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VENEZUELA’S TRAGIC MELTDOWN

HEARING

BEFORE THE

SUBCOMMITTEE ON 

THE WESTERN HEMISPHERE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTEENTH CONGRESS

FIRST SESSION

MARCH 28, 2017

Serial No. 115–13

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/ or

http://www.gpo.gov/fdsys/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

EDWARD R. ROYCE, California, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

DANA ROHRABACHER, California 

STEVE CHABOT, Ohio 

JOE WILSON, South Carolina 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

DARRELL E. ISSA, California 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

MO BROOKS, Alabama 

PAUL COOK, California 

SCOTT PERRY, Pennsylvania 

RON DESANTIS, Florida 

MARK MEADOWS, North Carolina 

TED S. YOHO, Florida 

ADAM KINZINGER, Illinois 

LEE M. ZELDIN, New York 

DANIEL M. DONOVAN, JR., New York 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

ANN WAGNER, Missouri 

BRIAN J. MAST, Florida 

FRANCIS ROONEY, Florida 

BRIAN K. FITZPATRICK, Pennsylvania 

THOMAS A. GARRETT, JR., Virginia 

ELIOT L. ENGEL, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

KAREN BASS, California 

WILLIAM R. KEATING, Massachusetts 

DAVID N. CICILLINE, Rhode Island 

AMI BERA, California 

LOIS FRANKEL, Florida 

TULSI GABBARD, Hawaii 

JOAQUIN CASTRO, Texas 

ROBIN L. KELLY, Illinois 

BRENDAN F. BOYLE, Pennsylvania 

DINA TITUS, Nevada 

NORMA J. TORRES, California 

BRADLEY SCOTT SCHNEIDER, Illinois 

THOMAS R. SUOZZI, New York 

ADRIANO ESPAILLAT, New York 

TED LIEU, California

AMY PORTER, Chief of Staff THOMAS SHEEHY, Staff Director

JASON STEINBAUM, Democratic Staff Director 

SUBCOMMITTEE ON THE WESTERN HEMISPHERE

JEFF DUNCAN, South Carolina, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

MICHAEL T. MCCAUL, Texas 

MO BROOKS, Alabama 

RON DESANTIS, Florida 

TED S. YOHO, Florida 

FRANCIS ROONEY, Florida 

ALBIO SIRES, New Jersey 

JOAQUIN CASTRO, Texas 

ROBIN L. KELLY, Illinois 

NORMA J. TORRES, California 

ADRIANO ESPAILLAT, New York 

GREGORY W. MEEKS, New York 

(III)

C O N T E N T S 

Page

WITNESSES 

Mr. Steve Hanke, co-director, Institute for Applied Economics, Global Health, 

and the Study of Business Enterprise, The Johns Hopkins University .......... 6

Mr. Russell M. Dallen, Jr., president and editor-in-chief, Latin American 

Herald Tribune ..................................................................................................... 18

Hector Schamis, Ph.D., adjunct professor, Walsh School of Foreign Service, 

Georgetown University ........................................................................................ 29

Michael McCarthy, Ph.D., research fellow, Center for Latin American and 

Latino Studies, American University ................................................................. 40

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Mr. Steve Hanke: Prepared statement .................................................................. 8

Mr. Russell M. Dallen, Jr.: Prepared statement ................................................... 20

Hector Schamis, Ph.D.: Prepared statement ......................................................... 31

Michael McCarthy, Ph.D.: Prepared statement .................................................... 43

APPENDIX 

Hearing notice .......................................................................................................... 60

Hearing minutes ...................................................................................................... 61

(1)

VENEZUELA’S TRAGIC MELTDOWN 

TUESDAY, MARCH 28, 2017

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON THE WESTERN HEMISPHERE,

COMMITTEE ON FOREIGN AFFAIRS,

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:08 p.m., in room 

2172, Rayburn House Office Building, Hon. Jeff Duncan (chairman 

of the subcommittee) presiding. 

Mr. DUNCAN. A quorum being present, the subcommittee will 

come to order. Before I recognize myself for an opening statement, 

I would like to show a few clips of the situation in Venezuela. And 

I think it is going to be on the screen, if you watch. 

[Video shown.] 

Mr. DUNCAN. I think that is a good preface for the hearing today. 

Before I recognize myself for an opening statement, we will welcome to the committee Congresswoman Mia Love from Utah to participate today. Without objection, so ordered. 

I now recognize myself for an opening statement. 

We are at a critical point in Venezuela’s history. Severe widespread shortages in food, electricity, medicine, and the basic goods 

within what was once the richest country in Latin America have 

led to starvation, the highest infant mortality rate in the world, 

and horrific conditions in the hospitals. 

Today, Venezuela is on the edge of a complete meltdown. The 

country has the highest inflation rate in the world, with a falling 

GDP, its oil company PDVSA, is not generating enough revenue, 

and the Venezuelan currency is worthless. Gross economic mismanagement, widespread corruption throughout the government, 

and an erosion of democracy, rule of law, and human rights in the 

country have led Venezuela to its sad state today. Americans 

should take note, Venezuela is a case study for the failures of socialism. 

This is the third hearing that this subcommittee has held on 

Venezuela since I became the chairman in January 2015, and we 

remain deeply concerned for the welfare of the Venezuelan people 

and potential regional implications from Venezuela’s instability. 

Venezuela has the largest oil and second-largest gold reserves in 

the world. But, incredibly, under President Maduro’s tenure—and 

dating back to President Chavez’s tenure—the country has become 

practically a failed state. 

Last year, the economy shrank by almost 17 percent. This year, 

the International Monetary Fund estimates that inflation will inVerDate 0ct 09 2002 12:45 May 02, 2017 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\WORK\_WH\032817\24831 SHIRL
2

crease to over 1,600 percent. The poverty rate is the highest in four 

decades and the homicide rate is at a 35-year high. Such indicators 

provide little hope for a recovery absent significant changes in the 

country’s policies. 

Those who can afford to leave are fleeing the country in droves. 

Thousands have gone to Chile, Colombia, and Brazil, seeking food 

and medicine. And here at home, Venezuelans make up the largest 

percentage of asylum requests to the United States, with those 

numbers growing by 150 percent since 2015, according to the 

United States Department of Homeland Security. 

If the crisis in Venezuela continues, we could all have a situation 

on our hands where we are faced with massive refugee flows and 

public health threats from rising numbers of malaria and diphtheria cases in Venezuela, and those do not respect borders. 

In addition, Venezuela’s PDVSA continues to creep along, but 

corruption and low oil prices have led to slower output. This situation has the potential to greatly impact gas prices here at home, 

as the United States is the third-largest importer of Venezuelan oil. 

The recent news that PDVSA received a $1.5 billion loan in exchange for giving Russia’s state-owned oil company Rosneft 49.1 

percent of its shares in CITGO is problematic for U.S. interests. 

Should Venezuela default on its debt obligation to Rosneft, the 

Russians would become the second-largest foreign owner of U.S. refining capacity and thereby take control of a critical U.S. energy infrastructure, including three U.S. refineries and a network of pipelines. This is an untenable situation and undermines U.S. energy 

security interests. 

Furthermore, Venezuela’s Petrocaribe program no longer provides energy with the same preferential financing terms as it did 

before. Its beneficiaries in the Caribbean and Central America 

should continue to seek alternatives for their own energy security, 

including from the United States’ own abundance of oil and natural 

gas. 

Moreover, the political landscape in Venezuela looks bleak as 

well. While the people turned out in droves last year and spoke 

loudly at the ballot box in December 2015, giving the opposition a 

two-thirds supermajority in the legislature, the Maduro government refuses to listen to its citizens. Instead, Maduro has used the 

Supreme Court and Electoral Commission to nullify all legislative 

action, and he has thrown over 100 political prisoners in jail. 

Maduro refuses to submit to the people’s accountability. He has 

stolen their right of free expression, nullified their vote, and continues trampling on the Constitution and the rule of law. 

This month, OAS Secretary General Almagro provided evidence 

of the further deterioration of the state of affairs in Venezuela and 

has issued yet another call for the Venezuelan Government to hold 

free and open general elections. 

On March 23, 14 countries in the Americas released a joint declaration supporting Almagro’s efforts, calling for Venezuela to hold 

elections, affirm democratic institutions, and free all political prisoners. The U.S. supported that effort. And while it called for dialogue, it also left open the possibility for further action, including 

suspension of Venezuela from the OAS if change does not occur. 

3

While I am hopeful that this declaration will result in a change 

in Maduro’s behavior, the past dialogue efforts have all failed to do 

just that. The OAS member states need to think very carefully 

about how long to give the Venezuelan Government to comply, as 

this declaration reminds me of a very similar situation last year in 

the OAS. It also begs the question for the Trump administration: 

How is U.S. policy toward Venezuela today any different than it 

was a year ago? 

Last December, MERCOSUR suspended Venezuela for failing to 

meet membership requirements. It is my view that the OAS should 

take the same approach if Maduro does not immediately call for 

elections and change his behavior toward his own citizens. 

As an aside, it has come to my attention that the Dominican Republic, El Salvador, and Haiti are not supporting the OAS General 

Secretary’s efforts to promote democracy in Venezuela. If this is the 

case, I think it would be difficult for the United States Congress 

to justify continued U.S. financial assistance to these countries, 

and I respectfully urge them to reconsider and support democracy 

in Venezuela. 

In conclusion, the United States is watching the situation in Venezuela closely. Last year, I, along with Ranking Member Sires and 

nearly 30 Members of Congress, urged the Obama administration 

to advocate for the release of Francisco Marquez and Joshua Holt 

from prison there in Venezuela. Today, Francisco is free, and he is 

sitting with us today in the audience. 

Francisco, I applaud your courage in the face of extreme brutality. Would you stand and be recognized? 

[Applause.] 

Mr. DUNCAN. He was supposed to be here in the audience. Hopefully, he will make it. 

I want to urge President Trump to prioritize the release of Joshua Holt and continue U.S. vigilance in countering the Venezuelan 

Government’s activities in drug trafficking, organized crime, and 

assistance to Islamist militants. This hearing could not be timelier, 

in view of today’s OAS Permanent Council meeting, and I look forward to what our witnesses will share with us. 

With that, I will turn to the ranking member, Albio Sires, for his 

opening statement. 

Mr. SIRES. Thank you, Chairman, for holding this timely hearing, 

and thank you to our witnesses for being here today. 

With every month that passes, we see the situation in Venezuela 

becoming more and more dire. Reports of families searching 

dumpsters for food and sick children unable to access lifesaving insulin or chemotherapy are, unfortunately, becoming the norm. 

Maduro continues to keep political prisoners, like Leopoldo Lopez, 

under lock and key to send a strong message to those trying to 

question his actions. 

Venezuela, a country with the world’s largest known oil reserves, 

is spiraling into a collapsed state where the people are struggling 

just to survive. Make no mistake, it is the failed Chavismo policies 

and the authoritarian actions of Nicolas Maduro that have brought 

all this pain and suffering upon Venezuela’s people. Maduro and 

his cronies continue to get richer as they traffic money and drugs, 

while doing nothing to help billions of suffering people. 

4

Instead of focusing on the economy, Maduro is staging mock military exercises and stoking fears by spreading propaganda of a U.S.-

led invasion. Press reports show that of the 800,000 businesses 

that operated under Chavez, nearly 600,000 have shut down. 

Maduro’s tactics are making it next to impossible to survive. 

With the recent sanctions of Vice President Tareck El Aissami 

under the Kingpin Act, it has become clear that Venezuela’s Government is acting as a narco-state and facilitating the shipment of 

narcotics throughout the region. 

The truth about Maduro is clear, and the international community is starting to unify against him. The OAS Secretary General 

Luis Almagro has wisely called for Venezuela’s suspension from the 

OAS unless he frees political prisoners, accepts humanitarian aid, 

and holds elections without delay. 

While a political solution is the only way to provide sustainable 

change for Venezuela, for the Venezuelan people, the dialogues up 

until now have done nothing but help provide Maduro a lifeline 

while his regime is teetering on the edge of collapse. I believe that 

we need to work together with our allies around the world and continue to insist Maduro abide by the international norms and give 

the Venezuela people the freedom they deserve. 

I am eager to hear how our panelists view the decaying situation 

in Venezuela and look forward to their recommendations as we 

continue to grapple with this complex issue. 

Thank you. 

Mr. DUNCAN. Since this topic is so important to me as chairman, 

I am going to give the other members a chance for a brief opening 

statement. 

I recognize Mr. DeSantis for a brief statement. 

Mr. DESANTIS. Mr. Chairman, thanks for your leadership on this. 

We have been following now for years the crackdown on political 

dissent, imprisonment of people like Leopoldo Lopez, but this socialist state just keeps getting worse and worse. They are short on 

food, in fact, they had the government inspecting the bakeries to 

make sure that the flour was not being misused, because they 

wouldn’t want someone to make brownies if they are short of 

bread. They are short on medical supplies. And even in the country 

that has some of the most proven and largest oil reserves in the 

world, they are running out of gasoline. 

This is an epic failure, and it is really a testament to the failure 

of socialism, the failure of central planning, and the failure of having a repressive police state. 

So, Mr. Chairman, thanks for doing this. We have got to keep on 

this and do all we can to help the people of Venezuela, because 

they are suffering at the hands of a really failed system. 

Mr. DUNCAN. I am going to come that way in just a second. 

Mrs. Love, do you have a statement? 

Mrs. LOVE. I do. Thank you so much for allowing me to come and 

give a statement and ask questions during this hearing. 

This is an issue that is personal to me, and I would like to just 

for the record—I will enter this into the record also—read a letter 

that we have written to the President of the United States:

I write to direct your attention to the now months-long 

imprisonment of Mr. Joshua Anthony Holt, a resident of 

5

Riverton, Utah, who has been held without trial in a Venezuelan jail since June 2016, and request that you take action and demand Mr. Holt’s immediate release. 

Joshua was arrested on fabricated charges of possession 

of weapons of war on June 30, 2016. He has not been 

granted a chance to defend himself or to share his story 

in a court of law, despite being imprisoned for months. 

My staff and I have remained in contact with a State 

Department official since his imprisonment, receiving periodic updates regarding Mr. Holt’s condition and treatment 

while he is imprisoned. We understand that Mr. Holt has 

lost roughly 50 pounds and has been forced to disrobe in 

front of guards and deliberately been humiliated. Moreover, he has been denied fair hearing, as his judge has either failed to appear or postponed his hearing dates numerous times. 

His treatment, condition, and time imprisoned have 

taken a significant toll on his family and the community, 

and I am growing increasingly concerned that Venezuelan 

officials plan to detain Mr. Holt indefinitely while continuing to deprive him of his due process.

I find it very difficult to believe that a country that has landed 

a man on the moon, a country that is the leader in this world cannot protect its own citizen from this wrongful imprisonment. And 

so what I am asking the committee and what I am asking the 

President is the same question I have had to ask myself: Are we 

doing for Joshua and other wrongly, innocent imprisoned Americans what we would do or what we would expect our representatives to do for our children? 

Thank you. 

Mr. DUNCAN. Thank you. 

Mr. Espaillat, as much time as you need. 

Mr. ESPAILLAT. Thank you, Mr. Chairman, Ranking Member 

Sires. Thank you for having this timely briefing on Venezuela. 

Just as we speak here today, there are ongoing discussions in the 

Organization of American States regarding the plight of the Venezuelan people and the plight of the nation. I think it is important 

for us to hear directly from experts on the current political, economic, and humanitarian situation in Venezuela. 

Venezuela has been a country that traditionally was known for 

having access to great revenue and where there was opportunity 

for an emerging middle class. However, we have seen that the current government has its economic challenges. In fact, according to 

the International Monetary Fund, the rapidly declining price of oil 

has hit Venezuela very hard. 

Under the Petrocaribe program, 10 members of the Caribbean 

Community, along with the Dominican Republic, Nicaragua, and El 

Salvador, had the ability to purchase oil from Venezuela. These 

challenges for these countries have disappeared. They are now unable to get access in many cases of this cheaper price of oil. 

We would like to hear what the status of that program is, and 

also the challenges of the availability of food and the human rights 

situation in Venezuela. These are all critical issues that we must 

address, and I look forward to hearing from the experts. 

6

Mr. DUNCAN. I thank the gentleman. 

We are now going to go to our witnesses. And I just want you 

to notice the lights in front of you. It is a lighting system. You have 

5 minutes to testify. It will start turning yellow as it is getting closer in the last minute, and then red. If you see the red, just start 

to wrap up. 

And so we will go ahead and recognize our first witness. The bios 

and information on the witnesses have been provided to the committee, so I am not going to go into that. 

Mr. Hanke, you are recognized for 5 minutes. 

STATEMENT OF MR. STEVE HANKE, CO-DIRECTOR, INSTITUTE 

FOR APPLIED ECONOMICS, GLOBAL HEALTH, AND THE 

STUDY OF BUSINESS ENTERPRISE, THE JOHNS HOPKINS 

UNIVERSITY 

Mr. HANKE. Thank you, Mr. Chairman. 

Mr. DUNCAN. Pull that microphone over. Everything is being recorded, and we want to hear what you have to say. 

Mr. HANKE. We are set now. 

Thank you for inviting me, both you and your colleagues. I will 

have six general points that I would like to raise with regard to 

Venezuela. And before I do that, I might add that I was President 

Caldera’s chief adviser in 1995 and 1996, so I have watched the situation as it has deteriorated and then essentially melted down, as 

the committee has recognized already. 

The first point I would like to raise is that when you think about 

Venezuela, you have to think former Soviet Union in the late 

1980s. You have to put the thing into context. 

My second point is, well, what does this actually mean? Some of 

you have already alluded to this, but the legacy that we face there 

is one of socialism, incompetence, corruption, massive oil reserves 

that are poorly exploited, all these things are very common with 

the former Soviet Union, and the list could go on and on. 

The third point I would like to make is that there is one precondition that must be met before all these things can be so-called 

fixed, because the list of things that are wrong is enormous and the 

number of reforms that will have to be made will be absolutely 

huge. And the precondition is that inflation has to be stopped. We 

recognize this. And I was an adviser to the governments in the Baltics, and also in the Balkans, and also in Latin America. And in 

all these cases where you have these meltdown situations, you 

must fix the inflation problem and establish stability before you 

can do anything. As I like to say, stability might not be everything, 

but everything is nothing without stability. 

So how do you fix the inflation? It is actually quite easy to do. 

There are two possibilities that are proven to work. The first possibility is to introduce something called a currency board system. I 

was involved in doing this in Estonia, Lithuania, Bulgaria, and 

Bosnia, and it stopped the inflation and stabilized things immediately. 

A currency board simply allows a country to issue their own currency, but it becomes a clone of the anchor currency. In the case 

of Venezuela, it would be the U.S. dollar, because it trades at a 

fixed exchange rate to the dollar. Under a currency board system, 

7

it is fully convertible and it is backed with 100 percent U.S. dollar 

reserves. So in that case the bolivar would be equal to the dollar. 

If you didn’t like the bolivar, you would just exchange it for greenbacks and 100 percent reserves would cover that and you would be 

fixed. 

The next point, the fifth point, is the second option, and that is 

to dollarize the country and just get rid of the local currency and 

adopt the U.S. dollar. I was involved in Ecuador when Ecuador did 

this in 2001, and, of course, it stabilized the situation in Ecuador 

immediately. And in Ecuador, even though the ideological frame is 

the same as the one in Venezuela, the performance in Ecuador is 

pretty good, actually. I have got data in my testimony before you. 

You can look at and review that. 

Now, the bottom line is, well, what should the U.S. actually do 

in terms of policy? And the first thing is that I would strongly advise no meddling, no direct meddling, forget the regime change 

kind of rhetoric that is so common in certain circles in Washington. 

So the question is, well, do we have any policy? Should we have 

a do-nothing policy? And the answer is no. There are many things 

that we can do. We have obligations with the OAS, with the U.N. 

We have already mentioned the OAS. Things are going on today. 

And the U.S. can take and use those vehicles to make their points. 

The second thing is something more direct that, in fact, hits inflation. And that is one thing that could be done is what Senator 

Dole did with Senator Steve Symms and Senator Phil Gramm, 

where they put an amendment in the foreign ops bill in 1992 that 

allows U.S. quota contributions to the IMF to be used to help establish currency boards. 

As far as dollarization goes, I would just remind you that Senator Connie Mack, when he was chairman of the Joint Economic 

Committee, was tirelessly working on promoting dollarization. And 

this helped, by the way, in the introduction of the dollar in Ecuador 

and then a year later in El Salvador. 

The last thing—I am running over, but let me just mention the 

reality of either a currency board system or dollarization. We just 

did a survey in Venezuela 2 weeks ago to see what public opinion 

looked like with regard to currency boards or dollarization. Number 

one, 50 percent of the public is sick and tired of the Central Bank 

in Venezuela and they don’t trust it. And if you look further into 

the detail of the surveys that were done, the majority of the population supports dollarization, 62 percent support dollarization and 

59 percent support currency boards. 

So, with that, thank you for letting me go a minute and 23 seconds over my time, Mr. Chairman, but that is it for now. Thank 

you. 

[The prepared statement of Mr. Hanke follows:]

8


24831a-1.eps

Testimony 

U.S. House of Representatives 

Committee on Foreign Affairs 

Subcommittee on the Western Hemisphere 

Venezuela's Tragic Meltdo\\11 

28 March 20 17 

Steve H Hanke 

Professor of Applied Economics 

Hanke 1 

Co-Director of the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of 

Business Enterprise 

The Johns Hopkins University 

Baltimore, Maryland 21218 

(410) 516-7183 

hank ~iftihu-.:.9JtLl 

(cl;Steve _Hanke 

Mr. Chairman, thank you for this opportunity to express my views on "·Venezuela-s Tragic Meltdown." A 

great deal of the commentary on the topic is polemical, and more-or-less political and ideological selfjustifications of one sort or another. h1 consequence_ the discourse is often confused and confusing. h1 an 

attempt to bring some clarity to the topic, I will focus on the one necessary condition that must be 

satisfied before the Venezuelan economy can be turned around. Inflation must be stopped before stability 

can be established. Stability might not be everything, but everything is nothing without stability. 

ON THE MELTDOWN 

Venezuela's economy, today_ resembles that ofthc former Soviet Union before it collapsed. Venezuela 

has the largest proven oil reserves in the world, and not surprisingly produces one major product, oil. Oil 

production is carried out by a state-owned oil company, Petr6leos de Venezuela, S.A. (PDVSA). PDVSA 

is so poorly rm1 and its pro\en oil reserves arc exploited so slowly as to render the value of its reserves 

worthless (Hanke, 2017). Venezuela's economy is also burdened by socialist-interventionist structure 

(Hanke and Yin_ 20 17). In consequence, economic life is heavily politicized and very uncertain. 

Venezuela's economy is collapsing. This is the result of years of socialism_ incompetence, and corruption_ 

among other things. An important clement that mirrors the economy's collapse is V cnczucla's currency, 

the bolivar. It is not trustworthy. Venezuela's exchange rate regime provides no discipline. It only 

produces instability and poverty. Currently, Venezuela is experiencing one of the highest inflation rates in 

the world: 150'/i, per year. 

I observed much of Venezuela's economic dysfunction first-hand during the 1995-96 period. when I acted 

as President Rafael Caldera-s adviser (Hanke_ 2016). For an excellent analysis of the state of economic 

dysfm1ction in V cnezucla during the pre-Chavez years, there is no better read than Moiscs Naim-s book: 

Paper ligers & Minolaurs: J'he Poltlics of" Venezuela's Hconomic Reforms (Naim, 1993). 
9


24831a-2.eps

Hanke 2 

In 1999, Hugo Ch<1vez W<lS installed as president. It W<lS then th<1t the soci<1list seeds ofVenezueb's 

meltdown started to be planted. As the seeds sprouted, Venezuela began to enter what has become a death 

spiral. For a most edifYing read-one that gives a real ±eel ±or the bizarre state of economic aft:~irs in 

Venezuela-I recommend Raul Gallegos' book: Crude Nation: Hmr Oilll.iches ll.11ined Venez11eia 

(Gallegos, 2 0 16) 

To put Venezuela on a sound, sustained economic path will require massive economic rc±om1s. Sound 

economies require sound institutions, even in oil-rich countries (Ka.znacheev, 2017). Venezuela, like the 

former Soviet Union, has none. So, the task ahead will be great. But, as we learned in the communist 

countries of the fanner Soviet Union, inflation had to be snuffed out and economic st<1bility established 

bc±orc successful economic rc±on11S could be introduced. 

ON VENEZUELA'S SYSTEMIC INFLATION 

V cnczuela su±lercd ±rom au unstable currcncv aud elevated inflation rates before the arrival of President 

Hugo Chavez, but with his ascendancy. fiscal and monetary discipline further deteriorated and inflation 

ratcheted up. By the time President Nicolas Madura arrived in early 2013, inflation was in triple digits 

and rising. 

With the acceleration of inflation, the Banco Central de Venezuela (BCV) became an unreliable source of 

inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation 

statistics. To remedy this problem. the Johns Hopkins-Cato Institute Troubled Currencies Project, which I 

direct, began to measure inflation in 2013. 

The most import.:'lnt price in an economy is the exchange rate bet\veen the local currency and the world"s 

reserve currency- the U.S. dollar. As long as there is an active black market (read: tree market) ±or 

currency and the black market data are available, changes in the black market exchange rate can be 

reliably transfonned into accurate estimates of countty\.vide inflation rates. The economic principle of 

Purchasing Power Parity (PPP) allows for this transformation and the accurate estimates of cmmtrywide 

inflation rates (Hanke and Buslmcll. 2016). 

Venezuela employs a multiple exchange-rate regime. coupled with exchange controls. In consequence, 

the official exchange rates arc not free-market rates. To obtain the free-market exchange rates required for 

the application of PPP. we usc black-market exchange rates. Black-market rates arc efficient processors of 

information when political and economic circumstances make the ofticial exchange rate unreliable or 

irrelevant. The course of the bolivar-U.S. dollar (VEF/USD) black-market rate is shown in the chart 

below. The v<1lue of the boliv<1r against the dolbr has plunged. <1nd with that. PPP suggests th<1t Venezuela 

has experienced a dran1atic inflation surge. And it has. 
10


24831a-3.eps

The Fall in the Value of the Venezuelan Bolivar l"he B!ack-J'vlar'o;et VEF/USD Exchange Rate 

5,000 

Sources: Banco Centra! de Venez!Jefa, Daf,lar.nu, Dolor Para.'efo, international Monetary Fund (IFSJ, Para lela Venezuela. 

Prtrpr:rt?d by Prof Steve H Honke, The Johns Hopk1r;s Unrversity 

Note: For purposes of ;!Just rating the declining value of the Venezuelan bolivar, re!atllJe to the U.S. dollar. the y-a1cs :s inverted. 

Hanke 3 

We compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the 

VEF/USD exchange rate into an annual inflation rate (Hanke and Bushnell, 20 16). The chart below shows 

the course of that annual rate_ which peaked at 800% (yr/yr) in the summer of2015. 
11


24831a-4.eps

Hanke 4 

Venezuela's Annual Inflation Rates 1000% 

800% 

600% 

400% 

JOO% 

0% 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

~f~~~~~~~g~g~~~~~~~~~~~~~~~~~~~~~g~~~~~~!~~~!g~~~~~ 

Sources· Banco Cen~raf de Venezuela, DafarToday, Dollar nu, Dolor Parafe!o, !nternatiDna{JIIfanetary· Fund (/FS}, ParaJelo Venezuefa, and 

colw/ations b}l Prof Stevl? H. Hanke, The Johns Hopt<:ins Umversity. 

Note; These annllal inflation rates are 1mpEed from the the black-market VEF/USD exchange rate. 

It is worth mentioning that a bit later, in December 2016, Venezuela's inflation became the 57th official, 

verified episode of hyperinflation and was added to the Hankc-Krus World H)perinflation Table, which is 

contained in the authoritative Routledge Handbook o(Ma;or Fvent' in Fconomic History (20 13). 

An episode of hyperinflation occurs when the monthly inflation rate exceeds 50% for 30 consecutive 

days. Venezuela's monthly inflation rate exceeded 50% on November 3, 2016 and remained above 50% 

until December 14,2016. The peak monthly inflation rate was 221%, which is relatively low in the 

context ofhyperinflations (Hanke and BushnelL 2016). Venezuela's hyperinflation episode is the 8'" to 

occur in Latin America. Previous episodes in this region are: Argentina ( 1989), Bolivia ( 1984 ), Brazil 

(1989). Chile (1973). Nicaragua (1986). and Peru (1988 and 1990). 

ON HOW TO STOP TNFLA TTON AND ESTABLISH STABILITY 

There are two prmen ways to stop '·high'' inflations and establish stability. A country can install a 

currency board system in \Vhich its local currency becomes a clone of a rel1able anchor currency. 

Alten1ati\-ely, a country can abandon its local currency and adopt a reliable foreign currency (read: it can 

'"dollarizc "'). 1 designed and implemented both currency board and "dollarized" systems in Latin America. 

the Baltics, and the Balkans (Hanke. 2016: Santos, 20 15). I can attest to the fact that these currency 

refonns al·ways \Vork to stop inflation in its tracks and establish the stable conditions necessary to carry 

out economic rcfon11s. 
12


24831a-5.eps

Hanke 5 

So just what is a currency board? An orthodox currency board issues notes and coins convertible on 

demand into a foreign anchor currency at a fixed rate of exchange. As reserves, it holds lo\v-risk, interestbearing bonds denominated in the anchor currency, and typically some gold. l11c reserve levels (both 

±loors and ceilings) arc set by law and arc equal to I 00%, or slightly more, of its monetary liabilities 

(notes, coins, and if permitted, deposits). A currency board's comertibility and foreign reserve cover 

requirements do not extend to deposits at commercial banks or to any other financial assets. A currency 

board generates profits from the difference between the interest it earns on its resenre assets and the 

expense of maintaining its liabilities (Hanke and Schuler, 2015). 

By design, a currency board has no discretionary monetary' powers and cannot engage in the fiduciary 

issue ofmoney.lthas an exchange rate policy (the exchange rate is fixed), but no monetary policy. A 

currency board's operations are passive and automatic. The sole function of a currency board is to 

exchange the domestic currency it issues for an anchor currency at a fixed rate. In consequence, the 

quantity of domestic currency in circulation is detem1ined solely by market forces, namely the demand for 

domestic currenc:y. 

Several features of currency boards merit further elaboration. A currency board's balance sheet only 

contains foreign assets. which are set at a required level (or a tight range). If domestic assets are on tile 

balance sheet. they arc frozen. In consequence. a currency board cannot engage in the sterilization of 

foreign currency in±lows or neutralization of out±lows. 

A second currency board feature that vvarrants attention is its inability to issue credit. A currency board 

cannot act as a lender oflast resort or extend credit to the banking system. It also cannot make loans to the 

±iscal authorities and state-<:Jwncd enterprises. In consequence, a currency board imposes a hard budget 

constraint and discipline on the economy. 

A currency board requires no preconditions ±or monetary rc±om1 and can be installed rapidly. 

Government ±inances, state-owned enterprises, and trade need not be already reformed ±or a currency 

board to begin to issue currency. 

Countries that have employed currency boards have delivered lower in±lation rates. smaller ±iscal deficits, 

lower debt levels relative to GDP, fewer banking crises. and higher real growili rates than comparable 

countries that have employed central banks. 

No modern currency board has failed to maintain comertibility at their ±ixed exchange rate. Indeed, 

currency boards have an excellent record of maintaining their promised exchange rates, unlike central 

banks. and this includes Key11es · Russian currency board in Archangel. The so-called British mble never 

deviated ±rom its ±ixed exchange rate with tl1c British pound. l11c board continued to redeem rubles for 

pounds in London until 1920, well after the civil war had concluded (Hanke and Schuler, 1991). 

It is important to stress, particularly at these hearings. that the currency board idea became engulfed in 

controversy, ilianks to Argentina. What Argentina termed ""Convertibility" was introduced in April 1991 

to stop inflation, which it did. The system had certain features of a currency board: a fixed exchange rate, 

full convertibility, and a minimum reserve cover for the peso of I 00% of its anchor currency. the U.S. 

dollar. However, it had two major features which disqualified it from being am orthodox currency board. 

It had no ceiling on the amount of foreign assets held at the central bamk relative to the central bank· s 

monetary liabilities. So, the central bank could engage in sterilization and neutralization activities. which 

it did. In addition, it could hold and alter the level of domestic assets on its balance sheet. So, Argentina's 

monetary authority could engage in discretionary monetary policy. and it did so aggressively. 
13


24831a-6.eps

Hanke 6 

Bec<Iuse of these fbws. I penned <In <Irticle which <Ippe<Ired in the W<Ill Street Journal shortly <Ifterthe 

introduction of Convertibility. In that article. I concluded that, unless Argentina adopted orthodoxy and 

amended the Convertibility law. the system would eventually collapse (Hanke. 1991). 

Since Argentina's Convertibility System allowed for both monetary and exchange rate policies. it was not 

a currency board (Hanke, 2008). Most economists fail to recognize this fact. Indeed, a scholarly survey of 

100 leading economists who commented on the Convertibility System found that almost 97% incorrectly 

identified it as a currency board system (Schuler, 2005). In short, those that use the collapse of 

Argentina· s Comertibility System to argue against currency boards are using a bogus argument. Indeed. 

they literally don't know what they are t<IIking <!bout. 

The second proven alternative to stop ''high'' inflations and establish stability is ''dollarization".lt occurs 

\Vhen residents of a country use a foreign currency instead of the country's domestic currency. The tenn 

"dollarization ., is used generically and covers all cases in which a foreign currency is used by local 

residents. Even though other foreign currencies, such as the curo and Swiss franc, arc sometimes used 

instead oflocal currencies. it is the U.S. dollar that dominates. Hence. the use of the term ''dollarization." 

At present, 33 countries are dolbrized. 

Countries that are o±licially dollarized produce lower, less variable inflation rates and higher, more stable 

economic growth rates than comparable countries with central banks that issue domestic currencies. 

Dollarization is, therefore, desirable. The accompanying chart shows the nom1alized values of real GDP 

in tem1s of U.S. dollars between 2001 (index value~ 100) and 2016 for nine Latin American countries. 

Three- Panama, Ecuador, and El Salvador- arc officially dollarizcd, while Peru is semiofficially 

dollarizcd. In the three o±licially dollarizcd countries. real GDP gro\V1h has been more stable and 

generally superior to growth in the countries that issue their own domestic currencies. While Peru's 

growth has only been surpassed by Panama's. it is less stable than gr0\\1h in the three officially dollarized 

countries. The sharp changes in tenus of trade, which were associated with the commodity cycle, affected 

the volatility of real GDP measured in U.S. dollar terms much more in the countries that issued their own 

domestic currencies than it did in those that were officially dollarized. 
14


24831a-7.eps

Dollarized vs. Undollarized Latin American Countries: Real GDP in USD at current prices 

(2001-2016} 

Hanke 7 

2002 2003 2004 2005 1006 2007 2008 2009 2010 2011 2012 20.13 2014 2015 2016 

····1!1!-,Venerl<=la--Ecuad<Jr 

Sources.- Do1'arToday, Ewnomlst Intelligence Unit, JMF World Economic Outlook, fnmuebfesenCaracm.com.ve, and World Bank. 

Calculations by Prof. Steve H. Hanke, The Johns Hopkms Umi!ewty. 

Note: Do!larized countries are represented by solid lines 

A U.S. POLICY RESPONSE TO VENEZUELA'S MELTDOWN" 

The meltdown ofVenezuela·s economy is tragic and ofVenezuela's own making_ What to do? The U.S. 

govenunent should avoid meddling directly in Venezuela's affairs_ Forget tl1e regime change mantra tl1at 

has long been popular in certain circles within Washington, D.C. Proactiyc U.S. regime change policies 

haw a long record of ending badly (Kinzer, 2013: Hanke, 2011: Hanke and Hanke, 2011). 

So, should the U.S. adopt a ''do nothing" policy towards Venezuela? No. l11e U.S. has international 

obligations. For example, the U.S. is a member of the Organisation of American States and the United 

Nations. These organizations, and others, proYide an awnue for the U.S. to be engaged in the Venemelan 

meltdown. 

In addition. specific actions to address Venezuela's immediate inflation problem can be taken. These 

actions could encourage either the establishment of a currency board system or the adoption of 

dollarization. For e"ample, in 1992, I worked with the leader of the U.S Senate, Bob Dole_ and Senators 

Steve Sy1mns and Phil Gramm to drafl U.S.legislation that would allow countries to usc part ofthe 

U.S.'s quota contribution to the TMF for the establishment of currency boards. This legislation, (HR-5368, 

Law no. 102-391 ), was signed into law on October 6, 1992. 

As for dollarization, it also has a U.S.-friendly history. For example, Senator Connie Mack worked 

tirelessly to promote dollarization and sound-money policies when he chaired the Joint Economic 

Committee of Congress (Schuler. 2000: Schuler and Stein. 2000). 
15


24831a-8.eps

Hanke 8 

It is gestures such as these that will prmide the political opposition the courage to propose the only 

proven solutions to Venezuela's inflation problem-solutions that would immediately stop Venezuela·s 

meltdown. 

In closing, it is encouraging that a recent survey in Venezuela concluded that the public supports both 

currency boards (59'% approve) and dollarization (62'!;, approve)_ Even a large porrion of those who 

support the current govcnunent don't support the central bank (50%) and want change_ with 43% favoring 

a currency board and 31% favoring dollarization (DatinCorp, 2017). 
16


24831a-9.eps

Hanke 9 

References 

DatinCorp. ··venezuela: (.Bolivar o D6lar"'' Estudio de Co;.~mtura Econ6mica. March 2017. 

Gallegos, Raul. Crude Nation: How Oil Riches ndned Venezuela. Lincoln, Neb: Potomac Books, 2016. 

Hanke. Steve H. "The Americas: Argentina Should Abolish Its Central Bank'' Wall Street Joumal [New 

York]25 Oct. 1991, Eastcm ed .. Al5. WSJ.com. Wall StrcctJoumal. 

Hanke, Steve H. '·Why Argentina did not have a currency board." Central Banking Journal, vol. 18, no. 3, 

2008, pp. 56-58. 

Hanke. Steve H. "On Democracy Versus Liberty.·· Globe Asia. February 2011. 

Hanke. Steve H. "Remembrances of a Currency Reformer: Some Notes and Sketches from the Field" The 

Johns Hopkins Institute for Applied Economics. Global Health, and the Study of Business 

Enterprise. Studies in Applied Hconomics working paper no. 55. June 2016. 

Hanke, Steve. "Venezuela's PDVSA: the World's Worst Oil Company." Forbes. Mar 6, 2017. 

Hanke. Steve H. and Charles Bushnell. "Venezuela Enters the Record Book: The 57'h Entry In The 

Hanke-Kms World Hyperinflation Table.'' The Johns Hopkins Institute for Applied Economics, 

Global Health, and the Study of Business Enterprise, Studies in Applied Fconomic.1· working 

paper no. 69. December 2016. 

Hanke. Steve H. and Liliane Hanke. ''Democratic versus libertc Lcs lc~ons tirces de Ia Constitution 

americaine II (Democracy versus Liberty: Lessons leamed from the American Constitution). 

Commentaire. No. 135, 2011 

Hanke, Steve H., and Nicholas Krus. "World Hyperinflations." Routledge Handbook of Major Events in 

Economic History. Edited by Robert Whaples and Randall Parker. London, Routledge, 2013. 

Hanke. Steve H .. and Kurt Schuler. "Keynes's Russian Currency Board'' in: Steve H. Hanke and Alan A. 

Walters. Capital Markets and Development. San Francisco: Institute for Contemporary Studies: 

43-58. 1991. 

Hanke. Steve H .. and Kurt Schuler. Juntas Monetanas para paises en desarrollo: Dmero. mjlac16n y 

estahilidad econ6mica. 2nd ed. Caracas: Cedice Libertad. 2015. The Johns Hopkins Institute fin· 
17


24831a-10.eps

Hanke 10 

Applied F.conomics, Global Health and the Study of Business F.nterprisc. Intemational Center for 

Economic Growth_ 2015_ 

Hanke, Steve H, and Jason Yin. "On Venezuela's Supply-Side Potential.-' The Johns Hopkins Institute for 

Applied Economics, Global Health, and the Study of Business Enterprise, Studies in Supply-Side 

Economics working papcrno_ 5_ March 2017. 

Kaznecheev. Peter. Curse or Blessing0 How Institutions Determine Success in Resource-Rich Economies. 

Policy Analysis no. 808. Washin;,>ton. D.C.: Cato Institute, 2017. 

Kinzer, Stephen. lhe Brothers: John Foster Dulles, A/len Dulles. and theu· Secret World War. New York: 

Times Books Henry Holt and Company, 2013. 

Naim, Moises. Paper Tigers and Minotaurs: the Politics c~f"Venezuela 's Fconomic RefiJrms. Washington, 

D.C: Carnegie Endowment for International Peace, 1993. 

Santos, Tristana. '·The Dollarizers." The Johns Hopkins Institute for Applied Economics, Global Health, 

and the Study of Business Enterprise, Studies in App!ted Economics working paper no. 31. April 

2015. 

Schuler. Kurt. -·Ignorance and Influence: U.S. Economists on Argentina's Depression of 1998-2002_'' 

Intellectual Tyranny of the Status Quo voL 2_ no.2, August 2005, Econ Joumal Watch pp. 234-

278_ 

Schuler. Kurt. "Basics ofDollarization.'' United States. Cong_ Joint Economic Committee. 106"' Cong., 

2'd sess. Cong. Rept. Washington_ D.C.: 349-94. 2000. 

Schuler. Kurt and Robert Stein. ''The Mack Dollarization Plan: An Analysis_" Do/larization: A Common 

CurrencyfiJr the Americas'! March 6, 2000, Dallas, Federal Reserve Bank of Dallas. 
18

Mr. DUNCAN. I thank the gentleman. 

Mr. Dallen, you are recognized. 

STATEMENT OF MR. RUSSELL M. DALLEN, JR., PRESIDENT 

AND EDITOR-IN-CHIEF, LATIN AMERICAN HERALD TRIBUNE 

Mr. DALLEN. Thank you, Chairman Duncan, Ranking Member 

Sires, and my local Florida Congresswoman, Ileana Ros-Lehtinen, 

for inviting my testimony before you today. It is an honor. 

Let me begin on a personal note. I spend my days and nights 

working with Latin America, by day working on sustainable private sector financing for countries and companies across Latin 

America at an investment bank, and by night overseeing some of 

the best reporters and journalists around the hemisphere at a 

newspaper. Both are based in Caracas, Venezuela. 

I began working with Latin America at the United Nations Association of the USA under Assistant Secretary of State Toby Gati 

and the United Nations Ambassador William vanden Heuvel after 

special graduate study under National Security Council Adviser 

Zbigniew Brzezinski and international lawyer Louis Henkin at Columbia University and Sir Ian Brownlie at Oxford, including a stint 

at the Senate Foreign Relations Committee, where I was a Rosenthal Fellow. 

In 2000, I moved to Venezuela to run the Latin American operations of U.S. investment bank Oppenheimer, and 3 years later 

bought a newspaper company there, The Daily Journal, a newspaper founded in 1945, which also owned other important newspapers in Venezuela, including Diario de Caracas and Tal Cual. 

In those roles, I have had the satisfaction of helping to finance 

development not just in Venezuela, but all across Latin America, 

as well as overseeing and training a host of some of the region’s 

best journalists. Those positions have also given me a well-placed 

midfield seat in the battle for Latin America’s heart and soul, a 

conflict, I am sad to report, that the forces of freedom and democracy have been losing badly in Venezuela. 

My friends and esteemed colleagues Professor Schamis, Professor 

Hanke, and Dr. McCarthy will testify to the disastrous results of 

the Chavez and Maduro administrations on Venezuela. I have been 

asked by the committee to focus on threats to national security, to 

the U.S. national security resulting from Venezuela’s communist 

dictatorship, and the country’s economic destruction, as well as 

what the U.S. can and should do to assist. 

At the top of that list—it seems to be Russia week or Russia 

month lately in Washington—in late December, my teams at Caracas Capital and at the Latin American Herald Tribune uncovered 

that Russia’s state-owned oil company Rosneft had secured a lien 

on 49.1 percent of CITGO in the United States from Venezuela’s 

state-owned oil company Petroleos de Venezuela, PDVSA by its 

Spanish letters, potentially making the Russian Government-controlled Rosneft the owner of America’s sixth-largest refinery and a 

vast pipeline network. 

That reality is made worse by the fact that Rosneft is under 

OFAC sanctions from the United States, as well as being headed 

by a longtime Putin deputy, Igor Sechin, who is also a named sanctioned individual. 

19

We made the discovery of Rosneft’s UCC lien filing because we 

were diligently searching for explanations for how PDVSA, which 

by the end of November was 2 weeks into technical default on some 

of its $35 billion in bonds, was able to come up with the funds to 

pay the remaining $440 million of the $4.2 billion in bond payments it owed in October/November and suddenly cause the Central Bank reserves to rise $890 million as well. The threads we 

pulled uncovered that Russia had loaned the Venezuelans $1.5 billion. 

While much of our attention here in the United States has been 

focused on other issues, Russia’s Rosneft has been active in Venezuela as well as all over the world. In the last year, they have acquired Indian assets, Egyptian assets, and this may come as a surprise to Americans who have lost much blood and treasure to liberate that country, but Rosneft is also drilling in Iraq—where, by 

the way, they are partnered with China. And this year, because of 

some additional purchases, but mainly because of the sale of Venezuela’s 50 percent of the Ruhr Oil Refineries in Germany to 

Rosneft for $1.6 billion in 2010, Rosneft is now the third-largest refiner in Germany as well. 

My father is a career Air Force noncommissioned officer, and he 

instilled in me a firm belief in the Noah principle; that is, that 

there are no prizes for predicting rain, there are only prizes for 

building arks. With that in mind, as I go through each policy I will 

make recommendations and we can discuss them. Obviously, because of time, we will just stick with the first one, and that is the 

CFIUS analysis of CITGO. 

A preliminary search of the database of the Committee on Foreign Investment in the United States does not show that the purchase of CITGO by Venezuela has ever undergone a CFIUS review. 

Under the Exon-Florio amendment, if the party has never availed 

itself of the voluntary CFIUS notification and review process, there 

are no limitations for the President’s authority to investigate a past 

transaction, especially since the 2007 Foreign Investment and National Security Act includes energy security, obviously something 

very important to the chairman. 

There is more in my written testimony, but because of time I will 

just conclude that allowing Venezuela to fall further into the hands 

of drug kingpins with close relationships with Cuba, Iran, Hamas, 

Hezbollah, Russia, and China, intent on doing us harm, while sitting on top of the world’s largest oil reserves must not be an option. 

Likewise, allowing Venezuela to fall further into anarchy and chaos 

will only open the door to further death and destruction, heightened regional insecurity, and Latin American instability. If the 

United States is unable to bring democracy to its own backyard, 

what chance does it have for bringing it to the rest of the world? 

Thank you for your time, efforts, concern, and good offices. 

[The prepared statement of Mr. Dallen follows:]

20


24831b-1.eps

Venezuela's Tragic Meltdown 

Testimony 

to the 

United States House of Representatives 

Committee on Foreign Affairs 

Subcommittee on the Western Hemisphere 

Russ Dallen 

Editor-in-Chief 

Latin American Herald Tribune 

March 28, 2017 

Thank you, Chairman Duncan, Ranking Member Sires, and my local Florida 

Congresswoman Ileana Ros-Lehtinen for inviting my Testimony before you today. 

It is an honor. 

Let me begin on a personal note. T spend my days and nights working with Latin 

America -- by day working on sustainable private sector financing for cmmtries 

and companies across Latin America at an investment bank and by night 

overseeing a staff of some of the best reporters and journalists around the 

hemisphere at a newspaper. Both are based in Caracas, Venezuela. 

I began working with Latin America at the United Nations Association of the 

U.S.A tmder Assistant Secretary of State Toby Gati and United Nations 

Ambassador William vanden Heuvel after special graduate study under National 

Security Adviser Zbigniew Brzezinski & international lawyer Louis Henkin at 

Columbia and Sir lan Brownlie at Oxford - including a stint working with the 

Senate Foreign Relations Conm1ittee as a Harold W. Rosenthal Fellow -- so it is 

with great pride that T return to testify before the House Foreign Affairs 

Committee. (Harold Rosenthal, a senior aide to this Committee's Senator Jacob 

Dallen I U.S. House Committee on Foreign Affairs 
21


24831b-2.eps

Javits, was killed in a PLO attack in 1976, and the Fellowship that continues to this 

day was created in his memory). 

In 2000, I moved to Venezuela to run the Latin American operations of U.S. 

investment bank Oppenheimer and three years later bought a newspaper company 

there -- The Dai(y Journal, a newspaper fotmded in 1945 which also owned other 

important newspapers in Venezuela including Diario de Caracas and Tal Cual. 

In those two roles, 1 have had the satisfaction of helping to finance development 

not just in Venezuela but all across Latin America as well as overseeing the 

training of a host of the region's best joumalists. Those positions have also given 

me a well-placed mid-tleld seat in the battle for Latin America's heart and soul-- a 

conflict I am sad to report that the forces of freedom and democracy have been 

losing badly in Venezuela. 

My friends and esteemed colleagues Professor Hector Schan1is, Professor Steve 

Hanke, and Dr. Michael McCarthy will testify to the disastrous results of the 

Chavez and Madura administrations on Venezuela. 1 have been tasked to focus on 

threats to U.S. national security resulting from Venezuela's communist dictatorship 

and the country's economic destruction as well as what the U.S. can and should do 

to assist. 

RlJSSIA 

In late December, my teams at Caracas Capital and the Latin American Herald 

Tribune uncovered that Russia's state owned oil company Rosneft had secured a 

lien on 49.9% of CITGO in the United States from Venezuela's state owned oil 

company Petroleos de Venezuela SA (PDVSA), potentially making the Russian 

govemment-controlled Rosneft the owner of America's sixth largest refinery and a 

vast pipeline network. That reality is made worse by the fact that Rosneft is tmder 

OFAC sanctions from the U.S. as well as being headed by long-time Putin deputy 

Igor Sechin, who is also a named sanctioned individual. 

We made the discovery of Rosneft's UCC lien filing because we were diligently 

searching for explanations for how PDVSA- which by the end of November was 

2 weeks into technical default on some its $35 billion in bonds- was able to come 

up with the funds to pay the remaining $440 million of the $4.2 billion in bond 

payments it owed in October/November and suddenly cause the Central Bank 

reserves to rise $890 million as well. The threads we pulled tmcovered that Russia 

had loaned the Venezuelans $1.5 billion. 

Dallen I U.S. House Committee on Foreign Affairs 
22


24831b-3.eps

While much of our attention here in the U.S. has been focused on other issues, 

Russia's Rosneft has been active in Venezuela as well as all over the world. 

In the last year, Rosneft has acquired Indian refiner Essar Oil, giving Russia 

India's second largest refinery, as well as port terminals, power plants and pumps. 

Rosneft acquired 30% of the Shourouk concession in Egypt and its giant offshore 

Zohr gas field. Rosneft is even drilling- and this may come as a surprise to many 

Americans who have given so much blood and treasure to liberate the cmmtry - in 

Iraq (where, by the way, they are also partnered with China). 

And this year, because of some additional purchases -- but mainly because of the 

sale of Venezuela's 50% of the Ruhr Oil Refineries in Gem1any to Rosneft for $1.6 

billion in 2010- Rosneft is now the third largest refiner in Germany. 

(Instead of keeping the money to invest in domestic oil production, paying for the 

expropriations or buying even food and medicine for his people, Chavez went into 

debt to buy over $6 billion worth of weapons from Putin, including 92 T -72 tanks, 

24 Sukhoi fighter jets, S-300 anti-aircraft missile systems, 15 Mi-35m combat 

helicopters, 20 Mi-17-1 B multipurpose helicopters, 3 Mi-26T transport helicopters, 

in addition to leftist-b'Uerrilla-favorite Kalishnikov rifles.) 

Meanwhile, in Venezuela, Rosneft has partnered in 5 joint oil ventures with 

PDVSA. Last year it increased its stake in PetroMonagas to 40% after paying 

Venezuela $500 million to purchase the portion of the venture that had been 

expropriated from ExxonMobil. ExxonMobil had owned 42% of what was then 

called Cerro Negro but has since been re-titled in the new name of PetroMonagas 

to paper over the previous ownership. 

My father, a career Air Force non-commissioned officer, instilled in me a firm 

belief in the Noah Principle - that is "there are no prizes for predicting rain; there 

are only prizes for building arks." With that in mind, I will try to make policy 

recommendations as we discuss each problem. 

POLICY RECOMMENDATION #1: CFIUS ANALYSIS OF CITGO 

A preliminary search of the database of the Committee on Foreign Investment in 

the United States (CFIUS) does not show that the purchase of Citgo by Venezuela 

has ever tmdergone a CFIUS review. Under the Exon-Florio Amendment, if a 

Dallen I U.S. House Committee on Foreign Affairs 
23


24831b-4.eps

party has never availed itself of the voluntmy CFIUS notification and review 

process, there is no limitations period on the President's authority to investigate a 

past transaction, which since the 2007 Foreign Investment and National Security 

Act includes "energy security." 

Second, we have gained access to only 2 pages of the Rosneft contract with 

Venezuela. We do not know what the trigger is tor Rosnetl to take control of their 

49.9% ofCitgo or even if that triggering event has already happened. (Our Citgo 

investigation sparked additional lawsuits from Canadian goldminer Crystallex 

[which this weekend had its $1.4 billion judgment against Venezuela from the 

World Bank's Tntemational Center for the Settlement of Investment Disputes 

(lCSID) upheld and registered by the U.S. Federal District Court in Washington, 

D.C.] and ConocoPhillips against Venezuela, PDVSA, Citgo, and Rosneft tmder 

Delaware's Unitonn Fraudulent Transfer Act. Those plaintiffs are seeking 

discovery in an attempt to find out similar infommtion which Venezuela has so far 

blocked with an appeal to the U.S. Federal Court of Appeals.) 

A CFTUS review would be able to access the Venezuela-Russia contract to know if 

Rosnetl is already the owner of Citgo. 

EXH!Ulf' 

10 FTNANONG STA'LEME.,"'JTfJ70R?.,I\ UCC-t} 

DEBTOR: PDV lla.ldi.:ng, ~-

SEC! HU20 PARTY: ROSNf\:t··'~' 1'rnding S..t\" 

Third, in October 2016, in an attempt to stave off default, PDVSA cajoled holders 

of $2.8 billion of its $7.2 billion in maturing debt to swap into $3.4 billion of new 

PDVSA debt collateralized by the other 50.1% of Citgo. It is possible that Rosneft 

owns a large share of those bonds, with the possibility of giving Russia majority 

control of Citgo. Again, a CFTUS committee would be able to get access to those 

details to be able to determine the potential owners of that other half of Citgo. 

Dallen I U.S. House Committee on Foreign Affairs 
24


24831b-5.eps

POLICY RECOMMENDATION#2: REASSESS OUR OIL RELATIONSHIP 

Venezuela is the third largest foreign supplier of oil to the U.S. and we are 

Venezuela's biggest customer. In basic terms, the U.S. has been financing 

Venezuela's "revolution." 

A brieflook at the numbers will help clarify the situation. 

N<>ltt: Ta/a!Jl may nmi!Jdr:l up dw 1<:1 tt><fepl!l11<1ent rol.ttt<Fillfl. 

Sou~: OPEC Si!lcroc~atiat 

I'J.14mb!d from the 

mill production lr 

Despite sitting on the world's largest oil reserves, Venezuela's oil production has 

tallen below 2 million barrels per day. That is down from 3.5 million bpd when 

Chavez took over the country. 

According to PDVSA's 2015 audited financials, the cmmtry uses 580,000 bpd 

domestically for fuel and power plants. Most of that is sold at less than a penny a 

gallon-- so at a total loss -leaving just 1.4 million bpd for export. 

Dallen I U.S. House Committee on Foreign Affairs 
25


24831b-6.eps

Of that remaining exportable 1.4 million bpd, 579,000 bpd go to China. The 

problem being that Venezuela receives no cash for those exports. China has 

loaned Venezuela over $60 billion dollars (65% of all its investment in Latin 

America) and Venezuela has already spent all that money and repays that loan by 

sending crude to Beijing. 

With 580,000 bpd being burned domestically at a loss and 579,000 bpd going 

to China for free to repay loans, Venezuela is left with just 800,000 bpd to 

export for hard cash. 

The bulk of that goes to the USA, where according to the Energy Information 

Agency, Venezuela shipped 719,000 bpd to the U.S. in December, making us their 

largest customer- and the largest consistently paying customer. 

To keep it simple, rounding up to 1 million bpd for cash sale at Venezuela's 

average price so far in 2017 of$45 a barrel (Venezuela's mix ofheavy oil trades at 

$10 below Brent and WTT), Venezuela is realizing just $45 million per day. $45 

million per day in a country of 31 million is less than $1.50 per person. (And I 

should point out that is before the actual costs of producing the 2 million bpd 

which is conservatively $10 a barrel). 

In short, the United States is keeping the lights on in Venezuela. 

Dallen I U.S. House Committee on Foreign Affairs 
26


24831b-7.eps

At the same time, because of the obvious shortage of cash, Venezuela is extremely 

dependent on the U.S. and Citgo (which is one of the few companies in the world 

willing to extend Venezuela credit today) for shipments of refined oil products 

such as naphtha, MTBE, diesel and fuel oil. In a country where drivers are now 

lining up in hours long waits for fuel as shortages of gas run rampant, blocking the 

flow of those fuel exports to Venezuela- which are also used to fuel the army's 

tanks, jets, armored vehicles and military machine being used against their own 

people- could be an effective way to send a message. 

But if the Venezuelar1 regime continues to deny its people food ar1d medicine as 

well as basic human and democratic rights, we should also consider pulling the 

plug on that tlow of money, by either putting a tax on oil imports from Venezuela 

or even halting them altogether. Those who trample on the free world's most basic 

norms should not be allowed to profit from access to the free world's greatest 

market. 

POLICY RECOMMENDATION #3: INCREASE THE BLACKLISTS 

Thanks to the efforts of Congresswoman Ros-Lehtinen and the members of this 

committee, the House and Senate passed - and President Obama signed -- the 

Venezuela Defense of Human Rights and Civil Society Act of 2014. With the 

addition of Venezuela Vice President Tareck El Aissar11i, who was nar11ed a "dmg 

kingpin" (along with his "testaferro" Sarnark Lopez Bello) last month, the U.S. 

Treasury's Office of Foreign Assets Control (OFAC) blacklist now contains 12 

high-ranking Venezuelan officials, including former Ministers of Justice and the 

Interior (in charge of all the courts ar1d police and investigative forces in the 

country), former Ministers of Defense, and even current state governors (who 

would have been replaced in gubernatorial elections last year but which the regime 

has blocked from taking place). 

An indictment for dmg trafficking against the current Minister of Justice ar1d 

Interior, Major General Nestor Reverol, was unsealed in New York in August. He 

has not yet graduated to the OF AC list. 

A former minister of Justice and the Interior, Ramon Rodriguez Chacin, was put on 

the OF AC list for material assistance to the F ARC. Emails from Rodriguez 

Dallen I U.S. House Committee on Foreign Affairs 
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24831b-8.eps

Chacin, indicating the degree of cooperation between the Venezuelan government 

and the F ARC, were fmmd on the laptop ofF ARC leader Raul Reyes, including 

documentation of $250 million worth of weapons for the F ARC. Rodriguez 

Chacin was replaced by El Aissami, who has now also graduated to the OFAC list, 

and as the current Vice President, is the second most powerful man in Venezuela. 

In addition, because of the efforts of those here in Congress, over 140 mainly, 

extremely wealthy Venezuelans who have collaborated with, participated in and 

profited from corruption in the Venezuelan government have now had their visas 

pulled. Although this list remains unpublished because of privacy concerns, 

publicizing the banned names is also something that should be discussed, but 

regardless, that list should also continue to be expanded. 

We are all proud of your efforts here in Congress to push the Obama 

Administration to sanction Venezuelans guilty of htmlatl rights abuse atld 

corruption using the Venezuela Defense of Human Rights Act. More names of the 

corrupt should be added. 

Since the Venezuelan institutions atld their checks and balat1ces have been hijacked 

and corrupted, it is up to us to stand for their beleaguered people. 

Because of the neutering of the domestic press, it is the foreign press atld the 

foreign press reporters in Venezuela that are left to do much ofthe work of getting 

the word out, which they do at great risk. 

Congress, the Administration, Prosecutors and the Courts here must continue to do 

the heavy -lifting of fighting and prosecuting the corruption and continue to provide 

evidence of the corruption, so that Venezuelans can see the evidence of the 

betrayal, deceit and criminality oftheir leaders with their own eyes. 

Those who tratnple the most basic tenets of the West's rule of law - from the 

universal rights of man and human rights to those against bribery, corruption, drug 

trafficking, theft, money latmdering, and murder -- must not be allowed to enjoy 

the economic atld political benefits that flow from our society's diligence in 

upholding that moral core curriculum. 

Dallen I U.S. House Committee on Foreign Affairs 
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CONCLUSION 

Allowing Venezuela to fall further into the hands of drug kingpins -- with close 

relationships with Cuba, Iran, Hamas, Hezbollah, Russia and China -- intent on 

doing us harm while sitting on top of the world's largest oil reserves must not be 

an option. 

Likewise, allowing Venezuela to fall further into anarchy and chaos will only open 

the door to further death and destruction, heightening regional insecurity and Latin 

American instability. 

If the United States is unable to bring democracy to its own backyard, what chance 

does it have for bringing it to the rest of the world? 

Thank you for your time, efforts, concern and good offices. 

I am happy to elaborate further on any of these strategies and others. 

Dallen I U.S. House Committee on Foreign Affairs 
29

Mr. DUNCAN. Thank you. 

Mr. Schamis. 

STATEMENT OF HECTOR SCHAMIS, PH.D., ADJUNCT PROFESSOR, WALSH SCHOOL OF FOREIGN SERVICE, GEORGETOWN UNIVERSITY 

Mr. SCHAMIS. Thank you, Mr. Chairman, Ranking Member, and 

members of the committee. Thank you for this session. 

To say that there is a tragic meltdown in Venezuela is perhaps 

an understatement, and I will try to highlight why the political, social, and economic dimensions and the security for the hemisphere 

are involved in this tragic meltdown. 

The constitutional order has broken down in Venezuela. The National Assembly is in the hands of the opposition after the landslide 

victory you, Mr. Chairman, highlighted, in December 2015, but 

ever since, it has lost all capacity to approve the budget, to legislate. It has even lost parliamentary immunity. Just this morning, 

the Supreme Court has ruled an across-the-board suspension of 

parliamentary immunity for the members of the National Assembly, how Congress is known in Venezuela. 

There are political prisoners with no rights. Torture has been reported. Francisco Marquez is someone we just mentioned. And the 

number of prisoners is 115 today. All of these while the government was allegedly maintaining a dialogue, discussing the liberation of political prisoners, the release of political prisoners. 

The sphere of political rights has shrunk to the point of extinction. The government has suspended elections indefinitely. There 

are supposed to be this year regional elections. They will not happen. And it has canceled the right of the Venezuelan people to recall its President, the recall referendum. There is no separation of 

powers nor checks and balances. Venezuela is under a dictatorship. 

There is a deep economic and social crisis that has been mentioned already. I don’t want to go too much into that. The monetary 

base has expanded to 236 percent. Inflation is the highest in the 

world. The population is below the poverty line at 82 percent, and 

52 percent under extreme poverty. 

All of this has entailed a deep humanitarian crisis. The basic 

basket is worth 15.3 minimum wages, 9.6 million people eat two or 

less meals a day, and there have been reports of weight loss and 

protein consumption decline. What we saw before shows people 

scavenging in garbage cans. There have been reports of children 

dying by ingesting poison Yuca, the tuber that is poisonous. People 

in hospitals have to provide their own medicines and everything 

they need for their treatment because there are no drugs, whether 

that is painkillers, antibiotics, let alone drugs for cancer treatment. 

The collapse of the public health system, we have to highlight, 

has been much worsened by the government’s incompetence and its 

criminal refusal, I want to add, to accept international humanitarian aid. The Maduro government talks about foreign invasion. 

They reject the foreign invasion of the Red Cross to assist this humanitarian crisis. 

There is corruption and crime. As the U.S. Department of State 

has reported, the Vice President has been named, designated a 

kingpin narcotics trafficker. The freezing of assets of the Vice 

30

President amounts to $3 billion. This is not the first time this has 

happened. Previous high officials of the government have also been 

identified and charged with drug trafficking. And the nephews of 

the First Lady have been tried and are expecting conviction in New 

York. 

Inevitably, lawlessness from above breeds lawlessness from 

below. Venezuela experienced 28,000 killings and violent acts 

throughout the country in 2015. Caracas is the most violent city on 

Earth, with a murder rate of 120 per 100,000 inhabitants. 

In my testimony, in my written testimony, I make a call for action. We are in front of a narco-state that entails risks for the security of the hemisphere, the U.S. and the neighbors. Today, the Colombian Senate discussed this morning the existence of 1 million 

refugees in Colombia alone. Venezuela is a large country, 30 million people, bordering Brazil, Colombia, Guyana, and with a coast 

in the Caribbean. Panama has begun to deny visas to Venezuelans. 

And this humanitarian crisis that you see normally in situations of 

war is happening in Venezuela as well. 

I entirely support the call for the invocation of the Inter-American Democratic Charter. The Senate has passed a resolution, the 

U.S. Senate has passed a resolution, Resolution 35, making that 

call as well. You just made that convocation, you convoked to that, 

and Mr. Duncan as well. And we need to certainly accomplish more 

cohesion. We need better collective action in the hemisphere. The 

OAS is the natural place and Secretary Almagro is certainly leading the way with that. 

We started last year with Article 20, which calls for an assessment of the Venezuelan situation, but Senator General Almagro 

has now invoked Article 21, which calls for a suspension of a country which has broken down the constitutional arrangement. We 

need to put words and actions together. Countries sitting on the 

fence must come on this side and put enough pressure on the Venezuelan regime to change, to call for elections, to release political 

prisoners, and to have a timetable for attending to the grave humanitarian crisis that the Venezuelans are suffering. 

Thank you very much. 

[The prepared statement of Mr. Schamis follows:]

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March 28, 2017 

Hector E. Schamis 

Adjunct Professor, \\f~tlsh School of l 1'oreign Sen.;rice, Ceorgeto\vn UniYersity, 

Columnist P! Pa!J (Madrid) and Senior c\dvisor to T nis :\lmagro, Secretary General of the 

Organization of _,_\.rnerican States 

Testimony for the session "Venezuela's Tragic Meltdown" 

VIr. Chainnan, Ranking Members, Vfcmbcrs of the Comnllttcc, thank you for the invitation to 

testify today. T appreciate your interest in this important subject. c\11 views presented here are solely 

rnine, and do not ret1ect the views of any of the institutions 1 arn affiliated \v-ith. 

To say that VeneL::uela is in a crisis is an understaternent; its depth and reach cannot be ignored any 

longer. T11is crisis has implications not only for Venezuela and its people but also for the 

neighboring countries and the security of the hen1isphere tts a \vhole. It is tt multidin1ensional 

disaster: political, cconorntc, hurnanitarian, and of lav.,· and order. Tt truly is nightrnarc at the door, 

as this session is entitled, :-t meltdo"\vn that begs for :-Ktion. 

The international cotnmunity must act using its available instih1tional tools, its diplotnatic resources 

cu1d its nonnative architecture, as specified by international and hutnan rights law and the regional 

agreements that bind us. The rights, health, safety and lives ot- the Venezuelan people merits nothing 

less. They need help, and we need to have the COLmtge to SM1d up to this appalling injustice. 

The Breakdown of the Constitutional Order 

For quite son1e tin1e, there has been a staunch effort on the part of President _\laduro's goverrunent 

to deviate from the constitutional procedures it is required to follow. This practice has reached a 

cntical point today, a peak at which a complete lack of accountability renders the Constttution 

rncaninglcss. 

Tn December 2015 a midtenn election gaw the opposition 'v!UD (United Democratic Table) a 

landslide victory, attaining its own qualiiied majority in the National Assembly, the V enezueLm 

unicameral legislative branch. Since d1en, d1e government has tried to neutralize the legislature wid1 

a sophisticated and never-ending menu of manipuhtion, including packing the Supreme Court with 

cronies and using it to rule unconstitutional virtually every piece of legislation. 

As a result, a series of :-mom:-tlous procedures and decisions have becon1e routine. The VenezueLm 

Congress docs not approve the budget nor can tt appropriate resources for the Executive branch or 

goven1n1ent agencies. The governn1ent unilateLtlly n1akes these decisions Yi<l executive decree 

authority, in tum validated by the Supreme Court. 
32


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Congress has been stripped of its responsibility over d1e contracting of foreign debt, a process dut 

the Executive has undertaken unilaterally and unconstitutionally, including the issuing of swaps, 

bonds and other strategies of debt restructuring by the state-owned oil comp<my PDVSi\. 

Because of these tl110111<tlies, Congress is unable to oversee the other beu1ches of governn1ent, 

nornin<tte judges, confirm 'tppointn1ents, ~md supen.,.ise nllning and oil concessions. L,tst but not 

least, a number of members of Congress have been arrested and denied passports to travel, in 

violation of their civil rights and their parli<m1entary immunity. 

2 

In sun1, \vhile the legishtive bcmch ren1ains open, it h;ts been neutered, one 111<ty S<ty, by the 

combined actions of the Executnc and Judicial branches through a series of decisions that should be 

seen as equivalent to a coup d'etat. 

Individual rights are thus non-existent. The security apparatus detains people at will. The number of 

political prisoners has increased lliroughout the last year, reaching 115 today. "\11 d1is while the 

governtnent \Vas carry-ing out a presumed-but obviously insincere---dialogue \vith the opposition 

for their release. Students, professors, journalists and political leaders, among d1em, several of those 

prisoners have been cotl\'ictcd with false evidence, as \vas rccogniL::cd by their own prosecutors . 

.:..-fost remain detained \Vithout tri,il. Those in custody often report being tortured. _A .nd prisoners in 

need of n1edical care rarely receive it. 1 

The sphere of political rights, that was robust until2015, has shrunk to d1e point of extinction. 'l'he 

government has cancelled the right of the Venezuelan people to recall their president-as specitied 

by d1e Constitution-and has suspended gubernatorial elections indetinitely. 

The type and extent of civil ;md political rights \vithdra\vn amount to a breakdo\vn of constitutiontll 

dcrnocracy. The absence of separation of po\:vc:rs and the erosion of checks and balances arc, in fact, 

defining ch;mtcteristic of ;tuthoritari;tnism. Add th;tt the ruling p;trty h;ts been in ofiice for eighteen 

consecutive years and that indefmite reelection is lcg<Jl. Plain and simple, Venezuela is under a 

dictatorship. 

Economic and Social Crisis 

Venezuela h:-ts one of the most ,tbund,lnt geologicJ endo"\vments in the \vorld. The state-o\vned oil 

company PDVS"' represents over 90% of total exports and 12o;, of 1ts GDP. During the last decade 

of very high prices, the country "\Vas ted 't unique opportunity to incre,tse in.vestn1en.t and production. 

Instead, production steadily declined due to lack of investment, incompetence, and corruption. 

Oil production decreased 253 kbpd (thousand barrel per day) or 8°'o between 2010 and 2015. In 

particulm, production fell2+3% ;md 1S.8% in the traditioml East ;md \\fest regions Oight, mediumgr,tde cn1de), :-tnd only rose 12.0~'o in the Orinoco Oil Belt (he,1vy, extnt-heaYT cn1de). Production in 
33


24831c-3.eps

fields solely opm1ted by l'DVSA declined 27.5% while iields operated by joint ventures increased 

42.3°~.2 

PDVSA's debt service increased almost tenfold to $10.2bn in 2010-2015 while total financial debt 

rose 7S% to roughly $4Sbn. PDVSA was noted to have an ongoing struggle to raise capital 

expenditures to halt the decline in production, let alone meet production targets. Its numerous 

operational challenges should also be considered to explain this decline: input shortages, drilling 

inefficiencies, inadequacy of gas and energy facilities, insufficient do\vnstrean1 infrastn1cture 

(re~-iners, up graders, etc), safety, envlrontnent and critne related risks, and deficits related to 

corporate govern;Lnce ,md industri;tl policy. 

Having exhausted foreign and don1estic debt isstunce ;md choosing to forego interntttional 

assistance, the govcnuncnt has consistently relied on deficit n1onctization. Bct\:vccn 2013 and 2015 

average deficit monetization sat at 13% of GDP. Tn 2016 the monetary financing of the dettcit was 

associated to an increase in the monetary base of 236%. It should be noted that the total increase in 

"direct loans" to PDVS:\ outlined above was 22"·o larger than the total increase in the monetary 

base, which spe-ak_s to the reliance on n1onet:ary financing. 

Debt sen,..ice appettrs unsustttinable given the Lick of access to internationttl tln,mce. Public external 

debt is at least S 130 billion, equivalent to 5.8 years of exports under reasonable assumptions for oil 

rrices in the short tern1. The Covernment continues to sust:--tin major regressive implicit subsidies 

for gasoline, utilities and foreign exchange. Conservative estimates put these subsidies at ~14 to ~19 

billion. ,\dditionally~ the cotnbined pressures o~- recession and in~lation are generating a signi~1cant 

collapse in tax revenues. 

So far the governn1ent ll1<lll<tged to st;ry in good terms \vith its creditors. It negotiated ne\v 

conditions on oil payments with China, its largest foreign creditor. Tt has swapped ~3 billion in 

l'DVSA bonds for long;er maturities :md hils r,1ised $1.S billion from Russiil's oil compilny Rosneft. 

Tt has also issued additional $5 billion for undisclosed buyers. \\'ithout a dramatic increase in oil 

price, ·vene?:uela's capacity to service its debt\-x.""ill continue declining. For several financial analysts~ 

default is inevitable. 

At the same time, V cncwcla's reserves arc crashing to a new low below $10.5 billion. "!he Central 

Bank reports that they closed 2016 with $7.7 billion in gold reserves, using their pricing 

methodolo!,'Y of$1,272.42 :111 ounce. 'lhat level is down $2.3 billion from the $10.0~ billion in g;old 

reported in Yenewela's 2015 financials, which used a lower gold price of$1,140.43. Venezuela's 

gold hrts no\v fttllen to rJn1ost half of \vhat it \Vas in just t\vo years, tts Venezueh reported that it 

started 2015 wid1 ~14.6 billion in gold-' 

2 I:.conomic Data from ''\\/eathcring Collapse: An Assessment of the Pinancial and 

Venezuelan C)il "Hemandez, l. & ~Vlonaldi, F, Center for lntemationalueveJop,me,rrt 

Birbara T .ira 

3 
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24831c-4.eps

4 

The country is plagued by the world's hig;hest int1ation, an annual 800%. "!he 1 00-bolivar note, 

worth less than 10 cents, was replaced last December. V enewelans waited in long lines to exchange 

their soon-to-!Je-"\V<Jrthless notes, but they "\Vent out of circulation !Jefore the rephtcement !Jills had 

arrived at banks or ATJ\-!s. People were torced to rely on credit cards or bank transfers, out of reach 

for the very poor, or to try to make purchases with bundles of hard-to-t!nd smaller bills often worth 

less th;m a penny each. 

Venezuela is thus a nation of broke millionaires, a result of the misguided tis cal and monetary policy 

o~- an abusrve government. Given these conditions, the country's population is facing a critical 

sitLution, bordering a humttnitttri;m crisis thttt demtu1ds urgent response. Recent independent studies 

put the share of population under the poverty line at 82° o and the share of population under 

extren1e poverty <lt S2(~'o. These ttre tJttrn1ing tlblLltes that represent historic highs. 

These same sh1dies report that existing sooal programs are poorly targeted. 72% of the population 

rnention that they are not covered by any social progratn, and out of the 28°/o that clain1 they are 

benet! ted by a social program only 40" o are poor. 4 

The complete collapse of the social safety net is particularly worrisome given the complex fiscal 

outlook, the tibsence of tin1ely reforn1s thttt could trigger ;m economic recovery <ind the decision to 

prioriti"e the fultlllmcnt of potential! y unsustainable debt service over other policy goals. 

A Humanitarian Catastrophe 

i\ccess to ~-ood and health care has \vorsened dratnatically in Venezuela, a sihtation that tnust be 

deen1ed ttbrming if not tr,tgic. Urgent action on the pttrt of the government, intern;ttional 

organizations, and relief institutions is needed. 

In january 2017, the basic food basket had increased 14% in relation to December 2016, and 481° o 

fn;n1 a ye.ar before. The purchase of the basic basket is \vorth 15.3 n1inin1un1 v.mges.5 

In addition to high int1ation, ttccess to food has been compromised by shortages and undersupply of 

a long list of staples. From dmry products to beef, from oil to flour, deodorant, soap, tooth paste 

and mttny more, present a sihltttion of sctrcity. 6 

\T enezuehns \vho reside overseas pack their suitcases \vith basic need products for their families 

\vhen they visit. l,ood security is a luxury th,tt only 6.7~'o of households enjoy. About 9,6 n1illion 

people cat two or less meals a day. The nutritional pattern has experienced a dramatiC change: 

g,trden produce and tubers have disphced foods \Vith higher protein content. 'l'his is consistent\vith 

6 1Lid. 
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the report that 73% of the population have <experienced weight loss averaging 8. 7 kilograms (20 

pounds) during the past year." 

5 

Faced vv~th a food basket that has become gradually unavailable, Venezuelans in poverty have been 

substituting products for cheaper ones and the very poorest increasingly looking for food in garbage 

cans. There has been a number of stories reported by the press about children dying by ingesting 

cassava \\"':ithout superYision. Yu~u in \Tenezueht, the tuber has tt s\veet but tllso a bitter, poisonous, 

vanety that can be dead] y 8 

Social media perfom1s many funct10ns in the world: infomution, entertainment, political debate, 

and rnany rnorc. Tn Vcnc-:ucla, T\),1ittcr, Faccbook and other platfom1s have also bee orne a virtual 

pharmacy, where people implore for undersupplied drug :md others offer to even donate it. 

Shortages range frotn expensive dn1gs for cancer treatment to tnorc routine antibiotics and regular 

painkillers. ~\hny people have died of :\11 untreated cancer or :m unmedic:1ted infection. 

According to the medical profession, hospitals and clinics only possess about 3~·o of the medical 

supplies needed. "lhus, to be treated patients must bring the materials themselves: dn1gs, gauLe, 

intravenous sentm, tmd the like, in ttddition to the food for their sttty. 9 Others reported that hospitals 

Lick supplies, \V~tter, ~md deming 111;.lteri~tls. 'lhey experience po\ver outages ~md their e4uipn1ent is 

datnaged. often to a point of no retun1. 10 

Infant mortality has increased rapidly. :\ccording to journalistic reports the rate of infant mortality is 

18.6 per one thousand children born alive. That number is above the indicator of 1.'i.+ that UNICEF 

estimates for Syria, a country vast! y damaged by war. In the first five months of 2016, 4,07 4 babies 

died bet(Jre turning one year old, 18.S~ o more th:m in the same period for 201 S. and SO" o higher 

tl1an the same interval of time in 2012. 11 

Dise~1ses once controlled or eL1dic-1ted have nnde ~m <llarrning con1eluck. Experts project for this 

year about 250 thousand cases of malaria, and between 350 and 500 hundred cases of diphtheria, 

which had been eradicated in tl1e past. In what amounts to a total collapse of the public health 

systern, the situation has been nlUch worsened by the incon1petencc of the governn1cnt and its 

criminal refusal to accept internariontll hmnanitaritm aid. 12 
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24831c-6.eps

Corruption and Crime 

\Vl1ile many Venezuelans go hungry because they cannot find or pay for basic foodstuffs, the 

\T enezuehm n1ilitary profits fron1 traftlcking in food, as it has been in charge of food distribution 

since July 2016. "Lrttely, food is a better business thru1 drugs," said retired Cen. Cliver _,_'\lctla, \.vho 

helped oversee -vene?;uela's border secunty. ''The tnihtary is in charge of Food managetnent no"\v, 

cmd they're not going to just take that on \Vithout getting their cut." 11 

By con1parison, ho\Ve\-et, this \Vcmld qualify as petty corn1ption. Precisely, the hrger picture is that, 

accordmg to the US Department of State's 2016 International Narcotics Control Strategy Report, 

Venezuela is one of the preferred trafficking routes for ille,;,tl dmgs, predominately cocaine from 

South ~~metica and to a ,·aricty of destinations, all facilitated, encouraged, and carried out by its 

governing elite. 14 

6 

In ftct, involven1ent in drug tr,tftlcking re;Khes the very top of the \Tenezuebn governn1ent. ()nly S<) 

could be explained that Venezueh ranks 71

h in priv~tte jet o\vnership. 1

s L-tst l 1'ebnury, the U.S. 

Department of the Treasury designated the Vice-President of Venezuela, Tareck El ;\issami, as a 

"Kingpin Narcotics Trafficker". His prin1ary front-man, Venezuelan national San1arkJose Lopez 

Bello~ \vas also included in the designation for providing material assistance and Financial support, 

and <Lcting for, or on behalf of, El .i\issttn1i. 

The Tre;tsury Depttrtn1ent further identitled ttnd froze <is sets of 13 con1ptmies o\vned or controlled 

by Lope" Bello or other designated parties that comprise an intematwnal network spanning the 

British Virgin Islands, Panama, the Cnited Kingdom, the United States, and Venezuela 16 The 

freezing of assets blocks the Vice-President from accessing a fortune estimated at $3 billion.'" 

J:::J ~\isscuni is the n1ost recent senior figure in the Venezuelan governn1ent to be accused of dn1g 

trafficking, but by no means the only one. In August 2016, U.S. prosecutors announced an 

indictment <igttinst t\vo forn1er top otEcittls at Venezuela's <U1ti-nttrcotics ttgenLT· One of those 

officials, Nestor Rcvcrol, \vas the fom1cr general director of the anti-narcotics agency and onctirnc 

conl111<lnder ofV.enezuela's National Cuard. 1

H He \Vas <tppointed Interior 1-Tinister by President 

_\laduro the next day, an obvious rnove to grant hin1 irnnlUnity. 
37


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In addition, El_A...issami appears to be a key contact in Latin _,_'\.rnerica for extremist organizations. 

Last February C'-.N and CN'-. en Espar1ol published a report on an organi~ation created to sell 

Venezuebm p<~ssports. According to C'\N, intelligence links Vice President El "\issmni to 173 

Venezuelan passports and ID's that were issued to individuals from the '\'Iiddle East, including 

people connected to the terrorist group Hezbollah." 

Tn '\oyember 2015, Efrain Campos and Franosco Flores, nephews of the First Lady, were arrested 

by DEA agents in Haiti for conspiring to smugg)e as much as 1,700 pounds of cocaine into the 

Cmted States. "\year later they were found guilty by a jury in Federal District Court in Manhattan. 

They e.rch face 10 years in prison. According to news sources, piloting the jet th<tt took the 

Prcsllicnt's nephews to Ilaiti Y\/Ctc rnctnbcrs of the presidential security and transportation unit, the 

Castt J\1ilitar.21 In sum, in \T enezueb the ruling elite should be seen as no more thttn <i crin1inttl 

organization that has rnanagcd to capture the state apparatus. 

Inevitably, lawlessness from above breeds lawlessness from below. Venezuela experienced 28,000 

killings in violent acts throughout the country in 20 15, ·with a rate of 91 murders per 100,000. Since 

2014, Caracas has been d1e most violent city on earth, with a murder rate of 120 per 100,000. 

Because of d1is d1e capital city has a natural curfew, with empty streets after dark." 

7 

Regular people fear con1n1on crirninals as tnuch as la\:v cnforccrncnt agents. The latter because either 

they ~tre then1selves engaged in crin1e-~ts sho'\vn :-tbove, sn1ug_~ling, drug :-tnd food tntffick.ing-or 

because when d1ey do tight urban crime they abuse d1eir power. As reported by a number of human 

rights organizations~ metnbers o~- the security ~-orces have cotntnitted graye violations, including 

extrajudicial killings, and arbitrary detentions and deportations. As an indicator, frorn January to 

June of 2016 extrajudicial killings increased by 66"o. 23 

At the same time, 2016 witnessed the highest number of murdered security forces in the 

ye~trs with -H-1- c1ses, according to :-1 report by the human rights Due Process l,'oundc1tion 

pam e! Debido Proceso- T'UNDFiPRO). 1l1e report was published in January 2017 and it compiled data 

frotn ne\vs coverage and intervie"\vs "\-x.rith security forces. 24 Tt has also been docutnented by other 

sources that clashes between different srnuggling and traHicking gangs fom1ed by n1ernbers of the 

security forces also account for some of these killings. 

A Call for Action 

The Venezuelan regin1e represents tt risk for its o\vn people and the region. \\fiJ.espreaJ. collusion 

bct\vccn govcrnrncnt officials m1d crin1inal organiL::ations-a !tarw-Jtate, we hear often-is a threat 
38


24831c-8.eps

8 

that the countries of the _\rnericas can no longer ignore. Intelligence and journalistic reporting 

shows that Colombia's ELN (National Liberatlon Army) and l('\RC (Revolutionary Armed Forces 

of Colotnbia) also operate in \T enezuela in coordination \Vith dntg cartels. The country has become a 

smuggling route as much as a safe haven for guernllas-tumed-drug dealers. 

The L:nited States h;-ts used ;-md should continue to use ttrgeted s;-mctions against individu;-tls 

involved in corruption, drug traHicking, money laundering, and human rights v10lations. The United 

States should also renew its efforts to build a larger coalition in d1e region, to persuade governments 

in Latin :\merica and the Caribbean to cooperate more actively. Tn July 201-l, the government of 

Aruba rele.1sed <md sent back to Venezuela c;eneral Hugo C1rnj<J, he<ld of military intelligence 

between 2004 and 2008, after imtiall y detaining him over United States accusations of drug 

tr;ttlicking ttctivities. This 'i.V<lS unfortunate. The nations of the hemisphere h;tve to understand thttt 

their own national security, public health and financial stability arc also at stake. 

The claim made by the J'vladuro regime that d1ese are sanctions against the V ene:ouelan people is 

preposterous to say the least. The only sanctions against the people of Venezuela have been issued 

by the governtnent of Vene£uela; narnely, by its continuous abuses and its refusal to accept 

international humanitarian aid to mitigate the effects of dramatic tood and medicine shortages. This 

is <l government <lt '\V<lr 'i-vith its o\vn people. 

The h,lrdship endured by the Venezuehns also entail the risk of a n1assive refugee crisis, equiY,tlent 

to those typically following a war, a natural disaster, or a farnine. A large proportion of the country's 

citizens are already suf-Yering hunger and are victitni?.ed by disease and lack of medical attention. 

Venezuela is a large country in the region-30 million people-bordering Colombia, Brazil and 

Guyana . .'Six million Colombians live in Vene7.uela, tnany of thetn having tled ~fom guerrilla and 

drug traftlcking violence in their country of origin. 

\\-'hile there has tJready been insttmces of migration, a massive exodus 'i-V<mld be a dest,lbilizing 

factor for \lenezucla's neighbors and represent an even larger risk for thosc-tnuch smallercountries in the Caribbean basin and Central i\tnerica. Consider the fact that Panatna is already 

denying visas to Vene:z:uelans, who had been settling there in large nutnbers over the last few years. 

This is a collective prohlem that requires a collective solution. 

The Ycnc:;;uclan gc)\'Cnlnlcnt's protracted authoritarianisrn is a very negative exarnplc in the 

hemisphere. On lVlarch 2, 2017 a United States Senate Resolution introduced earlier in l,.ehmary and 

expressing concern about \-:-enezucla "\Vas unanitnously approved. 1l1at resolution ''urges the 

President of the United States to provide full support for OAS efforts in favor of constitutional <md 

democratic solutions to d1e political impasse, and to instruct appropriate bederal agencies to hold 

oft!ci;~ls of the c;overnment of Venezuela 0\CCOuntahle for violations of United States law and ahuses 

of internationally rccogni:z:cd hutnan rigl1ts". 25 

It also "afti.rms its support for Ct-\S Secret1ry Cenercll ~\ln1ttgro's inYocttion of Article 20 of the 

Inter-American Democratic Charter and urges the OAS Pcnnanent Council, which represents all of 

the orgtmization's n1en1ber states, to undertake a collective assessment of the const.itution,tl tmd 

detnocratic order in Venezuela". 
39


24831c-9.eps

The Inter-American Democratic Charter is an agreement that 34 nations of the Americas signed 

freely tmd volunttrily. Doing so, they entered into a cotntnittnent to choose plur:tl, constitutional 

democracy as the only legitimate form of government. The Democratic Charter-h Catta 

i)emornifica-is binding. It specifies mechttnisms for collectively evttluating devi<Ltions fron1 the 

rrinciples of constitutional den1ocr:tcy and collectively choosing paths to restore them. 

9 

The government of Venezuela has indeed deviated from those principles. l'or m-er a year now, OAS 

Secretary General Lws c\lmagro has been delineating a course of action and proposing ditTerent 

steps to do ex:1ctly th.1t, all in accordance with Article 20 of the C:h:1rter which calls for the 

''convocation of the Pcrn1ancnt Council to undertake a collective asscssn1cnt of the s1tuation and to 

take such decisions <iS it deen1s ttpproprittte," including the necessary diplomatic initi;ttives. 

:\rticle 21, in turn, specif1es that "when the special session of the General '\ssembly rof the 0:\Sl 

detennines that there has been an unconstitutional interruption of the detnocratic order of a 

member state, and that diplomatic initiatiws have tailed, the special session shall take the decision to 

suspend said member state from tl1e exercise of its rig;bt to participate in the OAS by an afiirmative 

vote of two tl1irds of tl1c member states in accordance witl1 tl1e Charter of tl1e OAS." 20 

Tn other words, \\1hen a governrnent ceases to be accountable to its own people, the Den1ocratic 

Charter holds that government accountable. 'l'he Inter-American system has an obligation to hold 

_\!aduro accountable on behalf of tl1e Venezuelan people. 

We need to put words <md actions tog;ether. Those sitting; on the fence, OAS member states tl1at 

have been timid and even "~lling to defer to the whims of the Venezuelan dictatorship, must 

understttnd that its constitutionttl bre;tkdo"\vn is <i hen1isrheric security threat. It also sets <i bad 

exan1ple, one that would ernpower other \vould-bc dictators in the region. \\le should join forces 

around the Den1ocnttic Charter, the most in1rort,tnt institution,ll tool for the collective defense of 

detnocracv in the .-'i.tnericas. 
40

Mr. DUNCAN. Thank you, Dr. Schamis. 

Now we will go to Dr. McCarthy. 

STATEMENT OF MICHAEL MCCARTHY, PH.D., RESEARCH FELLOW, CENTER FOR LATIN AMERICAN AND LATINO STUDIES, 

AMERICAN UNIVERSITY 

Mr. MCCARTHY. Chairman Duncan, Ranking Member Sires, 

members of the committee, thank you for the invitation to testify 

today. 

Let me begin by commending the committee. This committee has 

long appreciated the importance of the Venezuela situation, and it 

has taken steps to raise awareness about the potential negative impacts of the Venezuela crisis on the United States, the hemisphere, 

and global governance. 

It is an honor to join the committee in this ongoing process of 

discussing policy options and considering potential solutions. I look 

forward to your advice and questions. 

Mr. Chairman, Venezuela’s downward spiral has left the country 

poised between crisis and collapse. As you know, over the last 3 

years the economy has fallen into a depression marked by severe 

shortages and hyperinflation; social protests frequently erupted 

into episodes of violent instability; and the government dismantled 

what remained of one of Latin America’s oldest democracies, yielding an authoritarian regime. 

Maduro and his government are hunkered down. In 2016, the 

government illegally blocked the opposition’s constitutional push 

for a recall referendum. Then, after Vatican-facilitated international dialogue broke down, the country’s humanitarian crisis escalated. Among other illegal detentions, the government arbitrarily 

jailed an elected Member of Congress. And as the rule of law further collapsed, the number of political prisoners rose to well over 

100. 

These power grabs amount to a Presidential self-coup. Regrettably, 2017 projects as another year of full-blown crisis. The population is restive and it is suffering amid an emerging humanitarian 

crisis. Great uncertainty persists about whether postponed gubernatorial elections will take place this year. And if there are no elections in 2017, then the popular response would likely be contentious protests, perhaps including street clashes. 

For the hemisphere, the country’s current trajectory represents a 

fundamental threat to its economic, social, and political stability. 

And I want to stress that today the Venezuela crisis is already a 

regional one. There are ominous signs out there, and there is already a substantial degree of regional instability. 

Over the last 3 years, Colombian civil society groups estimate 

that had 1.2 million Venezuelans entered the country. The breakdown of the numbers in terms of the type of migration is unclear. 

What we do know is that overall an estimated 350,000 Venezuelans 

stayed in Colombia. 

In 2016, Venezuelans submitted the most asylum requests of any 

nationality in three countries: The United States, Brazil, and 

Spain. In Central America, Costa Rica and Panama have experienced significantly increased levels of migration from Venezuela, 

41

while Caribbean countries continue to report high numbers of migration. 

In Europe, governments in Italy, Portugal, and Spain are casting 

a watchful eye over events. There are between 800,000 and 1 million Venezuelans with European Union passports. The overwhelming majority of these passport holders are from these three 

countries. 

The Venezuelan Government is responsible for this manmade 

disaster, and it will be up to Venezuelans to address the toughest 

problems, but the international community cannot remain idle. The 

crisis is already regional in its effects, and sustainable reconstruction will require determined international leadership and well-coordinated assistance efforts. 

For the United States, facilitating reconstruction can start with 

formulating a full-fledged policy for democratic stability in Venezuela. And I want to talk to you about messages, preparations, 

and actual policy options in the time that is remaining. 

The United States can start by sending an important message, 

in private and in public, that any transition must be peaceful and 

constitutional or else it will lack legitimacy. It also should send a 

message by speaking out about the importance of protecting legitimate political spaces. The opposition is under constant harassment, 

and it is crucial the United States work with regional partners and 

European allies to protect spaces for civil and political mobilization. 

Moving along to actual planning options. To address the immediate effects of the crisis, the United States should consider options 

for delivering humanitarian assistance to support the health sector. 

This needs to be done through secure multilateral or third-party 

channels. President Maduro’s request for technical medical assistance from the United Nations is not credible. We need evidence of 

deeds that clearly demonstrate the government’s willingness to accept relief via nonpoliticized channels of distribution. 

The United States can consider three areas of policy action in the 

following order. First, I think we need to redouble efforts to apply 

the Inter-American Democratic Charter, supporting Secretary General Almagro’s efforts. And I think it is important that we work 

with regional governments in the region to bring along those who 

thus far are not convinced that the application is justified. 

At the same time, we need to make clear the cost of nonaction 

regarding applying the Inter-American Democratic Charter. Not 

pressing to hold Venezuela to account would set a very bad precedent. In fact, it would send a dangerous message, that those who 

implement the model of authoritarian government may avoid being 

held accountable for their actions. 

I think that the Trump administration should strongly consider 

policy continuity with regard to the Caribbean Energy Security Initiative previously led by Vice President Biden. I think that effort 

is crucial to addressing the structural problem of dependence on 

subsidized Venezuelan oil. 

Now, moving along to the issue of sanctions. I think it is important to recognize that to maximize targeted impact, sanctions need 

to be seen as a tool, as part of a policy. Their effectiveness ultimately depends on the ability to advance a policy. 

42

In this respect, two questions need to be asked in the context of 

considering action: Does the measure achieve high targeted impact 

at a low multilateral cost? And do they raise the costs of the status 

quo for the government without disproportionately raising exit 

costs for government leaders. 

And I will conclude with one policy option that is new in terms 

of the policy toolbox out there. In 2016, the Global Magnitsky law 

came into being as a result of the Defense Authorization Act. My 

understanding is that it still needs implementing regulations, but 

the statutory language seems to be pretty clear based on its prototype. And the innovation with regards to this piece of legislation 

is that it would allow the United States Government to sanction 

human rights abusers without also invoking the International 

Emergency Economic Powers Act, and that is the act that requires 

the United States Government to declare the situation in a country 

an unusual and extraordinary national security threat to the 

United States. 

So summing up, if utilized, the Global Magnitsky Act might create greater clarity about the intention of U.S. sanctions. 

Thank you very much. 

[The prepared statement of Mr. McCarthy follows:]

43


24831d-1.eps

Prepared Statement 

Dr. Michael McCarthy' 

Research Fellow 

Center for Latin American and Latino Studies 

American University 

1HnlC~MJJ1@m:r~ti~~IDl,~d!JHouse Committee on Foreign Affairs 

Subcommittee on the Western Hemisphere 

Hearing on "Venezuela's Tragic Meltdown" 

1 ~ Session, 1 I 5'" U.S. Congress 

2172 Rayburn House Office Building 

March 28, 2017 

Chairman Duncan, Ranking Member Sires, Members of the Committee: Thank for you 

the invitation to testify today. 

Let me begin by commending the committee. You have long appreciated the importance 

of the Venezuelan situation and have duly raised awareness about the potential negative impacts 

of the Venezuela crisis on the United States, the hemisphere, and global governance. 

lt is an honor to join the committee in this ongoing process of considering policy options 

and discussing potential solutions. I look forward to your advice and questions. 

Between Crisis and Collapse 

Mr. Chairman, Venezuela's downward spiral has left the country poised between crisis 

and collapse. As you know, over the last three years, the economy has fallen into a depression 

marked by severe shortages and hyperintlation; social protest frequently erupted into episodes of 

violent instability; and the government dismantled what remained of one of Latin America's 

oldest democracies, yielding an authoritarian regime. 

President Nicolas Maduro is hunkered down. He has held on through military-tolerated 

power grabs. His actions amount to a Presidential self-coup. 

This has worsened the political crisis. ln 2016, Maduro illegally blocked the opposition's 

Constitutional push for a Recall Referendum. Then, after Vatican- and Union of South American 

Nations (UNASUR)-sponsored talks between the Maduro Government and the opposition's 

Mesa de !a Unidad (The Democratic Roundtable) coalition broke down, the country's human 

rights crisis escalated. Among other illegal detentions, the govermnent arbitrarily jailed an 

elected member of Congress. As the rule of law further collapsed, the number of political 

1 Adjtmct Professor. Elliott School oflntemational Affairs, George Washington University: Founder and Editor. 

Caracas \Vire: Consullant, Latin America Progrant \Voodrmv \Vilson Center for Scholars. 

1 
44


24831d-2.eps

prisoners rose to well over one hundred2 

2017 projects as another year of full-blown crisis. The population is restive and it is 

suffering amid an emergent humanitarian crisis. Great uncertainty persists about whether 

postponed gubernatorial elections postponed will take place this year. Tfthere are no elections in 

2017, then the popular response would likely be contentious protests, perhaps including street 

clashes. 

The Crisis Inflection Point 

The country's socio-economic descent is the direct result of a failed governance model. 

That model created the conditions for wastefulness, rampant corruption, and the collapse of the 

rule of law. 

Between 1999 and 2015 the Venezuelan government wasted an oil boom. Over this time 

period, the government reported $893 billion in petroleum export revenues. Just over half of this 

total- $450 billion-was earned during the second term of Hugo Chavez, 2007-2012. During 

Chavez's rule, the conditions for today's crisis emerged. The government ignored fiscal 

discipline, failed to save oil revenues, and expropriated productive businesses as part of a 

broader effort to undermine the private sector. When global oil prices collapsed fifty percent in 

2015 this shock uncovered the economy's vulnerabilities. Amid a further twenty percent decline 

in oil prices in 2016, Venezuela's year-on-year oil production fell eleven percent This equaled a 

loss of over two hundred thousand barrels a day. 

Instead of making economic reforms that might have mitigated the crisis, the Maduro 

government looked for scapegoats. Madura accused the United States, the local private sector, 

and Colombian authorities of waging economic war against the government As a default 

measure implemented to help the government pay its foreign debt, the government slashed 

imports. State imports-which are the main source for food, basic goods, and medicinedeclined from $57 Billion in 2012 to $17.6 Billion in 20163 

In 2016, poverty reached eighty percent, and one out of every five Venezuelans reported 

consuming one meal a day. 4 In the health sector, conditions at hospitals deteriorated steeply. In 

2016, seventy six percent of hospitals reported serious scarcities of medicines and eighty one 

percent faced shortages of medical and surgical supplies 5 Infant and maternal mortality, 

malnutrition, and tropical diseases all grew to their highest levels in decades." 

In this context, popular support for the government has dramatically declined. According 

2 Venezuelan human rights NGO Foro Penal regularly updates data regarding the number of political prisoners. See 

Foro Penal: h:rtm~fQIQll<,m!..tl cQrrlfnresos:QQJilicosi~ubhcJ. 

'Michael M. McCarthy. "YcncLucla's Manmade Disaster:· Current Historv February 2017. 

'

1 Venebar6metro, Feblllllry, 2017: Encuesta nacionnl de condiciones de vida Venezuela, 2016, 

"Encuesta nacional de hospitales." 

httjr//1vt"\"'Y. oy.;.alud. onr/pnb 1 i cncioncs/sn h ld/cncucst:;J-nadonn 1-dc-hnspl tnlcs-20 l 0/ 

(J Ibid: Batbara Fmser and Hildegrdd \Viller, "Venezuela: aid needed to ease the health crisis_·· T11e Lancet Volume 

388. No. 10048. September 3. 2016. pp. 947-949. 

2 
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24831d-3.eps

to a February 2017 Venehar6metro poll, eighty-five percent of the population considers the 

country's situation negative. Nearly seventy percent would like Madura to leave power 

immediately. 

The chavista political movement has suffered the consequences of remaining loyal to a 

failed governance model. Chavismo has lost its luster, its links to state conuption are evident, 

and its leaders are unpopular. However, it would be premature to characterize the movement as 

defunct. According to a Febmary 2017 Venebar6metro poll, thirty percent of Venezuelans selfidentify as chavistas. Twenty four percent self-identify as members ofchavismo's political party, 

the Partido Socialista Unida de Venezuela (PSUV) 7 

With chavismo in decline, the opposition has gained the upper hand in the polls. Its 

leadership is disjointed. But, following on its landslide victory in the December 2015 National 

Assembly elections, the anti-government coalition has made significant gains. For example, 

according to multiple polls, the opposition would \Vin any national election held in Venezuela 

this year. 8 Its constitutional proposal to recall President Madura mobilized millions before the 

government illegally canceled the petitioning process. 

At the level of the popular mood, the population is still mourning the loss of the Recall 

Referendum option. Speaking broadly, the emotional state of the population seems to swing back 

and forth between growing fed-up and becoming deeply fmstrated In the first quarter of2017, 

the country has not seemed to be as much of a powder keg as it was this time last year. However, 

the possibility of collapse into civil strife still exists. 

Regional and Global Dimensions of Venezuela's Crisis 

For the hemisphere, the country's current trajectory represents a fundamental threat to its 

economic, social, and political stability. 

Without delay, the hemispheric community must address two challenges. 

First, ±rom a political and moral standpoint, the hemisphere must speak out about 

Madura's Presidential self-coup. Madura's actions demand a response at the Organization of 

American States (OAS), the premier diplomatic fomm in the Americas. The organization's 

magna carla for democracy in the Americas, the Inter-American Democratic Charter (IADC), 

should be applied to hold the Maduro Government to account. 9 

Second, ±rom a security and economic standpoint, the hemisphere must prevent a collapse 

Venebar6metro, Febmarv, 2017. 

x Alcssando di Stasio. "Et~ VcncLucla no habni clcccioncs micntras la 

Febmarv I 0, 20 17. bin;d~~;:;;;:;~;;_~rtk;;L;;d;:r;L;;;;;;;~~~~~;;;;;;;J;;~~~~~~Wli: lfljJp_Q.';is;ion-M~-t.&L:lJIJJ:-

9 !vtichael M. McCarthy. "Tile Venezuela Crisis and La lin America ·s Fulure: Toward a Robust Hemispheric Agenda 

on Democratic Stability,'' Woodrow Vlilson Center Latin America ?vfarch 22, 2017, 

3 
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24831d-4.eps

into civil strife. On this front, ominous signs are already visible. Tn 2016, the Venezuela crisis 

began to generate instability throughout the region. 

In a collapse scenario, neighbor Colombia would experience the most severe direct 

repercussions. This is of great concern to US interests in South America. While Colombia has 

made important strides in strengthening state institutions and expanding sovereignty throughout 

the countryside, it is still in a very tl-a.gile place. Confirmation that coca cultivation spiked to 

188,000 hectares -a level unseen in two decades -is very alarming. 10 As Colombia begins to 

implement the peace accord signed with the Fuer::as Remlucionarias de Colombia (F ARC), it 

will need substantial assistance to prevent backsliding. 

Colombia and Venezuela are sibling nations. They have a recent political history of 

rivalry and disagreement. But strong cultural ties also link the two countries. There is a sizable 

Colombian-Venezuelan population and also a history compassionate efforts to integrate migrants 

from the other country into national society. Civil society groups estimate that 1.2 million 

Venezuelans entered Colombia in the last three years. An estimated 350,000 remained in 

Colombia. 11 

In 2016, Venezuelans submitted the most asylum requests of any nationality in three 

countries: The United States (18, 155), Brazil (2,238) and Spain (3,960). 12 Tn Central America, 

Costa Rica and Panama have experienced significantly increased levels of migration from 

Venezuela while Caribbean countries continue to report higher numbers. 13 

In Europe, governments in Italy, Portugal, and Spain are already casting a watchful eye 

over events. There are between 800,000 and 1.000,000 Venezuelans \Vith European Union (EU) 

passports. The overwhelming majority ofEU passport holders are from these three countries. 

These countries are already overwhelmed with immigrants from Ati:ica and the Middle East and 

recent inflows of refugees. At this time, they are especially ill- equipped to absorb a mass inHow 

of migrants tram Venezuela. 

Globally, a collapse in Venezuela would likely produce three sets of disruptive effects: 

financial panic amid an increased chance of debt defaults, oil market volatility from the loss of 

Venezuelan oil exports, and a deepening of already complex security challenges regarding 

transnational crime. 

10 TilC Associated Press. "Colombia ·s coca cultivation soars to highest level in hvo decades. says us;· !viarch 1-t-. 

2017. hnps:/.'\VJ;'>-IY.thcgw::rdJan.com/,~,-orJd/2(! I 7/mnr/ t-ticolomhia-coca-c:ocninc-lt~-dmg,;;;. 

11 Jm·ierMolina. ··cada vez es mayorla migrdci6n de venezolanos a Colombia.·· Febmary 5. 2017. 

b1.112J~~.ms.:1nn.i.~,_com.crd;gJ.Q.D1bi3~].da-v.::;l-C_1:l!illi.Qr-l<J-l!li.gnlcion.:4£.:l£JlQ_Qlano;;;-g.J1JJl1J 

12 Refugee Freedom Progmm. ··Presentaci6n en aucliencia de la CIDH: La crisis de los refugiados venezolanos.'' 

March22. 2017. 13 There arc two important details to underscore about the ovcrnll nature of out migration from Vcnc;:ucla. One. both 

Venezuelans of middle-income and lmver-income backgrounds have left in search of ne\v begirulings. T;.vo, beyond 

economic stress. many leave out of fear of political persecution. This includes population groups not often captured 

in the media spollight: segments ofihe urban poor. vv lrich lmve faced increased repression from Ute Govcmment's 

highly mi1itari7ed police units. and whistleblmvers. who must take great care to leave quietly. 

4 
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24831d-5.eps

Tn financial centers, a collapse would significantly heighten concern about a debt default. 

With Chinese and Russian state enterprises extending critical loans to Venezuela, both these 

governments have financial leverage. We do not know the fl.! II details of their bilateral financial 

arrangements. But it seems plausible to assume that Chinese and Russian government-linked 

companies could make claims on Venezuela's oil assers in the context of a default. Such claims 

could also include U.S.-based Citgo. The Madura government recently mortgaged 49.9 percent 

of the wholly Venezuelan-owned refining company to Russia's Rosneft oil company, in 

exchange for a loan valued between $1.5 and $1.9 Billion. 14 An investigation by the Committee 

on Foreign Investment in the United States (CIFIUIS) into this arrangement is of vital 

importance for determining its potential impact on U.S.-Russia relations. 

Commercially, a collapse would roil international oil markets and create challenges tor 

importers ofVenezuela's oil. A disruption of Venezuelan oil exports to the United States would 

have a substantial commercial impact, in particular along U.S. Gulf Coast. But, there would be 

no broader national security impact. From 2000 to 2016, Venezuelan oil exports to the United 

States declined roughly tifty percent-1.54 million barrels a day to 796 thousand barrels a day, 

according to the United States Energy Information Agency. 15 Venezuelan oil now makes up 9 

percent of total US. imports. 

Caribbean and Central American beneficiaries ofVenezuela's Petrocaribe policy (2005-

Current) stand to lose the most. In the context of suspended oil sales to Petrocaribe beneficiaries, 

one could expect heightened economic instability in these countries. 16 

For global security, a collapse would provide an important opportunity window for the 

numerous criminal actors operating in-country. Narcotrafficking interests have penetrated the 

highest levels of the government and military, police corruption severely undermines the 

capacity to tight organized crime and reduce the astonishing murder rate of 70 per 100,000, 17 and 

security forces are seriously hampered in their eflort to safeguard borders because informal 

economic matias exercise de fiu:to control. 18 In a situation of civil strife, the various criminal 

actors would likely expand their influences over illicit economies and state institutions. 

International Engagement: Messages, Plans, and Policy Options 

The Venezuelan government is directly responsible tor this manmade disaster, and it will 

be up to Venezuelans to address the toughest problems. But the international community cannot 

remain idle. The crisis is already regional in its effects and sustainable reconstruction will require 

coordinated international assistance. 

14 Latin American Herald Tribune, ··venezuela· s PDVSA Mortgages U.S. Refinery CIT GO to Russia's Rosneft," 

December 2016, llih1.lil~:n'w l.ahts:9ll-0JlttGlc__,_illi.l2~Artlcldd=2-l)1~CG..b~C:Jtcgon W..=_U2717 1

' United States Energy lnfonrmtion Agency, "Monthly Imports Report,'" 

hnps:/1-..,qy,-~,-.eia.go-v/petroktuniimnorts/compJll'i !ei-el/ 1

" David L. Goldwyn and Cory R. Gill. "The Warring ofPetrocaribe'' Central American and Caribbean Energy in 

Transitimt" Atlantic Council. 2016. 1

' Dorothv Kronick, "Hm,- to Count our Dead." Julv I, 2016 l:ill.;;l£ifnillc,Ql.!:fr;:;J2Ql!llll!£1.\::Uilll!a!lli{ll:'&Lil:i'w::: 

5 
48


24831d-6.eps

For the United States, facilitating reconstruction can start with formulating a full-fledged 

policy and strategy for democratic stability in Venezuela. The policy should be rolled out in 

consultation with Latin American and European allies so that plans can be implemented in a 

regionally coordinated fashion. 

Fortunately, there is a strong foundation from which to begin. The Trump administration 

can build on the bipartisan Congressional consensus about the significance of Venezuela's crisis, 

and reaffirm a key pledge. In 2015, the United States pledged to "stand by the citizens of 

countries where the full exercise of democracy is at risk, such as V cnezucla'' and "work with all 

governments that are interested in cooperating with us in practical ways to reinforce the 

principles enumerated in the Inter-American Democratic Charter (IADC)." 19 This is a crucial 

message to reiterate in light of Secretary General Luis Almagro's renewed etl'orts at the OAS to 

apply the Charter. 

Policy Messages 

The United States can send four key messages about the Venezuela crisis that, each at the 

appropriate time and venue. 

Underline Support for Peaceful Constitutional Change 

First, the United States needs to make clear, in public and in private, that any 

transition must be peaceful and constitutional or else it will lack legitimacy. The Bush 

administration lent tacit support for the April 2002 coup against Hugo Chavez. That 

decision was counter-productive. It hurt the U.S. reputation in the region. The 

Presidential recall could be reactivated, and early Presidential elections could be held 

as well, though these are unlike! y. 

Leverage Multilateral Support to Frame the Crisis as Regional and Increase Pressure 

Second, in its conversations with regional partners, the United States should frame the 

Venezuelan crisis as already posing major instability problems for Latin America, and 

thus, as representing the largest obstacle to hemispheric progress. The recent March 

23 declaration on Venezuela trom fourteen hemispheric governments is a positive 

start. The Trump administration should remain open to diplomatic initiatives that 

emerge ±rom Latin America and continue raising the Venezuela crisis in Presidentiallevel conversations. 

Spealc Out to Protect Legitimate Political Spaces 

Third, with the opposition under constant harassment, it is crucial the United States 

work with regional partners and European allies to speak out on behalf of protecting 

arenas for civil and political mobilization. These spaces must be protected to provide 

for the possibility of a breakthrough solution. 

After Judicial Refonn is Underway Move Transitional Justice Front and Center 

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Fourth, in 2016, the Venezuelan Congress passed an Amnesty Law, though the 

Supreme Court ruled the legislation unconstitutional. For a brief moment, the 

Amnesty Law placed the crucial issue of transitional justice at the top of the agenda. 

To increase the chances for sustainable change, Venezuela needs to have continued 

discussions about what peace building entails. Once judicial reforms begin to reduce 

impunity levels and help rebuild public support for the rule of law, the United States 

should consider sending a message that it would support transitional justice processes 

in the event that Venezuelans create them. 

Planning and Assisting with Crisis Alleviation 

hnmediately, the United States can undertake two contingency planning steps. 

Explore Humanitarian Assistance Options 

To address the immediate effects of the crisis, the United States should consider 

options for delivering humanitarian assistance for the health sector. This can be done 

through secure multilateral or independent channels that third party groups monitor. 

The United Nations (UN) and multilateral affiliates are one logical option. President 

Madura recently request for technical assistance from the United Nations regarding 

the country's medical shortages. This request is not yet credible. We need evidence of 

deeds that clearly demonstrate the government's willingness to accept relief via nonpoliticized channels of distribution2 ° Food assistance is also needed, though the 

military's control over the distribution system presents enormous challenges for 

ensuring efficient delivery. In the meantime, the U.S. should reach out to the UN 

Food and Agricultural Organization (F AO) to present leadership there with an 

alternative, more realistic picture of ground level conditions than the one being 

conveyed by the Madura government. Likewise, the United States should continue 

contingency planning efforts for two possibilities-debt default and a migration 

crisis-and expand these to include coordination with Caribbean nations. 

Prepare for Reconstruction 

To start work on long-term reconstruction efforts, the United States should enlist 

government and multilateral agencies to begin work in three areas: I) planning for 

economic restructuring; 2) transferring knowledge and lessons about successful cases 

of judicial reform, including those that involve internationally supported efforts to 

fight impunity, such as the UN-supported CICIG in Guatemala and the OASsupported MACCIH in Honduras, and 3) developing a new counter-drug policy for 

the Andean region that would establish the strategic objective of fostering 

cooperation between Colombia and Venezuela in the fight against narcotrafficking. 

Sequenced Policy Options 

The United States can consider three areas of policy action in the following order. 

as medicine shortages grow severe." CNN, March 25, 2017. 

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1) Marshal a Multilateral Coalition to Defend Democracy and Increase Pressure 

Redouble EtTorts to Apply the Inter-American Democratic Charter (IADC) 

In the context of Secretary General Almagro's renewed call for applying the InterAmerican Democratic Charter (TADC), the United States should work closely with 

regional allies to ensure the Charter is at the heart of multilateral efforts to protect and 

promote democracy in Venezuela. The United States might consider working 

strategically with moderate regional governments that favor applying the Charter. 

This may enhance efforts to reach out to those that have been less open to the idea of 

applying the I ADC regarding Venezuela's violation of democratic principle and 

practice. Pursuing the OAS route is not certain to result in attaining the two-thirds 

vote support to apply the Charter. But, calling for application may have other positive 

etTects, such as strengthening the regional consensus that the Madura Govermnent is 

well offthe democratic path. This in turn may have broader value for developing new 

initiatives based on a shared diagnosis of the government's behavior. 

Make Clear the Costs ofNon-Action Regarding the IADC 

Equally important is the fact that the costs of non-action are high. Not pressing to 

hold Venezuela to account via the IADC would set a very bad precedent It would 

send a dangerous message: those who implement a model of authoritarian governance 

may avoid being held accountable for their actions. 

Strengthen Relations with the Caribbean and Central America 

To strengthen its leadership role in the Caribbean and Central America, the Trump 

Administration should take a key step in the name of policy continuity. The 

administration should strongly consider strengthening the Caribbean Energy Security 

Initiative previously led by Vice President Biden. U.S. efforts to promote alternative 

energy sources in the Caribbean and Central America remain crucial for developing 

sustainable solutions to the problem of dependence on subsidized Venezuelan oiL 

2) Link Strategic Diplomacy with Sanctions 

To Maximize Targeted Impact Use the Sanction Tool as Part of a Policy 

Targeted sanctions for human rights abuses and public cormption are an important 

tool in the policy toolbox. But their effectiveness ultimately depends on their ability 

to advance a policy. Two questions need to be asked in the course of considering 

sanctions: 1) Does the measure achieve high targeted impact at a low multilateral 

cost? 2) Do they raise the costs of the slain~ quo for the government without 

disproportionately raising exit costs for key government leaders? Addressing these 

questions will ensure that the administration carefully weighs the strategic value of 

imposing sanctions on the Maduro government It is important to hold Venezuelan 

authorities to account for criminal actions, human rights violations, and undermining 

the rule oflaw. At the same time, the ultimate goal should be moving beyond 

condemnation to articulating a policy with regional support. 

Clarify Regulations for Implementation of the Global Magnitsky Law 

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If further sanctions on Venezuelan authorities are deemed necessary, the United 

States might consider use of the Global Magnitsky law. The 2016-passed law still 

needs implementing regulations, though the statutory lan1,;uage seems pretty clear 

based on the precedent of the prototype-the l'vlagnitsky Act created specifically for 

addressing human rights violations in Russia. The Global Magnitsky Act is in part 

designed to allow the US. government to sanction human rights abusers without 

having to invoke the International Emergency Economic Powers Act. This is 

important since this Act possesses the clause that requires an administration to 

determine that the "situation" in the country in question represents an "unusual and 

extraordinary national security threat" to the United States. If utilized, the Global 

Magnitsky law might create greater clarity about the intentions of US sanctions. 

This may open the door to multilateral coordination of firture sanction actions. 

Avoid Economic or Sector-wide Sanctions 

The possibility of placing sanctions on the state-owned oil industry in Venezuela 

constitutes one of the most aggressive measures available for attempting to place 

pressure on the Madura government. In 2016, Venezuela exported 796,000 barrels of 

oil to the United States, crucial cash t1ow for the Madura government. Venezuela also 

imported an estimated 50,000 barrels a day from U.S. sources in 2016. Sanctioning 

the oil industry would set a major new precedent. Following the precedent set with 

regards to sanctions on Russian officials for Russian government actions in Ukraine, 

targeted sanction action against the Venezuelan oil sector would seem to be justified 

only if the Venezuelan government undertook direct foreign military actions in the 

territory of aU S ally. 

Continue International Law Enforcement Regarding Narcotrafficking 

Venezuela's crisis includes the growing int1uence of narcotraffick:ing at the highest 

levels of the government. International law enforcement e±Iorts- which date to 2008 

and most recently involved the February 13, 2017 Special Designation of VicePresident Tareck El-Aissami- regarding narcotraffick:ing need to continue. The 

transnational crime of narcotrafficking is a national security issue. But, it does not 

threaten vital U.S. national security interests. 

3) Double Down on International Mediation 

Rcframe the Dialogue's Stakes and Value 

The United States can double down on international mediation by reframing the 

stakes of dialogue talks and the overall value of the broader dialogue process. Beyond 

helping Venezuela avoid civil strife, any etTorts to promote talks needs to be premised 

on ending the authoritarian status quo. In this respect, change to the sla/us quo means 

guaranteeing the National Assembly its constitutional authorities, liberating political 

prisoners, and setting dates for the postponed Governor's elections and the 2018-

scheduled Presidential. 

Recompose the Mediation Team 

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An immediate action is to explore options for recomposing the team of mediators that 

are working \Vith the Vatican to support dialogue efforts The inclusion of 

states persons without electoral politics backgrounds would be highly useful for giving 

the team of mediators added authority and increased legitimacy within Venezuela. 

A recomposed team of mediators would not mean the exclusion oflJNASUR. A 

continued role for UNASUR would help the Madura government, and the South 

American community, feel as though their voices are included. 

Costs ofDisengagement 

The United States, the governments of the Western Hemisphere, and the international 

community can take these direct steps to help prevent a collapse and move Venezuela toward 

democratic stability. But, expectations need to be kept in check. The tools of diplomacy are 

highly imperfect. 

The ability of the hemisphere, the United States, and the European Union to prompt an 

immediate change in the behavior of the Madura government is limited. 

A full picture of the international factors shaping Venezuela's future requires factoring in 

geo-economics. Developments in oil markets and the future ofMaduro' s financial arrangements 

with China and Russia-Venezuela's two largest bilateral creditors-are the key difference 

makers. Eventually, bringing China and Russia into the conversation about Venezuela's future 

will be necessary. 

The strong int1uences that China and Russia exert in Venezuela constitute one of the best 

arguments for expanding engagement. In this respect, proposed cuts to the State Department 

budget seem to be at counter-purposes with our national interests. To increase the priority level 

of the Venezuelan crisis in the hemisphere, and make sustained progress toward reestablishing 

democratic stability in Venezuela, the United States needs to redouble engagement. 

Thank you, I look forward to your questions. 

10 
53

Mr. DUNCAN. Thank you. 

Votes will be called at 3, so we are going to try to get through 

as many questions as members can. 

Dr. Hanke, we know that there is a glut of oil that has kept 

prices down. If there is an increase in the price of a barrel of oil, 

how will that help Venezuela in the short term? 

Mr. HANKE. Well, in the short term PDVSA, the state-owned oil 

company, might actually move from a negative cash flow—they are 

spending more money than they are actually taking in right now. 

So they are running a negative cash flow. And they are exploiting 

their proven reserves at a very slow rate, and the rate is so slow, 

actually, that the reserves are actually worthless. And the reason 

they are doing that is that they haven’t been able to maintain their 

production capacity or expand it. 

So if the price goes up—I think my models show that the oil prices will probably reach $70 a barrel by the end of the year, 

which is quite a bit above where we are now, we are a little bit 

below $50—that would be helpful, but it is just going to be a little 

bit of a Band-Aid on PDVSA, to directly answer your question. It 

will help them. The bleeding will slow down, but they will keep 

bleeding. 

This is the worst run state-owned oil company in the world. I 

have looked at all of these things, and it ranks at the bottom. It 

takes, to get the median reserve exploited and brought to the 

ground, almost 200 years in Venezuela. Exxon, it takes 6.8 years. 

So all these oil companies, the name of the game is, if you have 

resources, you have got to get them above ground and sell them. 

Otherwise, they are not worth very much if you just keep them 

under cover forever and you discount those reserves that you have 

in the cupboard at, like, 10 percent rate of interest. For Exxon, the 

present value of the reserves, the average is 46 percent of the price 

of the wellhead price of oil right now. For Venezuela, PDVSA, it is 

zero. Zero. 

Mr. DUNCAN. The way I look at it, he has got a hungry nation 

to feed, $10 billion in debt or whatnot, and creditors are going to 

want some of that money if the oil prices do jump up. So I am assuming that China and Russia will want some of that. 

Let me shift gears real quick and just ask Mr. Dallen about Russia. Talking about the debt and the amount of money owed to 

Rosneft, in the event of a default, which looks all but definite at 

this juncture, Rosneft and, by operation of the transitive property 

Russia, would own a majority share of a U.S. corporation. I think 

you have touched on that in your comments on that as well. Do you 

think that Rosneft’s investment in CITGO and PDVSA is a calculated part of Moscow’s strategy to gain power in the region? 

Mr. DALLEN. Thank you, Chairman Duncan. And the short answer is yes. Mr. Putin and Mr. Sechin both wrote their graduate 

theses on using oil as a geopolitical tool. And some of the decisions 

that Rosneft has made have not been economically rewarding, but 

they have given them access and control of important markets all 

over the world, including our allies in Germany, making them the 

third-largest refiner now in Germany. 

We actually don’t know how much Russia owns of Rosneft—how 

much Rosneft owns of CITGO. We know that they have this lien, 

54

but we don’t know what triggers it. We don’t have access to those 

documents. When they filed the UCC lien, they only had two pages 

of the contract. I have excerpted one of them in my—part of them 

in my remarks. We actually don’t know what the trigger is. It could 

already be triggered. We have no idea. 

In addition, PDVSA also mortgaged the other half of CITGO by collateralizing some debt when they did a renegotiation of $2.8 billion swapped into a new bond, because they couldn’t pay the shortterm bond. And so they collateralized that with the other 50 percent of CITGO. 

So it is very much possible, and we don’t have access to this. The 

courts are trying to get it. But a CFIUS review would certainly be 

helpful. Russia may own a majority of those bonds, making them 

the majority shareholder and owner of CITGO in the United 

States. 

Mr. DUNCAN. Yeah. 

Just shifting gears to a completely different topic, Mr. McCarthy, 

you mentioned the need for humanitarian aid, multinational humanitarian aid. I don’t disagree with you there, when I see starving people eating out of dumpsters and hear the stories that we 

have heard. But we also hear that a lot of that foodstuffs are 

prioritized. You see the lines of people waiting, but then the 

apparatchik ends up getting first choice and the bulk of it. 

So what kind of assurances do we have that any sort of multinational humanitarian aid would get to where the real problem is, 

where the rubber meets the road, in a closed Maduro government? 

Mr. MCCARTHY. Thank you, Chairman. 

I agree with you that making progress on delivery of food would 

be extremely complicated. In fact, that is why I suggested that it 

would be perhaps more intelligent to use——

Mr. DUNCAN. Let me just ask you this first: Would the Maduro 

government even be open to a multinational humanitarian aid effort? 

Mr. MCCARTHY. The answer to that, I think, is no. But I think 

that there is the possibility of some type of work on a technical 

front with regards to the health sector. And I don’t want to take 

Maduro’s word seriously, because we need to see real deeds that 

show genuine interest in trying to obtain some relief for the country. 

But I think if there is one area where it makes sense to try and 

press for alleviating the crisis, it is in the health sector, and that 

is because there are more opportunities for international engagement that would take place with multilateral institutions, and they 

would also take place outside channels directly controlled by the 

military. So in the case of food distribution, the Armed Forces control the process from the imports to the delivery; whereas, in the 

health sector, the role of the military is not as strong. 

Mr. DUNCAN. Thank you for that. 

I am going to turn to the ranking member. 

Mr. SIRES. Can you please tell me—we have been hearing about 

Venezuela being on the verge of collapse for the last few years. 

What further can go wrong until it collapses? I mean, they have 

no food, they have no health, they have no government. What else 

can happen that it will collapse? 

55

Mr. HANKE. Let me address that first, if I may. This can go on 

for a long time. 

Mr. SIRES. It has been going on for a long time. 

Mr. HANKE. Actually, it has been going on for a long time. Even 

when I was President Caldera’s adviser, things were deteriorating 

massively, and that is why he brought me in to see if something 

could be done. It turned out he didn’t have the political power at 

the time to make some of the changes that would have probably 

corrected the situation. 

But, at any rate, you have to think of the following. If you go to 

Yugoslavia, for example, Yugoslavia in January 1994 had an inflation rate in 1 month—this is 1 month—of 313 million percent. So 

Venezuela is peanuts compared to what was going on in Yugoslavia. It took a Balkan war, bombing in Belgrade, et cetera, et 

cetera, et cetera, to finally get Milosevic out in 1999. That is a long 

time. 

Now, if you want even a worse case, of course, the inflation rate 

in November 2008 in Zimbabwe was going so fast that the prices 

were doubling every 24 hours. And we still have Mugabe. Mugabe 

has been there over 30 years. Nothing happened. The place spontaneously——

Mr. SIRES. What has collapsed in Venezuela? That is what I am 

looking for. 

Mr. HANKE. Well, I am telling you that if you think it is going 

to collapse tomorrow, you might have to think a couple of more 

times, because there are plenty of cases where you have had——

Mr. SIRES. Look, I don’t think—I want to interrupt, because we 

have to go and vote. I mean, over the years—I have been here now 

10 years. For 10 years, I have been hearing about Venezuela. Okay, 

maybe different grades of how bad it is. 

But I just think this is a typical playbook of communists and socialists to lead into a one-man rule. I mean, they get people involved in trying to survive the 24 hours a day that they have no 

time to think. And I think this is exactly what is happening in 

Venezuela. And then you have all these other external forces basically managing Venezuela and their moves. 

Mr. HANKE. You hit the nail on the head. I completely agree with 

you. 

Mr. SCHAMIS. If I may add, I don’t know what the definition of 

collapse would be that we are discussing here, but to me the next 

step and the real collapse is a refugee crisis, which we haven’t seen 

yet. 

Mr. SIRES. Well, I spoke to the President of Costa Rica the other 

day. He is telling me——

Mr. SCHAMIS. The President of Costa Rica——

Mr. SIRES [continuing]. He is starting to see a number of Venezuelans. 

Mr. SCHAMIS. Exactly, and all countries around Venezuela. A refugee crisis in Venezuela, we are talking about a 30 million people 

country, it is not a small island in the Caribbean, countries which 

have had a refugee crisis, a number of them. This is a country on 

the continent and a 30 million people country with borders with in 

turn large countries, Colombia——

56

Mr. SIRES. I am going to let somebody else. But, Mr. McCarthy, 

can you just be short? 

Mr. MCCARTHY. Yes, I will be short. I think collapse entails civil 

strife. I think at this point it is relative. By most standards, Venezuela has collapsed. At this point, it is about preventing open civil 

strife in the country. 

Mr. SIRES. Thank you. 

Mr. DUNCAN. All right. Just trying to stay in order here. Looks 

like Mr. Rooney. 

Mr. ROONEY. Thank you. 

There are a lot of questions I would like to ask. First of all, 

maybe Professor Schamis or Russell. 

Given the fact that all the countries of the region except Salvador, Nicaragua, Ecuador, and Bolivia recently denounced Venezuela, which was a positive move, and talked about, even raised 

the specter of, as a last resort, kicking them out of the OAS. If the 

OAS is incapable of moving them forward, what do you think of 

odds of that happening are? 

Mr. SCHAMIS. The odds are higher than they were in June, the 

last meeting of the Permanent Council to discuss Venezuela, because of a variety of circumstances. First and foremost, Venezuela 

has gotten worse. 

Secondly, there is a new administration in the U.S. that has 

begun to voice concern about Venezuela. It is reported in the newspapers that President Trump discusses Venezuela whenever he is 

on the phone with Latin American Presidents, which hadn’t happened before, we must recognize. 

Lastly, there is a change of cycle in the politics of Latin America. 

Center government, center-right governments you may say, have 

been winning office and are expressing more concern with Venezuela, who, in turn, are less dependent on the Venezuelan old 

tricks. With the oil over $130 per barrel, that drove Hugo Chavez’s 

foreign policy and later Maduro’s foreign policy. Oil is not $130 per 

barrel, and those new governments are less dependent. They have 

less ties, strings attached to the Venezuelan regime. 

So the odds are better than they were before, and I am hopeful 

the OAS will increase its capacity for collective action regarding 

Venezuela. 

Mr. DUNCAN. Got one more? 

Mr. ROONEY. We need to get everybody, Chairman, because we 

don’t have much time left. I would yield to someone else. 

Mr. DUNCAN. Mrs. Love. 

Mrs. LOVE. Thank you. I wish we could spend so much more time 

on Venezuela. But I guess my question would be, and anyone who 

can offer the best opinion that they can in terms of correcting 

human rights abuses and releasing political prisoners, what kind 

of pressures from the U.S. do you think would be most likely to 

help? 

I know we are talking about sanctions. We talked about some of 

these other tools. And at this point I believe we are in a place 

where anything that we do is going to affect the people that are 

there. But their needs are so incredibly dire that unless there are 

some major disruptions, nothing is going to be changed. 

57

So I guess I am asking, what are the tools that we have in our 

arsenal in order to change the environment there, first of all, to release American prisoners, and second of all, to start seeing a little 

bit of change in the government? 

Mr. MCCARTHY. Let me try this. Thank you. It is a very difficult 

question, but it is absolutely urgent, I agree. 

The truth is that if you were trying to establish a link between 

implementation of sanctions and then change in behavior, thus far 

there is not a positive link. But that doesn’t mean that there isn’t 

another effect taking place. So I think, unfortunately, I would counsel patience with regards to the broader human rights situation in 

the country. I think that it is going to take some time before these 

problems can be fully addressed because, unfortunately, the government sees the human rights situation as part of a broader political negotiation. 

Mrs. LOVE. What about the immediate? 

Mr. MCCARTHY. With regards to Mr. Holt, I think that that is 

a private matter, and that has to be dealt with in terms of how the 

family and the U.S. Government are addressing it. 

Mrs. LOVE. Okay. So we have tried quite a bit with the former 

administration, and it hasn’t been moving. We have an American 

citizen who is there on charges. So I guess what I am trying to say 

is that I cannot accept that the United States Government can’t do 

anything. I cannot accept that. In terms of if we can’t squeeze or 

try and do everything we can with Venezuela, what about the other 

countries, some of the ones that we were talking about, that have 

not denounced Venezuela yet? What about their friends and their 

allies, like El Salvador, Nicaragua, Ecuador, and Bolivia? Is there 

a way to actually do that? 

Mr. MCCARTHY. I think that there has been quite a bit of discussion about what strengthening sanctions would entail, and I think 

the truth is that multilateral sanctions tend to be more effective 

than unilateral ones. And I think in that regard the Global 

Magnitsky Act is one option to think about a way to bring other 

countries on board, to see if there could be a statement, not just 

from the United States but from other Latin America countries as 

well, speaking out about the human rights crisis in Venezuela, 

which has to be dealt with in terms of results for this American 

citizen that has unlawfully been jailed. 

Mrs. LOVE. Okay. 

Do you have an opinion on this, Dr. Schamis? 

Mr. SCHAMIS. Yes. Thank you. Briefly, something else the U.S. 

can do and has happened yesterday or the day before is to enlarge 

the coalition in support of the Inter-American Democratic Charter 

and the possibility of suspension or any other form of approach toward Venezuela, which has already been going on, and it has been 

mentioned. And more members will have more capacity to put pressure on Venezuela. 

Whether that is going to be suspension or any other decision remains to be seen. But the bottom line is produce an election, release political prisoners, and attend the humanitarian crisis in a 

reasonable amount of time. 

Mrs. LOVE. And I would actually say that we need to start looking at the U.N., because here we are. They have a seat at the table. 

58

Yet they do not have elections. They do not have freer treatment. 

They are the worst when it comes to human rights violations. Why 

they have a seat at the table is beyond me. 

So thank you. 

Thank you, Mr. Chairman. 

Mr. DUNCAN. I want to thank Ms. Love for being here, and with 

that kind of passion for the subject, you are welcome back to any 

committee hearing we have any time. So thank you. 

I want to thank the panelists. I apologize, with 4 minutes and 

40 seconds left on the clock over at the Capitol, we are going to 

have to go vote. And with about an hour worth of votes, I am not 

going to ask you to sit here that long and wait for questions. 

Members may have additional questions for you, and if they do, 

we will submit those and ask you to submit answers in writing. 

Pursuant to committee rule 7, the members of the subcommittee 

will be permitted to submit written statements to be included in 

the official hearing record. Without objection, the hearing record 

will remain open for 5 business days to allow those statements, 

questions, extraneous materials for the record, subject to length 

limitations in the rules. 

There being no further business, again I do apologize, but let me 

reiterate, this is not the last hearing we are going to have on this 

subject. Venezuela is important to the United States Congress, and 

it is important to the chairman of the Western Hemisphere Subcommittee. We want to do what we can to keep awareness raised 

for the Nation and the world to the plight of the people in Venezuela. 

And with that, we will stand adjourned. 

[Whereupon, at 3:12 p.m., the subcommittee was adjourned.] 

(59)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE RECORD

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24831n.eps

SUBCOMMITTEE HEARING NOTICE 

COMMITTEE ON FOREIGN AFFAIRS 

US. HOUSE OF REPRESENTATIVES 

WASHINGTON. DC 20515-6128 

Subcommittee on the Western Hemisphere 

Jeff Duncan (R-SC), Chairman 

TO: MEMBERS OF THE COMMITTEE ON FOREIGN AFFAIRS 

You arc respectfully requested to attend an OPEN hearing of the Committee on Foreign Affairs, to be held by 

the Subcommittee on the \\!'estern Hemisphere in Room 2172 of the Rayburn House Ofticc Building (and available live 

on the Committee website at http://w\vw.ForcignAffairs.housc.gov): 

DATE: 

TIME: 

SUBJECT: 

WITNESSES: 

Tuesday. March 28. 2017 

2:00p.m. 

Venezuela's Tragic Meltdown 

Mr. Steve Hanke 

Co-Director 

Institute for Applied Economics. Global Health, and the Stud' of Business Enterprise 

The Johns Hopkins University 

Mr. Russell M. Dallen, Jr 

President and Editor-in-Chief 

Latm Amen can Herald Tnbune 

Hector Schamis, Ph.D. 

Adjunct Professor 

Walsh School of Foreign Service 

Georgetown University 

Michael McCarthy, Ph.D. 

Research FcllmY 

Center for Latin American and Latino Studies 

American University 

By Direction of the Chair"man 
61

Æ


24831m.eps

COMMITTEE ON FOREIGN AFFAIRS 

MINUTES OF SUBCOMMITTEE ON ________ ,,,_e_w_e_st_e•_·"_H._e_m_is._pl_w_·re _______ HEARING 

Day _ __:T::..:'::.::'e:::s::.d::..ay'--_Date._--'M=ar::..:c:.c·h::..:2::..:8cc,.::c2-.:.0cclc_7 __ Room, ___ .::c2col:_72=------

Stal'ting Time 2:00PM F:nding Time 3:12PM 

Recesses [n!a I (_to __ ) (_to __ ) (_to __ ) (_to __ ) (_lo __ )( __ to __ ) 

Presiding Member(s) 

Chairman Jeff Dunwn (SCw0.1) 

Clteck all of tlte following tit at apply: 

Open Session 0 

Executive !£!!>sed) Session 0 

Televised 0 

TITLE OF HEARING: 

Venezuela's Tragic Meltdown 

SUBCOMMITTEE MEMBERS PRESENT: 

Electronically Recordm.ftaped) [Z] 

Stenographic Record I_{_] 

Chairman .Te.fj"Duncan, Ranking Member Albio Sires, Rep. Ron DeSantis, Rep. Ted S. Yoho, Rep. Fmncis 

Rooney, Rep . .Totll[llin Castro, Rep. Norma Torres, Rep. Adriano Espaillat 

NON-SUBCOMMITTEE MEMBERS PRESENT: (Mark with an *if/hey are not members offitll committee.) 

Rep. Mia Love 

HEARING WITNESSES: Same as meeting notice attached? Yes GJ NoD 

(If "no", please lis/ below and Include Iitle, agency, department, or organization.) 

STATEMENTS FOR THE RECORD: (List any statements submitted for the tecord.) 

none 

TIME SCHEDULED TO RECONVENE ___ _ 

or 

TIME ADJOURNED __ 3_:1_2_P_M __ 

Subcommittee Staff Associate