The potential for disruption is contained to domestic impacts
Firms should not expect outsized impacts on their operations stemming from the ongoing situation. At the moment, the greatest risk is a reimposition of US sanctions on the Venezuelan oil and gas industry, a potentially debilitating blow to the country’s economy. Firms operating in Guyana should monitor communications from US Department of State and Defense officials, although major disruptions to operations remain unlikely. Overall, Guyana’s influence over global oil markets is limited, so any ripple effects on oil prices would be insubstantial.
Tensions have ramped up in the Guyana-Essequibo region after several announcements made by Venezuelan President Nicolas Maduro elevated the stakes in the century-long disputed territory. The Venezuelan government has launched a renewed campaign to advance its claims of sovereignty over Essequibo, which accounts for 75% of Guyana’s territory. The decision comes after Guyana granted exploring rights in offshore gas blocks to ExxonMobil, in defiance to Venezuelan claims. Although both sides are currently calling for a peaceful resolution through negotiations, the risk of military action continues to rise, as the US Southern Command announced military exercises in the region on December 7, while Brazil moved a regiment closer to its own border. Even though the prospects of a military conflict remain slim, the escalating rhetoric coming from the Maduro administration remains a factor to monitor in the upcoming months as Venezuela risks the reimposition of sanctions.
Following a December 3 referendum to incorporate the Essequibo region as a new state, while granting citizenship to its inhabitants, Venezuelan authorities ramped up pressure on their Guyanese counterparts. Maduro announced a three-month window for foreign companies with presence in the region to cease operations, but it was unclear what the consequences of non-compliance could look like. The region has acquired a renewed importance since the 2015 discovery in massive offshore reserves that made Guyana the world’s fastest-growing economy. Despite a week of escalation, Maduro signaled Venezuela’s commitment to a peaceful resolution on Saturday.
Maduro’s grip on power is facing its toughest challenge in almost a decade, as the country’s economic recovery dwindles while hyperinflation constrains the government’s money-printing capabilities. Furthermore, the opposition has rallied behind Maria Corina Machado as a credible contender for next year’s presidential election, under a US-backed agreement with government officials to provide electoral guarantees to opposition parties. In desperate need of support, Maduro has turned to a historic claim of territory to try to rally support among the population, aiming to stoke nationalistic sentiment to secure votes. In that vein, last week’s referendum can be interpreted as a test of the government’s ability to mobilize the population. The escalation that followed was probably intended as a show of force after a lackluster voter turnout. The upcoming months will have to be monitored closely, as evolving developments could ultimately shift the campaign’s objectives. A perceived failure to win the elections could push the regime toward desperate measures, such as postponing elections with the excuse of a security threat under a state of emergency (and thus risking reimposed US sanctions). Although the chances of military conflict remain slim, ill-experienced troops and foreign intervention on both sides raise the odds of accidental escalation.
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