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Trump Targets Gold as Crisis in Venezuela Worsens

January 30, 2019
Over the past decade, the humanitarian crisis in Venezuela has deteriorated the standard of living in the country. Former president Hugo Chavez and current president Nicolas Maduro have been unable to stimulate a stagnated economy in order to ameliorate living conditions in Venezuela. The United States has imposed sanctions on the country, arguing that they are necessary to restore democracy and human rights. Most recently, on November 1st, 2018, President Trump signed an executive order establishing sanctions on Venezuelan gold.[1] In this article, we provide an analysis of why the US government chose to target gold and present potential alternate solutions to the government’s current approach.

The Crisis in Venezuela

Analysts such as Alex Nowrasteh have argued that to understand the current situation in Venezuela, it is essential to understand the regime of Hugo Chavez.[2] Chavez, who came to power in 1999, campaigned on a socialist platform that vowed to redistribute wealth and land, following the model the Castro brothers had instituted in Cuba.[3] In his first years in power, Chavez concentrated economic and political authority. In the early 2000s, he expropriated private property, generating controversy among ranchers. Throughout his presidency, Chavez faced criticism from the groups such as the Democratic Unity Roundtable because of his attempts to expand the government’s powers over economic matters via price controls and devaluation of the currency.

After Chavez passed away in 2013, his appointed successor Nicolas Maduro won the presidency by a narrow margin. In the first year of his presidency, the Bolivar, Venezuela’s national currency, faced a 50% inflation rate. The Venezuelan Parliament granted Maduro emergency powers for a year-long period in an attempt to curb inflation. Maduro made it illegal for any business to generate more than a 30% profit on its sales.[4] In 2016, the Maduro government announced its intention to devalue the Bolivar and increase petrol prices, hoping to curtail the impending economic crisis. Between 2013 and 2016, the opposition staged protests in which violent clashes with the government resulted in civilian deaths.

The economic policies of the Chavez and Maduro regime have had dire effects on the lives of millions of Venezuelans. In the past five years, the Venezuelan economy has shrunk by 50%.[5] This economic instability has led to rampant malnourishment among the general population, which has in turn prompted a massive refugee crisis. To contextualize the scope of this humanitarian crisis, the United Nations estimates that 2.3 million Venezuelans (about 7% of the country’s population) have fled their native land in the past few years, searching for a better life.[6]

Image: Venezuelan migration routes, Source: The Straits TimesImage: Venezuelan migration routes, Source: The Straits Times

History of US Sanctions on Latin American Countries

The United States has imposed sanctions on Latin American countries for multiple reasons. To understand the relationships between the United States and Latin American countries, it is essential to understand their history. The United States has imposed sanctions on Latin American countries to destabilize unfriendly governments throughout the continent. Relationships between the US and countries in the region grew tense as a result of these destabilization policies.[7]

President Kennedy, for example, put a trade embargo and travel ban on Cuba during the Cuban missile crisis. This embargo prohibited all sorts of imports and exports between the United States and Cuba under the 1962 Trading with the Enemy Act. Though the Obama administration loosened trade and travel restrictions towards Cuba, many of the limitations brought about by this embargo are still in place and hint at the potential long-term consequences that sanctions have on countries.[8]

Why Target Gold

The Venezuelan government has sought to remedy its economic woes in numerous ways. Notably, for the past two years Maduro has relied on gold as a method to curb hyperinflation that the IMF projects to surpass 1,300,000% this year.[9] Following US sanctions barring Venezuela from international financial markets, Maduro turned to gold exports to buoy the country’s economy. In search of a method to obtain hard currency, Maduro leveraged Venezuela’s natural resources by ramping up gold exports. Turkey, the largest purchaser, has bought more than 20 metric tons of gold from Venezuela so far in 2018.[10] Thus, while Venezuela has become increasingly isolated in the international community, Turkey is marked as being one of its few allies.[11] However, the strengthening bond between Venezuela and Turkey, supported by their gold trade, raises fears for the US, as this relationship threatens to “undermin[e] the entire economic system,” according to Suzanne Maloney, deputy director of the Foreign Policy Program at the Brookings Institution.[12] As such, the US has placed sanctions on Venezuelan gold to limit the extent of the Venezuela-Turkey relationship.

Criminal gangs are heavily involved in the Venezuelan gold industry.[13] White House national security adviser John Bolton stated, “The new sanctions will target [criminal] networks operating within corrupt Venezuelan economic sectors and deny them access to stolen wealth.”[14] These sanctions, in the short term, are meant to prevent US persons from engaging with actors and networks participating in corrupt or deceptive transactions regarding Venezuelan gold.[15] Through this measure, the US aims to prevent the American people from helping fund criminal activity and ultimately weaken the Venezuelan government.

The Consequences of Sanctions

The sanctions on Venezuelan gold could have far-reaching effects on the country and its participation in international trade. These sanctions were put in place “to cut off the triangulation of gold and the movement of illegal funds through shell companies,” according to an official briefed on the administration’s plans.[16] However, sanctions may not be the best method to pressure Maduro to alter his behavior and anti-democratic tendencies.

A study by the Oslo Forum found that sanctions are only successful in coercing behavior 10% of the time.[17] Further, the study found that over the past 24 years, targeted UN sanctions have only successfully constrained, coerced, and/or signaled a target around 22% of the time, on average.[18] The study suggests that sanctions are most effective when coupled with peaceful diplomacy, as these economic constraints provide bargaining power to the country trying to influence another actor’s behavior. Yet, Venezuela-US relations currently lack peaceful diplomatic negotiations, rendering the power of sanctions less effective. For example, former US Secretary of State Rex Tillerson failed to appear at the regional Organization of American States meeting, thus letting a vote to condemn Maduro’s rule fail, despite strong support from other members.[19] Furthermore, tensions have been heightened by the fact that Maduro in May 2018 expelled Venezuela’s top American diplomat and his deputy, in part as a response to American sanctions.[20] In return, the US expelled two Venezuelan diplomats that same month.[21] Venezuela and the US have not had ambassadors in each other’s countries since 2010.[22] This highlights the deterioration of US-Venezuela relations, which is not conducive to the diplomacy that should complement sanctions. President Trump’s threat of using “military action” to force Maduro’s hand has exacerbated the ever-declining relationship.[23] The lack of functional and constructive diplomacy signals that the US has yet to translate its rhetorical condemnations of Venezuela into a concrete plan to promote democracy.

Moreover, the US economic and political constraints on Venezuela are seen by some leaders and citizens as “imperialist” policies, invoking notions of neo-colonialism.[24] The United States’ record of intervening in Latin American politics raises concerns that the imposition of sanctions in Venezuela is simply a tool to ensure its geopolitical interests are met in the region. The constraints on Venezuela also signal that the US may be reverting to strong-arming Latin American countries into protecting US interests. These sanctions remind Latin Americans of the political upheaval caused by US intervention in other countries in the region, such as Chile and Nicaragua.

US sanctions on Venezuela could be detrimental to Venezuelan citizens. While the US has stopped short of imposing direct sanctions on oil, as it would harm the Venezuelan people, the economic sanctions they have imposed do not leave citizens unscathed.[25] By sanctioning gold, the Venezuelan government will find it increasingly difficult to obtain the hard currency required to pay for scarce necessities, such as medicine and food.[26] These negative socio-economic impacts on the Venezuelan people thus inform their opinions of US sanctions. In a September 2017 poll, nearly 52% of Venezuelan respondents disagreed with Trump’s sanctions, and 57% opposed the United States resorting to military force to catalyze change.[27] However, in October 2017, Maduro’s approval rating was a dismal 23%.[28] These statistics demonstrate that while the majority of Venezuelans want a resolution to the crisis and oppose Maduro’s rule, they do not believe sanctions are the most effective method to achieve this goal.

Looking to Alternative Solutions

There is no simple or straightforward solution to pressure Maduro and his government to make swift changes to promote democracy. The matter is further complicated by the fact that the United States has recognized Juan Guaidό, President of the National Assembly, as the new interim President of Venezuela.[29] Ultimately, the pressures the US and the rest of the international community place on Venezuela should have the goal of promoting democracy in the name of liberty and human rights for the Venezuelan people. With this in mind, the US should consider implementing a system whereby all Venezuelan export revenue from the US be used to purchase food, medicine, and other necessities for the Venezuelan people.[30] This would ensure that the funds flowing into Venezuela are not being used to support Maduro’s regime. Of course, this requires the consent from Venezuela, which signals a larger need for diplomacy to supplement this economic pressure. The current sanctions on gold, if not coupled with diplomacy, will only serve to further isolate Venezuela and thus strengthen Maduro’s resolve to continue resisting US calls for democratization, regardless of whether or not the US recognizes his regime.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

   [1]https://www.bloomberg.com/news/articles/2018-11-01/trump-orders-sanctions-on-venezuela-gold-to-pressure-maduro

   [2]https://www.cato.org/blog/venezuela-biggest-humanitarian-crisis-you-havent-heard

   [3]https://www.bbc.com/news/world-latin-america-19652436

   [4]https://www.reuters.com/article/us-venezuela-economy/venezuela-decrees-new-price-controls-to-fight-inflation-idUSBREA0N1GL20140124

   [5]https://www.washingtonpost.com/world/2018/08/23/venezuelas-refugee-exodus-is-biggest-crisis-hemisphere/?utm_term=.411220aa6399

   [6]https://www.washingtonpost.com/world/2018/08/23/venezuelas-refugee-exodus-is-biggest-crisis-hemisphere/?utm_term=.160a6d7e1151

   [7]https://www.theguardian.com/business/2018/sep/05/venezuela-how-is-the-region-coping-with-its-collapse

   [8]https://www.engagecuba.org/embargo/

   [9]https://www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN

   [10]https://www.wsj.com/articles/u-s-plans-sanctions-to-target-venezuelas-gold-exports-1541009068

   [11]https://foreignpolicy.com/2018/11/09/trumps-fools-gold-in-venezuela/

   [12]https://www.brookings.edu/wp-content/uploads/2018/10/fp_20181024_nicaragua_venezuela_billingslea_transcript.pdf

   [13]https://www.bloomberg.com/news/articles/2018-11-01/trump-orders-sanctions-on-venezuela-gold-to-pressure-maduro

   [14]https://www.bloomberg.com/news/articles/2018-11-01/trump-orders-sanctions-on-venezuela-gold-to-pressure-maduro

   [15]https://www.bloomberg.com/news/articles/2018-11-01/trump-orders-sanctions-on-venezuela-gold-to-pressure-maduro

   [16]https://www.bloomberg.com/news/articles/2018-11-01/trump-orders-sanctions-on-venezuela-gold-to-pressure-maduro

   [17]https://www.wsj.com/articles/u-s-plans-sanctions-to-target-venezuelas-gold-exports-1541009068

   [18]https://www.hdcentre.org/wp-content/uploads/2015/02/Oslo-Forum-Paper-UN-sanctions-and-peace-negotiations.pdf

   [19]https://www.independent.co.uk/news/world/americas/venezuela-crisis-latest-news-oas-no-deal-protests-organisation-american-states-a7767471.html

   [20]https://www.nytimes.com/2018/05/22/world/americas/venezuela-us-diplomats.html

   [21]https://www.reuters.com/article/us-venezuela-election-usa-expulsion/u-s-in-tit-for-tat-expels-two-venezuelan-diplomats-idUSKCN1IP05F

   [22]https://www.washingtonpost.com/world/the_americas/venezuela-announces-the-expulsion-of-two-top-us-diplomats/2018/05/22/bd2cce64-5deb-11e8-b656-236c6214ef01_story.html

   [23]https://www.nytimes.com/2017/08/12/world/americas/trump-venezuela-military.html

   [24]https://www.cnn.com/2017/08/13/opinions/venezuelan-sanction-failure-opinion-oneil/index.html

   [25]https://venezuelanalysis.com/analysis/13936

   [26]https://venezuelanalysis.com/analysis/13936

   [27]https://www.reuters.com/article/us-venezuela-politics/venezuelas-maduro-approval-rises-to-23-percent-after-trump-sanctions-poll-idUSKCN1C8037

   [28]https://www.reuters.com/article/us-venezuela-politics/venezuelas-maduro-approval-rises-to-23-percent-after-trump-sanctions-poll-idUSKCN1C8037

   [29]https://www.state.gov/secretary/remarks/2019/01/288542.htm

   [30]https://www.britannica.com/place/Iraq/The-Persian-Gulf-War#ref793773

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  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>