Disrupting the Illicit Economy that Sustains the Maduro Regime
By Celina B. Realuyo* October 19, 2020
Nicolás Maduro and his cronies remain in control in Venezuela despite intense diplomatic pressure to move to a democratic transition, economic sanctions, and international recognition of Juan Guaidó as the acting president of Venezuela since January 23, 2019. The Maduro regime oppresses the population, destroyed the legitimate economy, engages in massive corruption, and increasingly depends on the illicit economy to survive. Hyperinflation, food and medicine shortages, insecurity and economic ruin have created a humanitarian crisis that has forced over five million Venezuelans to flee the country. The United Nations estimates that 90 percent of Venezuelans are living in poverty. The COVID-19 pandemic is exacerbating the human tragedy in Venezuela, once the richest country in South America.
The Maduro regime engages in various illicit activities including narcotics trafficking, illegal oil sales, and gold shipments. The regime also relies on Cuba, Russia, China, Iran, Turkey, and Colombian guerrilla members of the National Liberation Army (ELN, in Spanish) and former Revolutionary Armed Forces of Colombia (FARC, in Spanish) to keep itself in power. The U.S. government’s “maximum pressure” campaign seeks to impede access to the illicit economy that the Maduro regime depends on. It includes extensive sanctions on the oil and gold sectors, the public indictment of Maduro and his associates on narcoterrorism charges, a $15 million bounty reward for Maduro’s arrest and conviction, and U.S. enhanced counternarcotics operations, with international support, in the Caribbean and Central America that began April 1, 2020. The COVID-19 pandemic and related lockdowns, paralysis of global trade, and collapse of global oil prices are further aggravating the crisis in Venezuela. It is unclear how long the Maduro regime can cling to power given increased U.S. and international pressure and this challenging operating environment for Venezuela.
Promoting the cocaine trade
With cocaine production in Colombia at record levels, Venezuela has become an increasingly important transshipment point for international cocaine trafficking. The Maduro regime is enriching itself from the illicit drug trade. On November 14, 2019, U.S. Navy Admiral Craig S. Faller, commander of U.S. Southern Command (SOUTHCOM), stated that “Maduro’s regime has facilitated narcotrafficking with over a 50 percent increase of narcotrafficking in and through Venezuela, and Maduro and his cronies are lining their pockets, in cahoots with the narcotrafficking.”
The United Nations Office on Drugs and Crime estimated that in 2018, 240 tons of cocaine crossed into Venezuela from Colombia to be flown out of the country with a potential value of around $39 billion on the streets. According to CNN, the cocaine crosses the porous Colombian-Venezuelan border through illegal routes, is then moved by sea to Europe or via small airplanes to Honduras, and transported through Mexico to the United States.
The Maduro regime has been implicated in drug trafficking for years in partnership with the FARC and the ELN, which have helped keep Maduro in power. As far back as 2008, the U.S. Treasury Department designated senior Venezuelan officials such as Hugo Carvajal, then director of Venezuela’s military intelligence (DGCIM, in Spanish); and Henry Rangel Silva, then director of intelligence, as major drug traffickers under the Kingpin Act. In February 2017, Treasury added then Vice President Tareck El Aissami, to the “kingpin” list, and accused him of facilitating shipments of narcotics from Venezuela by air and by sea, and of protecting other narcotraffickers operating in Venezuela, (including the Mexican cartel Los Zetas, and Colombian drug lord Daniel “El Loco” Barrera). Two of Maduro’s nephews were convicted in U.S. court and sentenced to 18 years in prison for trying to transport 800 kilograms of cocaine into the U.S. in 2017.
Maduro charged with drug trafficking
In a historic move on March 26, 2020, U.S. Attorney General William Barr charged Maduro and 14 members of his inner circle with drug trafficking, money laundering, and narcoterrorism. This criminal indictment is only the second the U.S. has brought against a foreign head of state since the 1998 indictment against Panama’s Manuel Noriega. U.S. officials alleged a detailed conspiracy headed by Maduro that worked with Colombian guerrillas to transform Venezuela into a transshipment point for moving massive amounts of cocaine to the United States. At the same time, the U.S. State Department announced a reward of up to $15 million for information related to Maduro and up to $10 million each for information related to Diosdado Cabello Rondón, president of the illegitimate National Constituent Assembly; Army Major General (ret.) Clíver Alcalá Cordones; as well as Carvajal and El Aissami. While holding key positions in the Maduro regime, these individuals violated the public trust by facilitating shipments of narcotics from Venezuela, and by control
ling planes departing from Venezuelan air bases and drug routes through Venezuelan ports, among others.
On April 1, 2020, U.S. President Donald Trump announced the launch of enhanced counternarcotics operations in the Western Hemisphere. “In cooperation with the 22 partner nations, U.S. Southern Command will increase surveillance, disruption, and seizures of drug shipments and provide additional support for eradication efforts, which are going on right now at a record pace. We’re deploying additional Navy destroyers, combat ships, aircraft, and helicopters; Coast Guard cutters; and Air Force surveillance aircraft, doubling our capabilities in the region,” he said.
U.S. Secretary of Defense Mark Esper drew a link between the pandemic and the new military operation, saying that criminal organizations are trying to capitalize on the fact that governments are distracted by the COVID-19 outbreak. He said, “transnational criminal organizations continue to threaten our security and destroy lives and furthermore, corrupt actors like the illegitimate Maduro regime in Venezuela rely on the profits derived from the sale of narcotics to maintain their oppressive hold on power. The Venezuelan people continue to suffer due to Maduro’s criminal control of the country.” SOUTHCOM has reported five significant cocaine interdiction operations from April 1–May 15, 2020.
Evading U.S. oil sanctions
Venezuela has the largest proven oil reserves in the world, with a total of 303.3 billion barrels in 2019, and its oil revenues account for over 95 percent of export earnings. Venezuela nationalized the oil industry and created the Venezuelan state-owned oil company Petróleos de Venezuela S.A. (PDVSA) in 1976. It turned to international oil companies like ExxonMobil, BP, Chevron, Total, and ConocoPhillips for expertise to help develop its extra-heavy crude reserves. The oil industry has deteriorated dramatically over the past 20 years due to mismanagement, underinvestment, expropriations, and the exploitation of oil revenues to fund generous social programs, as well as the regime under Hugo Chávez, then Maduro. Venezuela’s oil production fell to 1.5 million barrels per day (bpd) in 2018, a decrease of more than 50 percent below 2006 levels, and further declined to 796,000 bpd by the end of 2019.
To pressure the Maduro regime after Guaidó was declared interim president of Venezuela, the U.S. targeted the lucrative oil sector and sanctioned PDVSA on January 28, 2019 to block all PDVSA property and interests subject to U.S. jurisdiction, and prohibit U.S. citizens from engaging in transactions with them. The sanctions were intended to prevent the Maduro regime from further looting the assets of the Venezuelan people.
Russia’s state-run energy company Rosneft has been very involved with Venezuela’s nationalized oil industry, providing significant capital investment and equipment since the time of Chávez. Moscow and Beijing own a massive amount of Venezuela’s prospective oil output and revenue as payment on debt. By August 2019, Rosneft took more than 66 percent of Venezuela’s oil shipments that was then resold to Asian buyers. According to Bloomberg, “invisible” tankers that turned off their transponders in Venezuelan waters to avoid GPS detection secretly exported Venezuelan oil reserves to circumvent U.S. sanctions and resurrect the oil industry. Of 10.86 million barrels of oil exported by Venezuela in the first 11 days of November 2019, around half were transported by this method, and most were delivered to China or India.
On April 22, 2020, the Trump administration ordered Chevron, the last U.S. oil company operating in Venezuela, to halt oil production by December 1. This wind down order also applied to four oil service providers: Halliburton, Schlumberger, Baker Hughes, and Weatherford International. This is the latest U.S. measure to further starve the Maduro regime of its cash. As a result of U.S. sanctions, oil exports must be sold at a large discount, and the country heavily depends on imports of gasoline. In an apparent attempt to skirt U.S. sanctions, five Iranian tankers sailed to Venezuela in late May, carrying at least $45.5 million worth of gasoline and similar products. The collapse of global oil prices to historic lows prompted by oversupply and decreasing demand due to the COVID-19 pandemic will translate into even more of a cash crunch for the Maduro regime as Venezuela sells each barrel of oil at a significant loss.
Going for the gold
The Maduro regime is increasingly dependent on gold for its survival. Venezuela has one of the world’s largest in-ground gold reserves and also had one of the largest reserves of monetary gold until just recently. Only a few years ago, Venezuela ranked 16th in the world in terms of monetary gold with more than 360 tons of gold. The increasingly isolated regime has turned to sales of Venezuela’s gold reserves as one of the only sources of foreign currency. The Central Bank’s reserves have fallen to their lowest levels with just 102 tons of gold reserves, worth some $4 billion, but a third of the total is being held by the Bank of England, which has refused to repatriate it back to Venezuela under Maduro. There have been recent reports of “gold for gasoline” schemes between Venezuela and Iran that involved invisible tankers and suspicious direct flights from Tehran to Caracas from Iran state-owned Mahan Air (under U.S. sanctions), as well as “gold for food” deals with Turkey.
Besides the actual sale of gold reserves overseas, the Maduro regime has exploited Venezuela’s gold mining sector to enrich itself. The gold sector has become Maduro’s newfound revenue generator, compensating for the oil industry’s collapse. Maduro uses cash and gold from illegal mining to keep Venezuela’s military loyal. While only Venezuela’s state-owned gold company Minerven is legally entitled to process gold, metal from illegal mining has fallen into the hands of Maduro’s inner circle that took over Venezuela’s rogue gold industry in 2017 — it was previously dominated by criminal gangs. First lady Cilia Flores and her family; Rafael Hernández Dala, DGCIM director; and El Aissami — all of whom have been sanctioned by the U.S — lead the government mafia group known as the Team.
Operating at least six gold extraction plants, the consortium is capable of producing more than 16 tons of gold per year, but is also forcing the smaller independent operators to sell them their output under the threat of violence, detention, or loss of their access to fuel in the remote mining area. The purchase of this gold, extracted illegally by the small miners, nets another 12 tons per year, worth more than $1.5 billion per year.
These gold mining operations sell one part of the extracted gold to the Central Bank and the other part is taken out of the country without any kind of control. In 2018, Venezuela sold almost 24 tons of “unrefined” gold valued at more than $900 million to Turkey, according to the Turkish Statistical Institute. It was exchanged for supplies later included in government subsidized food boxes for poor Venezuelans. In March 2019, a Russian cargo plane made two trips from Caracas to Entebbe, Uganda. Ugandan authorities were investigating the country’s biggest gold refinery, African Gold Refinery, over imports of an estimated 7.4 tons of gold, valued at around $300 million, after state-run media reported it could have originated from Venezuela. U.S. economic sanctions have seen Caracas turn increasingly toward gold transactions to evade international financial barriers and make payments for vital imports, including food and medicine. As a result, the U.S. Treasury Department imposed sectoral sanctions on Minerven and Venezuela’s gold mining industry to curb the revenues funding the Maduro regime.
The illegitimate Maduro regime relies on the illicit economy through narcotics trafficking, illegal oil sales, and illicit gold mining to sustain itself. The U.S. and partner nations have engaged in an aggressive diplomatic, economic, and law enforcement campaign to isolate, sanction, and indict Maduro and his inner circle in the hopes of moving toward a democratic transition in Venezuela. As the COVID-19 pandemic impacts the health and economy of the Western Hemisphere, the operating environment for the Maduro regime is increasingly difficult. There is hope that the enhanced counternarcotics operations, collapse of global oil prices, and increased oversight of illegal gold mining will curtail these revenue-generating activities that prop up the regime and eventually bring democracy and relief to the humanitarian crisis in Venezuela.
*Celina B. Realuyo is professor of Practice at the William J. Perry Center for Hemispheric and Defense Studies at the National Defense University, in Washington, D.C. The views expressed in this chapter are those of the author and do not necessarily reflect the views of the William J. Perry Center for Hemispheric Defense Studies, the National Defense University, or the U.S. Department of Defense.