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June 3, 2011 V E N E Z U E L A : U . S . S A N C T I O N S , P D V S A B O A R D S H A K E U P & E L E C T R I C I T Y U P D A T E This monitoring report is intended to provide monthly insight on events in Venezuela and how they might impact the country's government, political and social stability and economic and security environments. Sanctions Against PDVSA The United States officially sanctioned Venezuelan state-owned energy company Petroleos de Venezuela (PDVSA) in May in retaliation for an $800 million deal in which Venezuela agreed to sell gasoline to Iran. It is unclear just how much gasoline was actually delivered, though Venezuela has admitted to some shipments of refined petroleum products. Venezuela has also argued that it did not violate U.N. sanctions on Iran. The U.S. State Department alleges that Venezuela delivered at least two gasoline shipments to Iran worth a total of $50 million between December 2010 and March 2011. The U.S. sanctions ban PDVSA from U.S. government contracts as well as export/import financing, though they are not likely to have any significantly harmful effects on PDVSA, for which U.S. government contracts are not a major goal. The company has access to significant financing options from China and to its own reserves, so any short-term financing needs should be manageable without recourse to U.S. liquidity. Nevertheless, the Venezuelan governments reaction to the sanctions has been vehement. A call for a protest by the United Socialist Party of Venezuela drew thousands to the streets of Caracas on May 29. The decision to go ahead with what are fairly toothless sanctions is an indication that the United States is not yet prepared to threaten the trade relationship between it and Venezuela. Not only do 7 percent of U.S. oil imports come from Venezuela, but also the United States is the source of nearly a quarter of Venezuelas imports. Still, the decision to enact punitive measures after years of mostly neutral policy toward Venezuela represents a significant political shot across the bow of the government of Venezuelan President Hugo Chavez. This change in the U.S. stance is a result of significant pressure in Washington from special interest groups that oppose both the Chavez government and Iran. The relationship between Venezuela and Iran, which includes Venezuela serving as a financing hub for Iran, has prompted a political drive by these Washington groups to get the Obama administration to target Venezuela. With the Republican Party in control of the U.S. House of Representatives, there has been a more sympathetic ear in the legislature since the midterm elections in 2010. U.S. Congresswoman and chairwoman of the House Foreign Affairs Committee Ileana Ros-Lehtinen is a particularly strong advocate of harsh measures on the Chavez regime. However, support for broader punitive measures remains limited in the Senate and the executive branch of the U.S. government. Major disruptions in the relationship in response to the special interest groups remain unlikely, though the information campaign alleging that serious security risks are inherent in the relationship will continue. This campaign includes the December 2010 article in the

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German newspaper Die Walt reporting that Iran plans to place short-range missiles in Venezuela. The report resurfaced again in May, with placement in many newspapers in and out of Venezuela. The sanctions and slightly more aggressive posture from Washington can be expected to worsen bilateral relations, and may complicate business dealings if political tensions are allowed to spill over into the economic realm. However, the Chavez government needs as much trade and investment as it can get, given declining oil production and a strained domestic economy, and Chavez is unlikely to risk any major economic disruption for the sake of retaliation against the United States. It is also worth remembering that PDVSA has significant assets in the United States in the form of the Louisiana Chalmette refinery and the downstream petroleum distribution network Citgo. Any serious disruption in relations could put those assets at risk, which would be a severe blow to PDVSA and the Venezuelan government. PDVSA Board Shakeup Shortly after the announcement of U.S. sanctions, the Venezuelan government announced a reshuffling of the PDVSA board of directors. The newly appointed board members are Vice President of Exploration and Production Eulogio Del Pino; Vice President of Refining, Commerce and Supply Asdrubal Chavez; Executive Director of the West Ricardo Coronado; Executive Director of the East Orlando Chacin; Paraguana Central Refinery General Manager Jesus Luongo; Executive Director of Finance Victor Aular; and Executive Director of Automation, Information and Telecommunication Ower Manrique. Newly appointed external board members are Foreign Minister Nicolas Maduro, Finance Minister Jorge Giordani and Wills Rangel, president of the United Federation of Oil, Gas and Petrochemical Workers. These new board members replace those accused of playing fast and loose with the PDVSA pension fund and of being involved in the mishandling of thousands of pounds of food imports. The pension scandal, according to testimony given in a U.S. District Court in Connecticut in May, involved $500 million that was invested in a Ponzi scheme run by Venezuelan national and occasional government advisor Francisco Illarramendi, who has admitted to running the scheme since 2006 through the investment company Michael Kenwood Group. The court case is the culmination of a U.S. Securities and Exchange Commission investigation into the company, which was first announced in January 2011. Given the timing of the board shakeup, however, it is unlikely that the corruption charges were the real cause. Instead, it appears that the reshuffling was an effort to limit the influence of Oil and Energy Minister Rafael Ramirez. Sources report that Ramirez has been acting increasingly independent of Chavez and that he may have been responsible for some of the increased cooperation between Venezuela and Iran. It is not clear to what degree Ramirez has been able to enhance this relationship, though there are reports that he struck deals with the Iranians on his own. Although oil shipments to Iran are not particularly lucrative, there is money to be made in charging the Iranians high interest rates on finance deals. Replacement PDVSA board members were selected to dismantle Ramirezs support within the government. In particular, the arrival of Finance Minister Jorge Giordani, who is highly loyal to Chavez, as an external director is a signal that Chavez intends to increase his influence and supervision of the organization at the expense of

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Ramirez. By increasing his involvement, Giordani also intends to synchronize the macroeconomic policies of the finance ministry with PDVSAs planning cycles. It is worth noting that there have been no military personnel appointed to the board during this shakeup. Given the opportunities for graft afforded by access to PDVSA coffers, appointments like this are a way that Chavez can reward individuals in the government. Had he appointed top-level generals to the board, it could have been an indication that he felt insecure about the loyalty of the military. Instead, the appointments appear to be targeted at individuals with applicable and relevant skill sets as well as loyalty to Chavez. This suggests that, in addition to balancing Ramirez, the main concern is the operation of the flagging sector. The PDVSA shuffle follows on the heels of a similar shakeup in the state-owned power company Corpolec, and the power play associated with both moves can be expected to play out over the next several months as Chavez seeks to control these key sectors. Electricity Update The electricity crisis in Venezuela will continue into June and beyond. In Caracas, the local power grid is producing about 1,700 megawatts (MW), while demand rests at around 2,000 MW. The government has made a substantial effort to limit major blackouts in Caracas in order to mitigate their political impact. However, occasional electricity shortages can be expected in the capital. This can be a significant issue for people riding the subway, which is vulnerable to outages. The rest of the country is experiencing significant rationing and rolling blackouts. The Planta Centro and Tacoa electric plants are running at full capacity, though there are units at both facilities that are either out of commission or under maintenance. Fortunately for Chavez, water levels at the Guri dam are extremely high, and electricity generation at the hydroelectric plant is contributing in excess of 16,000 MW. Kidnapping Trends On May 31, Venezuelan Vice President Elias Jaua announced that kidnapping cases throughout the country had decreased by 57 percent from Jan. 1 through the end of April compared to the same period the year before. Taken at face value, these numbers would indicate a dramatic drop in kidnappings in Venezuela, though it is important to remember how easy it is to manipulate statistics. With an election just around the corner, the government could be discouraging the reporting of kidnapping cases or only counting certain types of cases, such as those involving high-value targets. In fact, an estimated 70 percent of all kidnapping cases in Venezuela go unreported, and recent reports from the Cuerpo de Investigaciones Cientficas, Penales y Criminlisticas cite a 17 percent increase in kidnapping cases in 2010 compared to 2009. Based on anecdotal reports, we believe kidnapping in Venezuela, especially of the express variety, is becoming more prevalent, along with other types of crime. Indeed, an opposition paper that published the vice presidents May 31 announcement titled it: Ni el no se cree, or Even he doesnt believe it.

On May 17, a three-person kidnapping team was arrested at a sports complex in Caracas in connection with the kidnapping of a young sociologist. The police were notified of the kidnapping by the young mans family, presumably after the kidnappers asked for a ransom so large the family could not pay. Although not many details were reported, security forces rescued the sociologist. The reported leader of

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the group, who authorities said was linked to 18 other kidnapping cases, was an 18-year-old woman.

This is interesting for a number of reasons. For one thing, criminal groups made up of amateurs are more prone to make deadly mistakes than more professional organizations. Such gaffes include asking for a ransom that is far too large (as in this case), which leaves the family with little choice but to involve the authorities. Amateurs are also likely to be less confident and more nervous and volatile during the commission of a crime than professional crews. This dynamic makes it more likely for accidents to occur such as the unintentional discharge of a firearm or a misunderstanding between the hostage and the assailants.

Professional crews understand that it is in their best interest to use minimal violence and take good care of their hostages because what they really want is to be paid. Amateurs, on the other hand, are more likely to lose sight of this goal and use unnecessary violence that can lead to injury or death for the victim. Finally, professional crews are typically more skilled in the art of negotiation, making it easier for all parties to come to an acceptable resolution and transfer the ransom without involving the authorities, thereby increasing the chances the kidnappers will get away with the crime.

The May 17 case also highlights the need to keep an open mind when practicing situational awareness regarding what a criminal might look like. Sometimes biases can overwhelm instincts and training. In this case, the ringleader was an 18-year-old female. Identifying a criminal based only on appearance and not behavior can be a fatal mistake.