear that the sharp deterioration in Venezuela’s living standards started long before August 2017,” the team concluded. 

On the other hand, a U.S. Congress agency—the nonpartisan Government Accountability Office—concluded that sanctions had caused obstacles for humanitarian organizations assisting Venezuelans. Some Venezuelan humanitarian workers have said that sanctions have resulted in financial difficulties for NGOs, as banks sometimes require overcompliance and donors become more unwilling to assume the risks of disbursing funds in a sanctioned country. 

The 2019 sanctions

Hausmann and Muci also mentioned the January 2019 sanctions after which “precipitous decline in oil production” followed. Yet, they explain, most sanctions were to take effect on April 15^th and even afterwards Venezuela has managed to redirect its oil sales—legally or illegally—to countries like China, Russia and India. 

The main driver of 2019 collapse in oil production weren’t the sanctions, Hausmann and Muci affirm, but the couple of days-long electric blackouts that hit the country in March of that year and paralyzed the refineries.

Nevertheless, it’s important to acknowledge that while both Bahar et al. (2019) and Hausmann and Muci’s piece can be a rebuttal to CEPR’s study, both are now outdated to measure the impact of sanctions on oil production since then. For example, in 2022, Muci wrote that “oil sanctions hit Venezuela hard in 2019, even if the exact size of the effect is unclear.” Yet, he says that oil production had already halved to a million barrels per day in 2016-2019 “due to mismanagement, underinvestment and hyperinflation” but that oil production fell a staggering 25% to 750,000 bpd the month after sanctions went live and then decline for a year until hitting a low of 350,000 bpd in 2020. Yet, production had risen to 730,000 bpd in 2022 as PDVSA found shady intermediaries, Russian, Iranian and Asian clients. In other words: it’s a mix of a lot of things. 

The sanctions’ food imports debate

In the context of a country where there are hidden and unaccountable food imports –as the government hasn’t released official data since 2014 and economists depend on mirror statistics– the debate over the impact of financial sanctions over Venezuela’s food imports have continued raging on through a series of briefs, working papers and rebuttals. In October 2020, Oliveros’ report for WOLA concluded that while Venezuela’s crisis “began before the first U.S. sanctions,” these measures deteriorated “the quality of life” by contributing to a steep drop in Venezuelan public imports by 46 percent in 2019 and another 50 percent in 2020.

Oliveros’ conclusions on food imports were also rebutted by the January 2021 Anova Policy Research study. According to Anova’s policy brief, the sanctions had contributed to a decline of oil production while also leading to a rise of food and medicine imports and a drop in their decline rates. 

“There’s no evidence that (sanctions) had a negative effect on food and medicine imports,” Anova concluded, affirming that the rise of imports coincided with Maduro’s soft liberalization of the economy from 2017 onwards. “However,” the brief said, “It is also possible to argue that the change of orientation in governmental policy was an immediate consequence of the hardening of financial sanctions against PDVSA.”

And yet, Anova’s policy brief was later rebutted by Rodríguez in December 2022. In a revision of Anova’s results, Rodríguez says that Anova’s “results are a consequence of data coding errors and questionable methodological choices.” Rodríguez concludes that, once these errors are corrected, “neither close inspection of the corrected data nor a battery of statistical tests shows evidence of any sustained significant improvement in food or medicines imports following the 2017 financial sanctions.”

“There’s no evidence that (sanctions) had a negative effect on food and medicine imports,” Anova concluded, affirming that the rise of imports coincided with Maduro’s soft liberalization of the economy from 2017 onwards.

According to Rodríguez, Anova’s study “omits ten two-digit import categories from their indicator of food imports” including cereals and oils. “In the year of sanctions, these categories accounted for 79.7% of all food imports as calculated by Bahar et al. (2019). In other words, the Equipo Anova results are based on a food imports series that covers just around one-fifth of food imports at the time of sanctions.” And yet, Rodríguez’s rebuttal opens up the way for more debate. “The omission of these categories appears to have been an inadvertent error caused by a typo in footnote 2 on page 6 of Bahar et al. (2019)”, he says in a footnote, “Equipo Anova claim to have also constructed an alternate series including most of the omitted code 1 categories in their footnote 18 and to have obtained similar results to those reported in their note, yet do not publish these.”

Zambrano says that Rodríguez’s rebuttal is based on suppositions on his team’s work: “He never gave us the opportunity to defend ourselves or explain our methodology”, he says. 

In fact, in 2023, Anova wrote another brief—not yet published and taking Rodríguez’s criticism in consideration—analyzing the January 2019 sanctions and found that twelve months before these sanctions, imports fell on average $15 million per month while they rose $9 million per month affect the sanctions: or a 93% increase between December 2018 and December 2019. “As a political instrument, sanctions have been 100% ineffective,” Zambrano said. “As an economic instrument, the results are paradoxical and perhaps influenced the government’s change of course,” regarding the mild liberalization of the Venezuelan economy. 

Beyond quantitative evidence

According to a working paper published in Rodríguez’s site, sanctions affecting the oil output could have resulted in a 4.3% GDP loss since 2012. And reduced imports-capacity caused by sanctions could have decreased the GDP by another 10.2%. Nevertheless, Rodríguez clarifies that this is “indicative and suggestive at best” because measuring the effects of Maduro’s 2013 Dakazo and price controls over private sector decisions is “intractable.” 

In fact, much of the effect—political or economical—of sanctions could be described as intractable. Luis Oliveros’ report describes that certain business chambers have decried over-compliance and import limitations as affecting the Venezuelan private sector. In fact, business guild Fedecámaras—whose current leadership has cozied up with the government and is vocally critic of sanctions and the hardliner opposition—says their survey found that 81% of Venezuelan private companies say they have been affected by sanctions through over-compliance, lack of access to international financing and reputational damage. 

Nevertheless, some political scientists and economists believe that sanctions—by cutting the government’s main income—could have forced the Madurista elite to remove price controls, tariff controls and currency exchange controls while allowing generalized transactional dollarization. 

These policies not only gave the government maneuvering space and reduced political instability, through the consumption bubble felt in Caracas and other cities known as the pax bodegonica. They also allowed for the Venezuelan economy to grow for the first time in a decade from the last trimester of 2021 to 2022, though this growth cannot be analyzed without considering the distortion of the pandemic economy. 

According to a working paper published in Rodríguez’s site, sanctions affecting the oil output could have resulted in a 4.3% GDP loss since 2012. And reduced imports-capacity caused by sanctions could have decreased the GDP by another 10.2%.

Political scientist Alejandro Armas, for example, quotes New York University professors Bruno de Mesquita and Alastair Smith’s 2011 book, which asserts that the lower the income for an authoritarian regime, the fewer resources to distribute among the elements that support it. If this happened in Venezuela, it may have forced the government to liberalize the economy. 

Sanctions could have also led to a rise in illicit trades, which could now represent 16% of the GDP according to a study by Transparency’s local chapter and consulting and researching firm Ecoanalítica. The trickle-down effects of these booming ‘enterprises,’ which have resulted in its own clientelistic networks and beneficiaries according to the study, cannot be easily measured. 

The impact of sanctions on the political decisions of the Madurista elite, which has remained hermetic on its economic shift, cannot be quantitatively measured either. Same with the role of sanctions on carrot-and-stick negotiations for free and fair elections. 

Nevertheless, some political scientists and economists believe that sanctions—by cutting the government’s main income—could have forced the Madurista elite to remove price controls, tariff controls and currency exchange controls while allowing generalized transactional dollarization.

As Ecoanalítica director Asdrúbal Oliveros has affirmed, Chavismo’s will to negotiate political rights and electoral guarantees with the opposition and its American allies is a result of its desire to have sanctions lifted. Asdrúbal Oliveros, for example, has criticized consultants who assure that “unilateral lifting of sanctions without lasting institutional agreements will automatically cause the country’s recovery.”

Other elements of political economy cannot be easily measured in analysis of decreased oil output and oil GDP: What ‘s the real impact of Tareck El Aissami’s billion dollar corruption schemes on the oil industry? What’s the true impact of pre-sanctions underinvestment and current constant oil spills on the Venezuelan industry? Why did Iran and Russia, both more sanctioned and isolated than Venezuela, evade similar contractions and the former has even reiteratively exported fuel to Venezuela? 

While it is clear that sanctions had an effect on oil output, Venezuela’s complex political economy and the extent of the mismanagement and corruption of its ruling elite generates an infinite series of variables that can smirch any quantitative conclusion. The Venezuelan economy and salaries haven’t flinched much, even with the oil production rising from 733 bpd in September 2023 –the month before the sanctions relief– to almost 810 bpd in March 2024 and with PDVSA selling oil without the discounts it had to resort to before the relief, which could have generated an estimated additional $2.5 billion in oil income during this period according to Ecoanalítica. 

Therefore—and considering the political lobbies and intentions on both camps—one should always approach this topic with a grain of salt. No es fácil.