Venezuela yesterday (24 May) rejected the US Department of State's decision to impose sanctions on state-owned oil company Petroleos de Venezuela, S.A. (PDVSA)—put in place as a result of its commercial links with Iran—in another sign that relations between the US and Venezuela continue to deteriorate.
The Venezuelan administration of Hugo Chávez yesterday (24 May) rejected the United States' Department
of State's decision to impose sanctions on Petroleos de Venezuela, S.A. (PDVSA), Venezuela's national-owned oil company, as a result of its commercial links with Iran, following an announcement made by the US deputy secretary of state James Steinberg which also included sanctions against several other foreign companies (see Iran - Syria - World: 25 May 2011: IAEA Cites Evidence on Iran's Nuclear Militarisation Agenda, US Penalises Global Firms). According to a statement by the US Department of State, PDVSA delivered at least two cargoes of a blending component known as reformate to Iran between December 2010 and March 2011, worth around USD50 million, in violation of the sanctions. The sanctions against these companies, according to Steinberg, include a ban on signing contracts with the US government and prevent access to US funding for exports or imports and for licences for the control of technologies. Venezuelan minister of foreign affairs Nicolas Maduro said the decision was as an "aggression" and "a hostile action that violates the international law and the UN Charter". Maduro added that Venezuela was assessing the situation to determine the extent to which these sanctions affect the operations and supply of 1.2 million oil barrels a day to the US. Maduro explained that "Venezuela reserves the right to respond in the most appropriate manner to this imperialist aggression". Defiantly, Maduro said that Venezuela would continue "deepening" its links with Iran as a sign of "dignity". Steinberg, however, stressed that these sanctions would not affect PDVSA's oil supplies to the US or other markets and would not extend to its subsidiaries. This is a crucial point as PDVSA has a US subsidiary, CITGO, which owns and operates three refineries in the US with a combined refining capacity of 749,000 b/d, as well as owning 48 oil product terminals and an extensive network of service stations in the country. If Venezuelan oil exports and CITGO's operations are not included in the sanctions, then it is hard to see how much of an impact they will have on PDVSA's day-to-day operations, especially as the company is not heavily reliant on financing from US government agencies. Indeed, a source at PDVSA cited in a report by Reuters claims that the only activity affected would be any oil exports by CITGO to Venezuela. The worry is, however, that any retaliatory action taken by Venezuela to cut its links with the US could have more of an impact on the company. President Hugo Chávez criticised the decision on his Twitter account with his usual rhetoric, saying, "Sanctions against the Fatherland of Bolivar? Imposed by the "gringo" imperialist government? Well, they are welcomed Mr Obama! Don't forget we are the sons of Bolivar, the Liberator". Chávez's remarks are controversial as he has in the past threatened to halt oil supplies to the US. Rafael Ramírez, the minister of energy and oil and president of PDVSA, said yesterday that oil supplies to the US were guaranteed and claimed that the measure was aimed at dividing the Organization of Petroleum Exporter Countries (OPEC). Venezuela supplied an average of 987,000 barrels per day to the US in 2010, according to US official statistics, which constitutes nearly 10% of the latter's oil imports. More sanctions were also imposed on Compañia de Industrias Militares de Venezuela (CAVIM), a state-owned defence company, which was previously sanctioned in 2008. The sanctions were applied based on a law effective since 1996 that aims to restrict Iran's nuclear programme.
IHS Global Insight Perspective | |
Significance | The Venezuelan administration of Hugo Chávez yesterday (24 May) rejected the US Department of State's imposition of sanctions on Petroleos de Venezuela, S.A. (PDVSA), as a result of its commercial links with Iran. |
Implications | The sanctions will have little impact on PDVSA's day-to-day activities and will not affect oil supplies and exports from Venezuela to the US or its subsidiaries in commercial terms, The sanctions do, however, impose certain limited operational constraints and further limit access to overseas credit and are a warning that more severe sanctions could follow. |
Outlook | The event is a clear indication that the US is developing a harder line against Venezuela as a result of Chávez's links with Iran; while ties can be expected to remain strong between Venezuela and Iran, the former should be careful not to push its "warm relations" with Iran too far beyond US tolerance limits. |
of State's decision to impose sanctions on Petroleos de Venezuela, S.A. (PDVSA), Venezuela's national-owned oil company, as a result of its commercial links with Iran, following an announcement made by the US deputy secretary of state James Steinberg which also included sanctions against several other foreign companies (see Iran - Syria - World: 25 May 2011: IAEA Cites Evidence on Iran's Nuclear Militarisation Agenda, US Penalises Global Firms). According to a statement by the US Department of State, PDVSA delivered at least two cargoes of a blending component known as reformate to Iran between December 2010 and March 2011, worth around USD50 million, in violation of the sanctions. The sanctions against these companies, according to Steinberg, include a ban on signing contracts with the US government and prevent access to US funding for exports or imports and for licences for the control of technologies. Venezuelan minister of foreign affairs Nicolas Maduro said the decision was as an "aggression" and "a hostile action that violates the international law and the UN Charter". Maduro added that Venezuela was assessing the situation to determine the extent to which these sanctions affect the operations and supply of 1.2 million oil barrels a day to the US. Maduro explained that "Venezuela reserves the right to respond in the most appropriate manner to this imperialist aggression". Defiantly, Maduro said that Venezuela would continue "deepening" its links with Iran as a sign of "dignity". Steinberg, however, stressed that these sanctions would not affect PDVSA's oil supplies to the US or other markets and would not extend to its subsidiaries. This is a crucial point as PDVSA has a US subsidiary, CITGO, which owns and operates three refineries in the US with a combined refining capacity of 749,000 b/d, as well as owning 48 oil product terminals and an extensive network of service stations in the country. If Venezuelan oil exports and CITGO's operations are not included in the sanctions, then it is hard to see how much of an impact they will have on PDVSA's day-to-day operations, especially as the company is not heavily reliant on financing from US government agencies. Indeed, a source at PDVSA cited in a report by Reuters claims that the only activity affected would be any oil exports by CITGO to Venezuela. The worry is, however, that any retaliatory action taken by Venezuela to cut its links with the US could have more of an impact on the company. President Hugo Chávez criticised the decision on his Twitter account with his usual rhetoric, saying, "Sanctions against the Fatherland of Bolivar? Imposed by the "gringo" imperialist government? Well, they are welcomed Mr Obama! Don't forget we are the sons of Bolivar, the Liberator". Chávez's remarks are controversial as he has in the past threatened to halt oil supplies to the US. Rafael Ramírez, the minister of energy and oil and president of PDVSA, said yesterday that oil supplies to the US were guaranteed and claimed that the measure was aimed at dividing the Organization of Petroleum Exporter Countries (OPEC). Venezuela supplied an average of 987,000 barrels per day to the US in 2010, according to US official statistics, which constitutes nearly 10% of the latter's oil imports. More sanctions were also imposed on Compañia de Industrias Militares de Venezuela (CAVIM), a state-owned defence company, which was previously sanctioned in 2008. The sanctions were applied based on a law effective since 1996 that aims to restrict Iran's nuclear programme.
Links with Iran
Relations with Iran have been growing, with President Chávez becoming an important backer of the country's internationally isolated regime. The bilateral co-operation in principle appeared to be aimed more at justifying Chávez's international "anti-Imperialist" rhetoric than really aimed at intensifying commercial interchange. Chávez's government's foreign policy is characterised by its anti-US stance, even though most of the oil produced in the country is in fact destined for the US. Chávez has long defended Iran's right to develop a civil nuclear energy programme and condemned the sanctions as US and EU interference in the country's internal affairs. This topic is particularly sensitive in terms of energy and banking, two key sectors of future bilateral co-operation. In July 2010, the EU ordered all the banks and financial institutions of its member states to freeze the accounts of Venezuela's Banco Internacional de Desarrollo, a subsidiary of the Iranian Export Development Bank, a bank that has been included in the list of 34 financial institutions that support the highly controversial nuclear programme. In terms of security, suggestions of military co-operation have also been controversial (see Country Intelligence: Venezuela: 19 May 2011: Venezuelan Government Denies Having Iranian Military Base on Its Territory). US-Venezuelan Relations
United States-Venezuela relations are poor because of marked divergences in political and economic visions. President Chávez's foreign policy has been characterised by anti-American rhetoric and forceful attacks on US influence regionally as well as globally. Given economic and trade ties linked to oil—Venezuela is one of the most important suppliers of crude oil to the US—and large US foreign direct investment (FDI) in Venezuela, government officials have long maintained that it is possible to have a co-operative economic policy with the US, while disagreeing in the political sphere, and so far both parties have been very pragmatic when it comes to business, in particular, with regard to oil supplies from Venezuela to the US. Hopes that bilateral relations would improve under US president Barack Obama's administration have so far not materialised, however. Since 2010, neither country has had high-level diplomatic representation in the other. In an apparent tit-for-tat move, the US government revoked the visa of Bernardo Álvarez, the Venezuelan ambassador in the US capital, Washington following the refusal of Venezuelan president Hugo Chávez to accept the US' nomination of Larry Palmer as that country's ambassador to Venezuela. The US' initial reaction to the failed civilian-military coup on 11 April 2002 that ousted Chávez for 48 hours added major, lasting strain to US-Venezuela relations. The US government expressed no regret at Chávez's brief removal from power, recognising the interim government that briefly replaced him. Since then, allegations that the US would be behind efforts to unseat the controversial Venezuelan leader have been a recurrent feature as much as US warning about eventual sanctions against Venezuela over its links with Iran and criticism over Chávez's growing authoritarian tendencies. Venezuela has already been banned from acquiring US weapons and accessories for its F-16 jet fighters, prompting the South American country to turn to Russia for weapons and military equipment. Outlook and Implications
It is yet to be seen how PDVSA's operations will be affected by the sanctions, although so far it appears that it will have little impact on its day-to-day activities and will not deter companies from partnering with Venezuela's national-owned company. The most important issue is that oil supplies and exports from Venezuela are not likely to be affected and that the measure does not, in principle, affect CITGO. Despite the fact that PDVSA will not be directly affected in commercial terms, however, the sanctions do impose certain limited operational constraints and further limit access to overseas credit, and are a warning that more severe sanctions could follow. Moreover, the sanctions generate concerns that eventually the US secretary of state could be tempted to include Venezuela on the US' list of countries that sponsor terrorism, something that US Republican hardliners in Congress have previously demanded. Indeed, it is likely that the decision to sanction PDVSA over its commercial links with Iran could be aimed at trying to ease the demands of Republican hardliners who are pressing hard for Venezuela to be included in the list in the next US Secretary of State Report on Terrorism. Importantly, despite the strong rhetoric between the two countries, it is not likely that Chávez will attempt to suspend oil supplies to the US as revenues from oil exports are essential for the Venezuelan economy. Tensions between the US and Venezuela will continue to affect bilateral relations, but it is unlikely that trade will be further affected, especially as both nations share a very pragmatic business approach when it comes to their mutual interest in relation to continuing oil supplies. In any case, this event is a clear indication that the US is developing a harder line against Venezuela as a result of Chávez's links with Iran. Although ties can be expected to remain strong between Venezuela and Iran, the former should be careful not to push its "warm relations" with Iran too far beyond US tolerance limits at a time when its support for the regime of Libyan leader Colonel Muammar al-Qadhafi and his unclear links in the past with the Colombian guerrilla Fuerzas Armadas Revolucionarias de Colombia (FARC) will also be causing some consternation in the US government. 
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