Wait for it: Washington will impose greater sanctions on the embattled government of Venezuela. President Trump has already announced more names to Treasury's individual sanctions list, including Venezuelan president Nicolas Maduro. But more sanctions are right around the corner, especially if October elections look rigged.
In the war of words battle, Washington has been much more explosive of late.
On Aug. 14, vice president Mike Pence called Venezuela a "failed state" and that its downfall "threatened the security of the hemisphere and the people of the United States of America." Pence was doing what all VEEPs do in this case, reiterate what the Commander-in-Chief said just days prior. On Aug. 12, Trump played his usual strongman hand and said, "by the way, I'm not going to rule out a military option." While this is highly unlikely unless Maduro's military begins overtly cracking heads in the streets of Caracas, or the government breaks down completely and needed some form of foreign military support to maintain order, the foreign policy press were quick to point out the poison in the president's words. U.S. military intervention into Latin America is toxic history. If Latin Americans had statues of American statesmen dotting their landscape, they'd probably call for them to be removed. Memories of CIA-backed coup d'etats are not conspiracy theories, and so threats of sending the Marines into Venezuela would drive a wedge between Washington and its allies in South America, as everyone has now pointed out.
But on the other hand, Trump's belligerence, coupled with some rank and file military members in Venezuela growing tired of civil strife, may have calmed Maduro down...for now.
That said, what's the latest stress in Venezuela and what is the likelihood of Maduro and his Socialists United Party (PSUV) rearranging the deck chairs to allow for majority rule, and get the country moving forward again?
For starters, local elections won't tip the power scales in Caracas. And PSUV is about as likely to give the majority opposition in the National Assembly a voice as Trump is likely to stop tweeting.
There is some good news worth noting: daily protests have become less violent. Venezuela has not retaliated against U.S. sanctions, and Maduro has signaled a willingness to talk with Trump (even though this Latin American crisis is not the fault of Washington). He also remains open to the normal presidential election cycle in 2018. All positives.
There is still no clarity on the agenda from the new PSUV-centric Constituent Assembly (which replaces the legislative powers of the National Assembly, or congress) and there are mixed signals now as to whether this new political body represents an outright power grab by PSUV or was just a distraction designed to give them a breather from the opposition in congress. The opposition parties have all boycotted the Constituent Assembly, and they agreed to participate in the local elections in October 2017. They mostly stood down and did not vote for the Constituent Assembly because they felt their vote would not matter. As a result, pro PSUV voters, which represent a little under a third of the population, voted to give Maduro the rights to avoid congress completely.
The upcoming mayoral races won't tip the scales of power and some see it as another rigged deal.
"We assume it’s a rigged process again," says Siobhan Morden, a managing director at Nomura in New York, with regards to the upcoming local elections. "The opposition needs to defend whatever is possible in terms of representation across the institutions," she says. "It’s also curious that President Maduro didn’t rule out the prospect for presidential elections in 2018. There has been a more conciliatory tone perhaps to discourage retaliation from the U.S. or breakaway dissidents from the military ranks."
The market is watching Venezuela as closely as Latin America political junkies. Goldman Sachs recently forked over a billion dollars to buy the bonds of Venezuelan oil company PDVSA. Numerous hedge funds who love distressed assets have taken a buy and hold strategy on PDVSA's long dated bonds, maturing beyond 2018, in hopes that Venezuela's long democratic tradition trumps Maduro's ideological push towards Havana-style politics. In such a free and open election, Maduro is expected to lose hands-down, sending bond prices soaring. PSUV 's base would continue to shrink, or barely hold water, following years of economic misery. The party is dependent on three types of voters: government employees (namely PDVSA workers), the poor (increasingly dependent on government hand-outs for survival and easily convinced an anti-PSUV party will take it all away) and communist ideologues fighting the good fight against Yankee imperialists from the bygone Cold War era.
Nomura Securities has been watching these developments closely. Morden thinks that the sanctions program will intensify next year.
"The Maduro administration has already crossed the line with an illegitimate Constituent Assembly that further consolidates power and undermines the opposition-controlled legislature," she says. So much for majority rule in Venezuela. "The rigged local elections and consistent persecution of the opposition politicians should further motivate retaliation from the U.S. on their sanctions policy with the latent threat of sector sanctions next year the main constraint against a sustainable recovery in PDVSA bond prices."
