March 11, 2008

The SSOT scenario

Katy says: Last week's bizarre diplomatic/military crisis left many uncovered manholes. One of the biggest comes from the information supposedly contained in Raul Reyes' computer, showing the deep links - political, military and financial - between the Chávez government and Colombia's FARC.

Not surprisingly, the U.S. State Department is looking into the possibility of including Venezuela in its list of State sponsors of terrorism, a list that is currently composed of international pariahs Cuba, Iran, North Korea, Sudan and Syria. Venezuela is currently the only country listed as "not fully cooperating" in the fight against terrorism that is not in that list.

I think Venezuela's inclusion in the SSOT list is still a longshot, and the "announcement" of the "possibility" of "looking into" its inclusion sounds more like a threat than a decision that has been made. Still, the possibility exists, and we should start working through what the consequences would be.

There is no recipe for the type of sanctions placed on SSOTs, as they vary from country to country. However, the State department webpage says sanctions typically include:

1. A ban on arms-related exports and sales.

2. Controls over exports of dual-use items.

3. Prohibitions on economic assistance.

4. Imposition of miscellaneous financial and other restrictions, including opposition to loans by the World Bank and other international financial institutions; lifting diplomatic immunity to allow families of terrorist victims to file civil lawsuits in U.S. courts; denying tax credits for income earned in terrorist-listed countries; denial of duty-free treatment of goods exported to the United States; authority to prohibit U.S. citizens from engaging in financial transaction with a terrorist-list government; and prohibition of Defense Department contracts with companies controlled by terrorist-list states.

The likely effects of Venezuela's inclusion are the following:

1. Our oil would be cheaper in the U.S. and harder to sell. Undoubtedly, one of the main effects of this move would be that Venezuelan oil would be more difficult to sell in the U.S. The price of our oil would suffer, since U.S. companies would have to incorporate both the extra cost of doing business with PDVSA and the risk of being sanctioned by the government. A likely tax on Venezuelan oil would be that much easier, since our oil would lose its duty-free status. The amount of oil we sell to the U.S. would also suffer because companies would undoubtedly substitute away from PDVSA. This would mean having to place our oil in markets that are further away, increasing our transport costs and hurting our bottom line. Finally, U.S. companies would be less inclined to engage in joint ventures in the Venezuelan oil, gas or mining sectors, paving the way for oil companies from France, Russia, Brazil and other countries.

2. Families of terror victims could sue in the U.S., potentially hurting our assets there. Think of the following scenario: American or Colombian-American relatives of people killed or kidnapped by the FARC sue the Venezuelan government for damages in U.S. courts. The courts decide in favor of the relatives, and they award the families billions of dollars. Citgo and other assets the Venezuelan government holds in the U.S. (including bank accounts of people linked to the government) are seized to pay for damages. Right now this is not possible, but our inclusion in the SSOT list makes it entirely plausible and, in my view, highly likely.

3. Deepening military links to Russia and China. Venezuela's defense policy has traditionally been supported by U.S. technology. The Chávez government has been shifting away from U.S. technology, preferring Spanish, Brazilian, Russian and Chinese military weaponry instead. If SSOT sanctions were to be put in place, this trend would accelerate.

4. Increased visa restrictions for everyone. A lot of people think that our inclusion would mean shutting down the U.S. Embassy in Caracas. This is not necessarily the case since the U.S. has, for example, an embassy in Syria. However, visa restrictions would increase and it would be much tougher to get a visa to fly or go live in the U.S. The increased restrictions vary from country to country, but the visa page on the website of the U.S. Embassy in Damascus gives you a taste.

That rubber stamp at the head of this post will be showing up more and more on Venezuelans' visa applications. Venezuelans will have to forego some of their trips to Disney World and try more exotic locales like Havanna, Damascus, Teheran or Khartoum. Pyongyang, for instance, is lovely this time of the year.

5. No loans from the World Bank or the IMF. Right now, as Venezuela is awash in petro-dollars, so this seems like a harmless sanction. Venezuela does not really have any IMF loans, and I believe its World Bank loans portfolio is very limited. However, if oil prices were to fall, Venezuela would be hurt by these sanctions. Not only would it wipe out the possibility of getting loans from these institutions, it would make it much more expensive to get financing from private international financial institutions.

When Pres. Chávez announced Venezuela's decision to withdraw from the IMF and the World Bank, he immediately backtracked and the move never materialized. Venezuela's presence in these institutions provides some guarantees that help maintain a minimum flow of foreign direct investment. Financial sanctions would decidedly hurt our chances of receiving FDI. I guess the Banco del Sur would not seem like such a crazy idea at that point.

Finally, I don't believe the sanctions would include freezing of assets held by Venezuelan citizens in the U.S. Most of the wealth of Venezuela's wealthier citizens - estimates I have seen range from $50 billion to $100 billion - is in the U.S., so a move like this would be dramatic to say the least.

A lot of people think that these sanctions would mean the freeze of bank accounts and the impediment to sell or buy property or stock in the U.S., but I think that's unlikely. I believe the U.S. understands that its government is one thing and its citizens are another.

All in all, not a pretty picture, but it may be coming. Are we ready?