Venezuela, power, and markets

Over the weekend, the United States apprehended an accused narco-terrorist who also happens to be the leader of Venezuela, Mr. Nicholas Maduro. What are the implications of this operation, conducted by a massive US armada assembled off the coast of Venezuela for several months? What happens next? Is this a geopolitical moment of real impact on markets? Below, I’ve addressed many of the questions investors have been asking about what may lie ahead.

But first, I want to pause for a moment and acknowledge the competence of the US military, especially the legendary Delta Force special operators who conducted the raid in the early morning hours, inducing a significant cyber-attack that turned off the lights in Caracas. They easily brushed aside both Venezuelan and Cuban hand-picked defenders, apprehended the President of a sovereign state alongside his wife, and swiftly delivered them to New York City to face charges.

What might this mean for defense and energy investing?

From an investment perspective, this draws a line under several aspects of defense investing. We are in an era in which we will continue to see massive spending increases in Europe (both NATO and Russia) as well as the Pacific (notably Japan, which will shortly have the third largest defense budget in the world, only behind the United States and China). The raid encourages a view of the importance of cyber and cybersecurity, special operations, unmanned vehicles, sea-based and highly flexible naval forces, and stealth.

A second implication is the impact upon global energy. If there is a peaceful transition to a democratic, pro-western government in Caracas (perhaps in 3-6 months), there is the potential to unlock a far higher percentage of the oil under severe sanctions in Venezuela. If the United States succeeds in transitioning the economy to a more capitalist model (either run by the US or by an aligned Venezuelan regime), an additional 300 billion barrels of crude (admittedly very heavy “dirty” crude) could flow into global markets over the next few years.

Clearly getting the oil infrastructure in Venezuela up-to-speed will require significant private-public cooperation between the United States, the oil industry, and of course whatever regime emerges in Caracas. And it will likely take several years. But the long-term implications could be profound in terms of oil supply.

What may be next for Venezuela?

If the US pursues “running” Venezuela, there are three options:

1. The first, almost a throw-away, is to re-run the Iraq playbook; send 250,000 troops and firmly establish control. This would be wildly expensive, politically explosive in the United States, and therefore highly unlikely, in my opinion.
2. The second option would be to throw all the US influence behind the opposition leaders, Edmundo Gonzalez and Maria Machado. Based on President Trump’s dismissive comments about the latter, that appears less likely.
3. The third option would be to turn former senior leaders in the Maduro regime and bend them to US desires, starting with the vice president (and now acting president) Darcy Rodriquez.

I believe some combination of options two and three are most likely, an approach that seeks to find a balance between the legitimately elected opposition (the 2024 election was quite clearly stolen by Maduro) and the remnants of Maduro’s regime. Getting them together into some kind of transitional government will be a narrow sea to sail, but stabilizing the current government coupled with a new election to determine a new, legitimate president could be the right pathway forward.

Exerting any level of real influence in Venezuela is going to require maintaining a significant presence, putting about 15,000 Sailors, Marines, and Special Forces in the ready position, based in either Puerto Rico or Guantanamo Bay. Additionally, air forces will need to be on constant standby. It will be expensive – both in dollars and in the opportunity cost of those forces being pulled from efforts to deter China and Russia. But the Trump Administration appears to be all in at this point and will probably lean on Secretary of State Marco Rubio to run the plays.

How might Russia and China react?

Finally, there are geopolitical “knock-on effects” in both Russia and China. Both of those authoritarian states will have admired the pure competence of US special operations. But they will also interpret the US action as being one that may allow them far more freedom of action in their spheres of influence.

Look for China in particular to be more assertive and less accommodating in its territorial claims of owning the vast South China Sea and over what they call the “rogue island province” of Taiwan. Likewise, Russia will redouble its efforts to have control not only in Ukraine, but also in the Central Asian republics, especially Kazakhstan, which Putin covets. Whether the United States under a Trump Administration firmly pushes back on such adventurism by Russia and China remains to be seen as the new National Security Strategy of the US, released several weeks ago, puts a heavy focus on the Western Hemisphere.

Are there other targets in the Americas?

A final pair of outliers with big geopolitical implications is how the administration will approach other targets in the Americas. In particular, there is speculation concerning the semi-autonomous island of Greenland. President Trump clearly covets it, and many of his supporters are openly advocating for a more aggressive stance there. It is, of course, the sovereign territory of Denmark, a NATO ally.

Both Denmark and the Greenlanders themselves have vigorously pushed back on the idea of becoming part of the US, saying they are not for sale but “open for business.” It seems unlikely that the Trump Administration would simply occupy the massive, resource-rich and geo-strategically crucial island, but expect more pressure to get to a deal of some kind, short of an outright conquest.

The other potential outlier would be an active move by the Trump Administration against another Latin American nation, notably Colombia, Panama, or Cuba. That still seems unlikely as the juice may not be worth the squeeze (e.g. no oil). More likely, the administration will wait for the Cuban regime to collapse on its own and exert influence in Panama using economic and diplomatic levers. Colombia will continue to receive incoming sniping from President Trump, but a military move appears unlikely.

Overall, given the pressures of consolidating Venezuela, I believe the administration will be tempted but unlikely to move militarily on the outlier possibilities – at least in the immediate moment. But a lot of unlikely things have been happening in the world of geopolitics recently.