Ahead of Sunday’s presidential election in Venezuela, Risa Grais-Targow, director-Latin America, at the Eurasia Group, spoke to S&P Global Platts about the expected US response, the impact of rising oil prices on sanctions and the ongoing collapse of the country’s oil sector.

The interview has been edited for brevity and clarity.

PLATTS: What do you expect the US response will be to Sunday’s election?

GRAIS-TARGOW: I think the US has already been pretty clear that they view these elections as fraudulent. So I think, at a minimum, they will reject the results and refuse to recognize them. There could be some additional sanctions in response as well.

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PLATTS: What will those sanctions look like?

GRAIS-TARGOW: The signaling from the [Trump] administration in more recent weeks has been less in the direction of aggressive sanctions right off the bat. I think especially with [exit from] the Iran deal they seem to be a bit more concerned about international oil prices and higher domestic gasoline prices. Obviously, their Iran policy contributes to that and it seems like, even though we have a more hawkish foreign policy team, there may be a bit more reluctance to add Venezuela to those pressures as well. I think that it would be, maybe, milder sanctions to begin with, something more like a ban on the sale of diluents and lighter crudes to Venezuela or potentially an insurance-related ban that would affect their oil cargoes. But it seems like the import ban that was being discussed a few months ago more actively is now looking like something that would only happen over a longer time frame.

PLATTS: What would need to occur for an import ban to go forward?

GRAIS-TARGOW: In general, the preference here has been to escalate sanctions. The fact that we haven’t had those initial, targeted sanctions for the oil sector happening before the vote means that you start with them after the vote. To the extent that it doesn’t change the Maduro administration’s behavior then we could still escalate towards an import ban. But it seems like we would probably start with milder actions and escalate towards that, using the threat of more aggressive actions as a potential deterrent.

PLATTS: Is there an outcome Sunday in Venezuela that wouldn’t draw a US response?

GRAIS-TARGOW: I think the only scenario in which we don’t is if [Venezuelan presidential candidate Henri]Falcon somehow manages to win, which, in my view, is pretty unlikely at this point.

PLATTS: What impact have existing sanctions had on Venezuela’s oil sector?

GRAIS-TARGOW: Some of the sanctioned individuals had been executives at PDVSA, so what we saw last year was some reluctance to enter into deals with PDVSA. The existing sanctions, the financial sanctions that were imposed in August, those have had a much more severe impact on the oil sector. They don’t allow the government to issue promissory notes to service providers and so that’s really hurt their ability to maintain these relationships with service providers and it’s one of the reasons that we’ve seen such aggressive production declines over the past six months or so.

PLATTS: How much are oil prices at the moment impacting what the US response to Venezuela could be?

GRAIS-TARGOW: It’s certainly a factor. We had Trump tweeting out a few weeks ago this attack on OPEC over oil prices. It does seem to be something that he’s concerned about. If you look at historic trends, higher domestic gasoline prices tend to really change domestic economic sentiment and generally tend to hurt the administration. That’s something the government obviously wants to avoid with November mid-terms. Especially since we’re entering into peak summer driving season, that’s become more of a consideration as they think about the policy response to Venezuela.

PLATTS: Where is rock bottom for Venezuela’s oil sector? Are we already there?

GRAIS-TARGOW: I think we’ve all been shocked at the acceleration of production declines. I’ve generally seen a floor owing to the joint ventures, which are much more functional than PDVSA’s solely operated production. That range is 900,000 b/d to 1.1 million b/d that are being operated as joint ventures. That, to me, has always been the floor. The challenge now is that the government has been more aggressive with its joint venture partners and so now we’re in a new era where we could see the joint venture partners starting to reduce their presence or suspend operations. If we see some of the western companies starting to pull out owing to safety concerns or some of these issues and concerns about their human capital then I think that floor starts to sink further.

–Brian Scheid, brian.scheid@spglobal.com

–Edited by Richard Rubin, newsdesk@spglobal.com

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