AP Explains: The wide reach of Trump’s Venezuela sanctions

BOGOTA, Colombia (AP) — Wide-reaching U.S. sanctions aimed at toppling Venezuelan President Nicolas Maduro’s government could inflict further damage on an economy already reeling from six-digit inflation by scaring off remaining investors. The new measures don’t include Venezuela’s private sector, but the mere prospect of being sanctioned by the U.S. by engaging in transactions that in any way involve the Maduro administration could serve as a powerful deterrent.

Here’s a look at the scope and potential impact of President Donald Trump’s executive order:

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IS IT AN EMBARGO?

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The new sanctions announced by the Trump administration this week freeze all Venezuelan government assets in the United States and allow the Treasury Department to sanction any person, business or other entity assisting the Maduro administration.

While those measures are similar to strict U.S. sanctions on nations like North Korea, Iran and Cuba, they are not as wide in scope. Notably, Venezuela’s still sizeable private sector is not blacklisted.

Francisco Rodriguez, chief economist of New York-based Torino Capital, and other analysts say they would not characterize the sanctions as an embargo since they specifically target the government and not overall trade.

But Rodriguez adds that previous U.S. sanctions nonetheless constitute an “oil embargo” since they target Venezuela’s state-run oil company, which controls all transactions.

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WHAT’S THE LIKELY IMPACT?

The biggest impact probably will come from “secondary sanctions” that could have a devastating effect on Venezuela’s economy.

The Trump administration can now punish foreign governments and businesses that help Maduro stay in power from doing business in the U.S. National Security Adviser John Bolton put it in stark terms Tuesday: Do business with the Venezuelan government and you’ll be barred from the U.S.

“Make a very careful calculation,” he warned.

Analysts say the definition of providing “material support” is so vague that it could have a ripple effect that chills all business with Venezuela. In particular, countries like India and Malaysia that now buy 46 percent of Venezuela’s exports could decide they are better off reducing trade.

“All these measures are impacting the economy’s import capacity and will lead to a deeper economic contraction,” Rodriguez said.

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WILL IT BE ENFORCED?

It remains to be seen how strictly the Trump administration will enforce the new sanctions against third-party foreign entities.

Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics who has extensively studied sanctions, said the onus will fall on individual companies to ensure that their transactions do not violate sanctions, and because of the Venezuelan state’s wide reach, it will be difficult for many businesses to show that zero government capital is involved.

“Because the scope of the obligation is ambiguous, a company doesn’t know when it is at risk of being in non-compliance,” Schott said.

Rodriguez said it will be a “daunting task” for financial institutions to determine whether they are being used as a channel for government transactions, and the “prudent response for many” will be to significantly restrict such dealings.

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WILL EXEMPTIONS BE ALLOWED?

The executive order allows for the delivery of humanitarian assistance, but even shipments of food and medicine are likely to diminish.

Similar sanctions imposed in other parts of the world show organizations and financial institutions typically choose to err on the side of caution even when U.S. policy explicitly allows for the delivery of certain goods.

“They usually don’t continue even though they’re authorized,” Schott said.

He described it as an example of the “collateral damage” that sanctions often involve: Businesses and people who are not specifically targeted by the measures are nonetheless hurt.

Restrictions on trade have made many banks and companies around the world hesitant to do business with Iran, for example, even though the U.S. insists that medicine and humanitarian goods are exempt from sanctions. Prices on imported medicines like chemotherapy drugs have soared and doctors worry they will become out-of-reach for many Iranians .

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ARE ECONOMIC SANCTIONS EFFECTIVE?

Studies say that at best economic sanctions are effective in only a third of cases in which they are imposed to achieve political goals.

A frequently cited review of 115 cases from 1914 to 1990 found 40 instances that could be characterized as a success. Subsequent analyses have challenged that conclusion and contend they are effective at an even lower rate.

In defending the sanctions, Bolton said: “It worked in Panama, it worked in Nicaragua once, and it will work there again, and it will work in Venezuela and Cuba.”

None of those examples are clear cut, however.

U.S. sanctions on Nicaragua seeking to topple the Sandinista government in the 1980s inflicted a devastating blow on the economy that some argue led to the party’s defeat in elections, but the sanctions were combined with military efforts against the regime. Panamanian strongman Manuel Noriega was only toppled when U.S. President George H.W. Bush sent in troops. Cuba remains governed by the Communist Party despite more than a half century of U.S. sanctions.

Rodriguez said the sanctions are unlikely to sway Maduro to leave the presidency. Rather, he said, high-level guarantees assuring members of the Maduro administration they won’t be prosecuted if they give up power would be more effective. “You have to build that exit option,” he said.

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