Podcast - What's Changed in Venezuela and Where Things Are Headed

Stephanie Goldstein: Hello, everyone. Thank you so much for joining us in our first podcast episode of Holland & Knight's new podcast, "Global Markets, Policy and Power." We are joined today with some of my colleagues: George Mencio, who is Holland & Knight's chief international officer, Beth Viola, who is Holland & Knight's chair of our Energy & Natural Resources Industry Sector Group and Ambassador Nathan Sales, a partner in our regulatory practice. Thank you all for joining us today. In today's episode, we are talking about Venezuela. We step back from the headlines to assess what has actually changed since January, what remains unresolved and what companies should be watching for next. If you're trying to understand Venezuela's direction in a rapidly shifting environment, this is the place to start. So we're going to go ahead and get started. So Ambassador Sales, just to level set for listeners, how would you describe Venezuela's political and economic posture today compared to the immediate aftermath of Maduro's removal in January? What feels materially different and what does not?

Amb. Nathan Sales: Well, it's a great question, Steph, and it's a complex question as well, because in a certain sense, there's a lot that looks very, very different. But there's also a sense in which there's a decent amount of continuity between the Venezuela of the Maduro days and what things look like on the ground today in Caracas. So let me talk a little bit about what's different. The most obvious difference is that the disputed president, Nicolás Maduro, is no longer in office and is instead in a jail cell in a prison in the United States. He's been indicted for a variety of federal offenses, including narcotics-related offenses. So he's out. Another major change is that the U.S. influence over the political system in Venezuela and the economy in Venezuela is significant right now. The rump government in place in Caracas is very cooperative with the United States when it comes to responding to demands for political change and responding to demands from Washington for economic change. So those are the top-line differences, and we should be clear, those are major and fundamental differences. But if you scratch beneath the surface, you see a decent amount of continuity between the Maduro era and the transition era that we're in right now.

Delcy Rodríguez, the current interim president of Venezuela, was Nicolás Maduro's vice president and before that a minister in the Maduro government. She is a member of the political movement that produced first Hugo Chavez and then Nicolás Maduro. And she's still in charge. Now she's responsive to direction from Washington, but she still wields the reins of power. And others throughout the government, whether it's in the defense ministry or in the interior ministry, two very important ministries when it comes to Venezuela's future trajectory and political change, a lot of the senior folks in those ministries remain Chavista era holdovers, including the head of the interior ministry. We can talk about him and some of the problems associated with him, Diosdado, later on. So big picture, a lot has changed, but a surprising amount of things have stayed the same, temporarily pending longer-term political and economic change in Caracas.

Stephanie Goldstein: Thank you so much, Ambassador Sales. So now over to you, George. Since January, there has been no shortage of headlines. What are the two or three developments that genuinely matter for understanding where Venezuela is headed as opposed to short-term noise?

George Mencio: Well, there's no question that we're in a transition period, and there's been quite a number of developments. It all started back in late January, when OFAC (Office of Foreign Assets Control) started easing the sanctions. And you began to see quite a lot of activity. By the beginning of February, you had U.S. Energy Secretary Wright visiting Venezuela with a meeting with the Venezuelan administration and Delcy Rodríguez with several U.S. oil and gas companies, and that moved along. Venezuela then launched an amnesty law and you're beginning to see the release of political prisoners. And then by March, you see that the United States had normalized diplomatic relationships with Venezuela after a seven-year hiatus, and now we have a fully functional embassy in Venezuela. And April was actually quite a definitive month. It started with the U.S. Treasury removing interim President Delcy Rodríguez from the sanctions list, along with several of her folks in her administration. You see the IMF (International Monetary Fund) and the World Bank beginning to address with Venezuela the normalization of relations there as well. On April 30, we had the beginning of commercial flights between the United States and Venezuela, something that hadn't happened in the last seven years. And on that date, also, you saw that several U.S. oil and gas interests were signing MOUs (Memoranda of Understanding) with PDVSA (Petróleos de Venezuela S.A.), the Venezuelan government's agency in charge of all the oil and gas activities in the country.

Stephanie Goldstein: Thank you, George. Ambassador Sales, back to you. The U.S. administration outlined a phase framework – stabilization, recovery and transition – based on policy actions and diplomatic engagement to date. Where do you think we actually are in that framework?

Amb. Nathan Sales: So this is a sequential framework, with three different phases, one supposed to follow after the other. So we start with stabilization, which means ensuring that the arrest of Maduro and his replacement by Rodríguez doesn't unleash economic or political or legal chaos in the country. Then you move to step two, which is recovery, meaning primarily recovery of the economy, attracting American investment into the country, obtaining the necessary legal reforms to make Venezuela an attractive investment environment – so things like independent courts, things like rule of law, things like updated legal frameworks for the hydrocarbon industry and other industries. And then third, you move to transition, political transition, where the holdover Chavista office holders would be replaced and you would have elections, which would usher in a new era of democracy under the leadership of Nobel Prize laureate María Carina Machado, or others, as part of her pro-democracy movement.

So that's the way the administration has outlined how it sees the short- to midterm picture for Venezuela. But I think we're actually in all three of these phases simultaneously, and these are different work streams, if you will, that are taking place at the same time. So stabilization is not just something that has to happen in the days immediately after the arrest of Maduro. It's important even to this day to keep the instruments of Venezuelan state power under control so that the interior ministry doesn't begin lashing out and the military doesn't go off course. So stabilization is still important even today. Same thing with political transition: That is not something that you can afford to wait until all of the other check marks have been affixed to the work plan. Political prisoners need to be released, and we've seen some, albeit insufficient, progress on political prisoners being released. And when it comes to investment and recovery, that's a long-term project as well. The Venezuelan economy, once one of the most prosperous in the hemisphere, has really been battered by 20 years of mismanagement. And it's not going to turn around overnight. It's something that's going to require continued attention from policymakers in Caracas, policymakers in Washington and certainly the private sector. So I think those latter two points, recovery and transition, really go hand in hand. Because if you're an investor in a capital-intensive industry, are you really prepared to sink billions of dollars of capital in Venezuela at a time when you're not sure whether rule of law reforms and political transition reforms are going to stick for the long term? You might want to see more irreversible progress on the political front before you take on the economic risk of investing.

Stephanie Goldstein: Thank you, Ambassador Sales. So Beth, the United States is now engaging directly with acting president Delcy Rodríguez, while maintaining that the long-term goal is a democratically elected government, as Nathan just said. How sustainable is that balance, and what conditions appear to be driving U.S. engagement right now?

Beth Viola: Thanks, Steph, and I think this is a perfect transition from Nathan's comments, but from my perspective, I think the U.S. strategy of security and stability first prioritizes immediate economic and geopolitical interests over a rapid democratic transition, is a little bit fragile in terms of its balance. But speaking to the factors that are contributing to U.S. engagement, it's important to note that the U.S. government, on a daily basis, is engaging with acting president Delcy Rodríguez's team on a lot of urgent economic priorities. But obviously energy security, and we're back to a little bit of "drill baby drill," as it relates to Venezuela. And a primary driver of the rapid restoration of Venezuelan oil production is important as we look at creating an alternative to global supplies that are disrupted by other conflicts globally, and the U.S. is already, and we'll talk about this in the next podcast, has already issued a number of licenses allowing some of the major firms to resume their extensive operations. So I think that's really important and a big driver.

The other piece is the U.S. is really using its leverage to redirect oil revenues in U.S.-monitored accounts to fund public services and infrastructure rather than regime enrichment. And I think this is trying to help Venezuela escape its ties to places like China and Russia. And then another big one is the access to minerals. Obviously there is huge interest in expanding our access to critical minerals and strengthening supply chains in the West. And I think there's a huge strategic push right now to secure Venezuela's vast mineral reserves, and again, reduce our dependence on China for those things. So I think those are really important drivers right now for the U.S.

Stephanie Goldstein: George, back to you. Have we seen any meaningful movement on electoral timelines, institutional reform or constitutional clarity? Or does uncertainty remain the defining feature of this period?

George Mencio: There's still some uncertainty, but most information that we are receiving directly from Venezuela is that national elections will likely not be scheduled until December of 2027.

Stephanie Goldstein: Thanks, George. Beth, [I'm] going to pivot back to you. So since January, we've seen selective sanctions relief – which our colleagues, Andy and Steph, will cover on our next episode – narrow political prisoner releases, as Nathan mentioned, and targeted legal reforms, particularly in the energy and mining sections. Which of these signals should companies take seriously and which should be viewed cautiously?

Beth Viola: Well why don't I start on the things that should be taken seriously, and I'll let Nathan maybe pivot back on caution. But I think a couple of pieces here, one is the structural, legal and energy reforms. I think those are pretty credible signs that have been codified into law and should be helpful to most major industries. The hydrocarbon law overhaul, the January 29 reform, is a genuine shift in policy. It's really effectively ended the state's monopoly by allowing private companies to hold majority stakes and assume a direct operational control of oil and gas fields. So I think that's really important. A lot of our colleagues out of Latin America are working on arbitration and dispute resolution. We've got a new framework that allows independent international arbitration for energy disputes, which is a major departure from what we had seen in the past. Mining formalization, the April 9 mining law, sought to formalize the work that we're doing on mining reform there and offers 30-year concessions with explicit safeguards against unilateral asset seizure, which is allowing for a renewed investment in that sector. And then I think U.S. institutional support, the establishment of the foreign government deposit funds by the U.S. Treasury to manage oil revenues, provides a layer of financial transparency that we did not have in the past. So I think those are all the important drivers.

Stephanie Goldstein: Ambassador Sales, over the next 60 to 90 days, what developments, whether they're political, regulatory or diplomatic, would you consider the most important leading indicators of Venezuela's direction?

Amb. Nathan Sales: Well, I think there's a couple of things to watch, both in Caracas and in Washington. So in Venezuela, what kinds of short- to medium-term political reforms are we going to continue to see? We've talked about political prisoners. That's a really important signal of Venezuela's future direction. It means that the transition to democracy is picking up steam. If we see that, that's great. That's a great signal for investors and companies. If Caracas drags its feet, that also tells us something about the likely direction and how much capital Washington is going to have to expend to continue to change direction. Also, look for the scheduling of elections. We don't have a firm date yet, as we've heard. We need to see what that looks like over the next 60 to 90 days. Will a formal announcement happen? Or are we going to continue to hear rumors and innuendos about when things might take place?

Let's watch Washington to see how much Washington prioritizes political reform and legal reform in Venezuela. This is something that Secretary of State Marco Rubio has really emphasized in his public statements and in his private diplomacy with leaders in Caracas. Caracas is only going to adopt the necessary reforms if Washington asks them to, if Washington pressures them to. They're not going to surrender power out of the goodness of their heart. They're going to do it because they feel compelled to do so because of political or economic pressure coming from Washington. And so the last thing I'll say on this: The most important indicator really is how much private sector investment are we seeing and in what arrange of different industries? Because ultimately a private company that's investing in Venezuela is making a vote of confidence in the future of the country, politically, legally and economically. That's really the canary in the coal mine. The more companies that are prepared to go in, the more confidence we can have that the reforms underway are durable and are going to stick.

Stephanie Goldstein: Thank you, Ambassador Sales. George, we're going back to you on this question. If you had to name one risk that remains underappreciated and one opportunity that is emerging, what would they be?

George Mencio: Well, the risk that continues is the fact, as Ambassador Sales mentioned, that the Venezuelan government is pretty much staffed by many of the same people that were there under Nicolás Maduro, and Hugo Chávez before Nicolás Maduro. So, again, you're dealing with an administration that was problematic then, and it's trying to refine itself, perhaps, in this transition period. In working with clients dealing with this situation, you definitely have to observe several factors to avoid falling into potential risk of exposure. One is, what are your touch points with the Venezuelan government, its agencies and its instrumentalities? You're going to make sure that whatever those contacts are, that they are permissible under our sanctions policy. The second is the flow of funds, any payments going back into Venezuela. Where are they going, and who's getting them? You still have the risk that there may be kickbacks, and that is extremely problematic. So you need to take the right precautions. But in terms of opportunities, clearly, the opportunities are there. The market is opening, not just in oil and gas, but in mining, electricity and several other sectors. Private deals between private companies and individuals which don't touch the Venezuelan government touch points that we mentioned, are permissible. There are opportunities to be taken, but you know, if you wait too long, you may find yourself in the back of the line.

Stephanie Goldstein: That was kind of my last question, too, George. So to piggyback on that, for companies and investors who are still in that "wait and see" posture, is caution still the prudent approach, or is there a real risk to waiting too long in the current environment?

George Mencio: You have to be prudent, you have to be cautious, but if you wait too long you may miss opportunities. I mean, how many fields are there for commercial exploitation? How many opportunities in mining, in oil and gas, in the collateral industries that support these energy sectors? Obviously the players are coming in from the U.S. and they're taking positions, they're taking calculated risk, but if you wait until the end, it's going to be hard for you to wedge yourself into a beneficial position.

Stephanie Goldstein: Thank you so much, George, and thank you, Ambassador Sales and Beth, for being on the podcast today of our first episode of "Global Markets, Policy and Power." And thank you to our listeners. Our next episode will be all about sanctions and will feature Steph Connor and Andy Fernandez. So make sure you listen to that one as well.