Sanctions against Venezuela's oil sector are likely after the 20 May presidential election in which incumbent president Nicolas Maduro aims to be re-elected extending the mandate of the ruling United Socialist Party of Venezuela (PSUV) for six more years taking advantage of the control it exercises over the National Electoral Authority (CNE) and the armed forces.

• Venezuela is holding a presidential election on 20 May, which the international community refuses to recognize, the opposition is boycotting and against a background of continued economic contraction and intensifying shortages of food and basic goods.
• The most likely scenario is that incumbent president Nicolas Maduro will be re-elected for six more years, taking advantage of his control over the military and the National Electoral Council.
• The US is likely to respond with sanctions on Venezuela's oil sector, isolating the country even further: regime change is only possible in the unlikely event that the military, still loyal to Maduro, withdraws support given escalating protests.

Venezuela is holding a presidential election on 20 May in which incumbent president Nicolas Maduro, in power since 2013, is looking to extend his ruling United Socialist Party of Venezuela's (PSUV) rule for six more years. The election will not be recognized by the international community, including the US, EU, Canada and most Latin American countries including Argentina, Brazil, Chile, Colombia, Peru and Panama. These parties are calling for its postponement and for the appointment of a new National Electoral Council (CNE) and reform of the electoral system.

The opposition candidate, Henry Falcon from the Progressive Advance Party (AP), has been expelled from the most representative opposition coalition, Table of Democratic Unity (Mesa de la Unidad Democratic) which is boycotting the election and calling it a "farce". Most polls have shown Falcon leading by over 10 percentage points but the international community and the MUD claim that minimum conditions for a free and fair election will not be met.

Maduro's popularity has been significantly undermined by severe shortages of food and basic goods, including medicines, periodic water supply rationing schemes and electricity blackouts and economic recession (since 2013). Venezuela's economy is likely to contract at least 15% in 2018 and inflation will reach around 8000%. Economic recovery in Venezuela is only possible through its oil sector, which represents 25% of GDP, 50% of fiscal revenues and provides 97% of export revenues. However, oil production has fallen 43% since 2015 and currently stands at 1.5 million barrels per day, according to the Organization of the Petroleum Exporting Countries (OPEC). On 24 August 2017, the US imposed sanctions on the issuance of new debt and equity issued by the Venezuelan government and PDVSA, although with Venezuelan debt trading at 45 percentage points above US Treasury yields, new bond sales or private-sector lending is practically impossible, with markets assuming heavy debt-restructuring losses.

Outlook and implications

The most likely scenario is that Maduro will be re-elected, taking advantage of divisions within the opposition and the control the government has over the military and the CNE. Falcon is likely to recognize the results and potentially engage in a national dialogue with the government to explore ways to stabilize the economy. In turn, the US is likely to respond to allegedly fraudulent elections with sanctions targeting the oil sector. These are most likely to involve a ban on Venezuelan oil imports to the US, on US exports of diluent (or gasoline) to Venezuela , and of national oil company PDVSA conducting transactions in US dollars. This is critical as Venezuela is already in technical default on sovereign and PDVSA debt due to repeated failure to make timely payments within grace periods.

Overall, the most likely scenario is one of gradual further economic deterioration in Venezuela driven by economic mismanagement and sanctions. The population is likely increasingly to rely on the government's food subsidy programmes such as the CLAP food bags which are delivered weekly to civil servants and in low-income areas including shanty towns. This system is likely to be hurt by international sanctions, which will make it harder for the government to import food and basic goods. The combination of international sanctions, lower oil production, and weak international oil prices is likely to intensify food and basic good shortages, also further undermining the country's already crumbling energy and utility infrastructure.

Risks of protests and riots risks will remain high in the one-year outlook with an average of 30 protests already occurring daily. Periodic events of looting of supermarkets, pharmacies and retail stores, including thefts from electric appliance stores and food cargo tracks, are likely. The potential for protests to destabilize the government will be mitigated by military support for Maduro's government and mass migration of discontented Venezuelans to Colombia and elsewhere in the region. Colombian authorities estimate that more than 1 million Venezuelans have relocated to Colombia.

Maduro is likely to increasingly rely on the military for survival. The weaker Maduro becomes, the more power influential top military commanders will obtain, largely behind the scenes. Senior military officials, represented in the High Military Command, will continue controlling the formal economy such as the oil sector, ports and airports, and food and basic good imports (which most leading military commanders arrange through intermediaries and shell companies) but also via informal market channels linked to drug trafficking, illegal mining and fuel smuggling. Their privileged position reduces the risk of the military staging a coup and guarantees strong repression of social protests in low-income areas. Security forces have shown themselves still capable on containing protests, including looting, prior to this becoming widespread or threatening government stability.

So far, discontent among the middle ranks in the military and police force only has served to trigger purges in the armed forces and security services and that is likely to remain the case in the one-year outlook. Any attempt to stage a coup is unlikely to be successful without the support of upper military ranks. The military is only likely to consider withdrawing support for Maduro in the unlikely scenario that - despite the government's efforts to rig the elections - Falcon manages to secure an electoral majority, or that widespread protests and looting escalate beyond the containment capacity of the security forces.

Trade relations with Russia and China are a key indicator of government and policy stability. Venezuela is becoming increasingly dependent on these sources for funding, credit and scope to sell and transport oil outside Venezuela, especially if sanctions are extended. A second major indicator is whether, after Maduro's re-election, Venezuela's relations with Colombia deteriorate. This risk arises from the increased flow of migrants and growing allegations from the Colombian government that the Colombian insurgent group ELN freely operates in Venezuelan territory. These factors are likely to generate regional pressure also to impose sanctions on Venezuela.