GeoLegal Weekly #29 - Winning Elections “By Hook or by Crook”
Promising to win “by hook or by crook" may sound like a Donald Trump quote but not quite. Find out which Latin American autocrat proved this week he meant it - and what it means for geolegal risk.
Greetings from the Maldives, which once held one of my favorite acts of political theater - an underwater Cabinet meeting to highlight the risk that climate change poses to this small island nation. Video below is kind of amazing.
On a different coastline, President Nicolás Maduro was declared the winner of Venezuelan elections earlier this week by a national election committee he controls in an election he vowed to win “by hook or by crook.” Despite exit polling showing him likely to be trounced by opposition candidate Edmundo González, Maduro was declared winner by over 7 percentage points. The result came after a 6 hour delay, which the government blamed on a purported cyber attack but some suspect was to allow for data fiddling. International election observers were largely excluded while local observers noted intimidation and irregularities as well as the inability to access paper ballots to check digital tallies, as is their right under Venezuelan law. Maduro’s commission supposedly plans to release data and evidence that he is the winner in the coming days.
In the meantime, Russia, Cuba, Syria, North Korea, Iran and China are the only countries recognizing Maduro’s “win”. The US, Brazil and a host of others are pushing for Maduro to prove his victory, while the US is threatening additional sanctions. A weary population is registering their discontent - some by banging pots in the safety of their own homes, others braving the streets and being brutally repressed for doing so. Maduro’s government has called for the arrest of the opposition candidates because of the protests that have ensued.
Why would I choose to cover this story this week when Israel is conducting strikes and assassinations inside Lebanon and Iran or when US President Joe Biden has released a Supreme Court overhaul proposal? The simple fact is that nothing demonstrates geolegal risk better than the crisis in Venezuela.
For a while, Venezuela was one of the wealthiest countries in Latin America. In 1960, its oil reserves (still the world’s largest) made the country’s per capita GDP 80% of that of the US. It was a leading member of OPEC in the flush 1970s before falling into the Latin American debt crisis in the 1980s. Maduro’s predecessor, Hugo Chavez, benefited from strong oil sales which enabled his socialist agenda during his reign from 1999 until his death in 2013. To say that Venezuela has deteriorated since Chavez’s death is an understatement. From 2013 to 2021, GDP dropped by 75%. The country of just under 30 million has seen nearly eight million people flee in the last ten years.
What happened and why does it matter?
The Venezuelan leadership has played a brutally authoritarian game in recent years. For example, as the Atlantic outlines:
"Maduro and his predecessor Hugo Chávez have a long history of imprisoning and intimidating dissenters, but as Sunday’s election approached, not only political activists but anyone who interacted with [opposition candidate] María Corina could expect consequences. The hotels where she stayed were closed. A station that sold gas to her was shut down. A doctor was fired from a hospital for taking a selfie with her. On that day in May, Elys and Corina Hernández, the sisters who run Pancho Grill with their aunt Nazareth, must have known that selling empanadas to María Corina could put their business in jeopardy. They did so anyway, and the authorities showed up that very day to close their restaurant for 15 days for alleged tax evasion. According to one count, 22 establishments have been closed or inspected after providing services to María Corina and her entourage.”
But being authoritarian is not enough to destroy an economy; there are plenty of authoritarian countries that are economically stable.
However, the Venezuelan government decided to be brutally authoritarian while also cozying up to Cuba, Russia, Iran and China and while frequently lashing out at the US. Chavez delighted in this role, even shipping heating oil to poor residents in the Bronx to spread his version of socialism. Autocrats who line up to be enemies of the US tend to place themselves at considerable risk of sanctions and more while those that play nice tend to get a free pass.
Venezuelan sanctions present an interesting geolegal use case because they have served as both a carrot and a stick in this case. From 2005 onward the US began to implement sanctions. These sanctions include arms sale restrictions while other sanctions targeted Venezuelan travel agencies that the US claimed financially supported Hezbollah. A bevy of Venezuelan officials have been hit with visa restrictions for corruption and human rights abuses. Former US president Donald Trump implemented crushing sanctions over his tenure largely geared at corruption and human rights abuse. The most pertinent of these restricted access to the US financial system including by the state oil company (PdVSA) and restrictions on transacting with the Venezuelan digital curreny. The currency itself–the Petro–was a failed experiment to replace the plummeting Bolivar with a “crypto” vehicle purportedly backed by Venezuela’s gold and oil reserves. Between corruption and derision, the currency folded earlier this year. By 2019, Trump went further to block all of PdVSA’s assets subject to US jurisdiction, put sanctions on the main banks of Venezuela and froze all assets of the Venezuelan government that it could (you can read more here).
These sanctions pushed Venezuela further toward Russia and China while exacerbating poverty that has led to mass migration. Of the nearly 8 million Venezuelans that have fled in the last ten years, the better part of a million have crossed the US southern border in hope of better lives while the balance have created challenges in Colombia, Ecuador, Mexico and elsewhere. Regardless of the impact, Maduro the strongman stayed the course.
In 2022, the Biden administration started to dangle carrots in front of Maduro, authorizing Chevron and others to negotiate and transact with Venezuela and PdVSA on the back of Maduro’s agreement with the Venezuelan opposition to hold a fair election. Within months, however, the Venezuelan government had banned the head of the opposition from running and the US started to reimpose sanctions. Today, Venezuela appears to be brazenly attempting to go much further than that by fabricating its election results.
There are a few takeaways from all of this for me.
First, Venezuela is perhaps the best example of how the US has weaponized sanctions laws in recent years at a scale previously uncontemplated. The Washington Post, in an excellent assessment of sanctions policy, notes that “more than 60 percent of all low-income countries [are] now under some form of financial penalty” (note that this is probably an overstatement in that it counts a singular sanction on a person in a country - but still the scale is massive). Such policies are wildly inconsistent, with friendly autocrats evading sanction while the less friendly ones have their economies crushed. The WAPO analysis argues that Washington is addicted to sanctions following success crippling North Korea and bringing Iran to the negotiating table all without firing a single bullet. Venezuela has the world’s largest oil reserves and the US has long viewed global oil as a distinct national interest. But Venezuela’s potential to inflict pain on the US is nothing like North Korea’s or Iran’s.
Sanctions law is particularly hard on companies, since the penalties for violating financial sanctions (Office of Foreign Assets Control) or export controls (Bureau of Industry and Security) are stiff and the list of sanctioned entities and prohibited products and services is - well, non-intuitive. As everyone learns eventually, it’s quite possible to violate sanctions without knowing it - e.g. by partnering with a foreign company not subject to the sanctions who then sells into a sanctioned country. Or - by exporting a controlled technology without knowing it. For example, the Playstation 2’s processor was once considered so advanced that it was illegal to export the video game console without a license. Some folks in Miami were prosecuted for selling Playstation 2 consoles to a shopping center in Paraguay. They were alleged to have known this, but not only were they selling video games without an export license (!), but the shopping center was a Specially Designated Global Terrorist entity per OFAC. If this seems surprising, well, here it is. The individual defendants faced up to 35 years in prison and fines of up to $1.25m. In the event, all pled guilty and were sentenced to probation.
Second, this underscores that the human rights dynamic is eroding as a concern. Washington wants a Venezuelan government that will partner with the US instead of China and Russia. It is willing to crush the economy and create a migration crisis to achieve that. This is all geopolitics - this is only about democracy to the extent the US thinks democracy will deliver a government in its interest.
Third, there’s a lot of risk for corporations getting involved in sanctioned countries, even when there is temporary relief or a carve out. The reality is that sanctions policymaking is much more arbitrary than the normal regulatory process. The executive branch is being lobbied on all sides to implement sanctions, sometimes even by lawmakers trying to win commercial advantage for constituent companies. Understanding whether or not to make a fixed investment involves complex calculations of what both the domestic and geopolitics of the particular country will be in the future. The gold rush into Myanmar a few years ago is a cautionary tale, as the country found itself again under crippling sanctions. And sanctions on oil producing countries in particular also seem to be subject to broader concerns about the global economy, with the severity of enforcement reflecting a complex calculation–how to combine the optimum amount of pressure without pushing energy prices too high. This can lead to extended tolerance for gray market shipping and sales followed by sudden crackdowns if global demand falls or production rises elsewhere. Indeed, the Biden administration began its short-lived 2022 rapprochement with Venezuela when oil prices spiked after Russia’s invasion of Ukraine.
One thing is for sure though: The complexity and scale of sanctions business means its boom time for law firms that can help corporations navigate and for lobbying firms that can help them bend the rules to their preference.
In Other News:
Israel vs. Everyone: Tensions in the Middle East are seriously escalating, in line with our analysis earlier this year. Israel launched an assassination in Iran of Hamas’ political leader while also retaliating in Beirut for a missile strike by Hezbollah. The potential for a multifront war - and for further retaliation and escalation from Iran and Hezbollah which draws other Gulf states in, is possible.
Supreme Court Reforms: President Biden has proposed a series of Supreme Court reforms that have no chance of making it through Congress in 2024 but could be the focus of efforts by the Harris administration if she wins and has control of Congress. The reforms are a reaction to the fact that there are ethics scandals swirling around at least two Justices and also to the fact Democrats have little other leverage to upend a status quo where they are significantly more likely than not to lose at the Court. I’ll write more about this soon.
Thanks to Varun Oberai for his research on the topic and Dan Currell, Karthik Sankaran and Steve Heitkamp for their inputs.
-SW
Very interesting piece Sean, though I think that there's another interesting geo-legal angle that may be worth talking about further the impact of Venezuela's increasing debt distress in the years leading up to the maximum pressure sanctions and the persistence of the interests of debt holders and those holding other arrears even today. For many years following Venezuela's decisions to prioritize debt repayments (including those held by local military) over domestic transfers or investment in domestic economy, led to more and more repression. And of course the debt distress was yet another aspect that got frozen as tougher sanctions came into place. The debt and arrears arguably made China and Russia more attractive as partners, and create a web that needs to be addressed in case of any (perhaps overly optimistic) normalization. Just highlights the complex layers of geoeconomics and legal risks. .
Absolutely Rachel and I’m really glad you highlighted this. I had been going back and forth with my colleague Karthik on this and we’re both very much aligned with what you outlined below, just didn’t get it fully into the piece. It’s a complicated and messy story for sure and the county’s debt plays a big role.