Oil Sanctions Reach Limits as Venezuela Is Wrung Dry

Venezuela’s oil industry is reeling, but additional U.S. sanctions will have little effect as it trades with countries that will ignore them

By Spencer Jakab

Motorists waited in line to fuel up their vehicles at a Venezuela gas station last month. Photo: Rodrigo Abd/Associated Press

The vise is tightening on Venezuela, but the oil market can shrug off the latest news.

The U.S. last week ratcheted up sanctions on state oil company Petróleos de Venezuela SA, or PdVSA, by banning companies from sending it diluent—liquids necessary for it to transport and process its heavy crude oil. Washington held off, for now, from imposing an outright ban on purchases of Venezuelan crude.

But the damage already has been done, and the fallout is ongoing. The January ban on U.S. imports of Venezuelan oil and on U.S. diluent exports to Venezuela broke off flows to and from the South American country’s major traditional customer and supplier, respectively. Countries that are still purchasers and suppliers, notably Russia, will likely ignore further sanctions.

Venezuela’s oil production fell to 720,000 barrels a day last month according to Platt’s—the lowest since the country was hobbled by a strike over 15 years ago and about half the level of a year earlier. To put that into perspective, its output has now fallen below that of neighboring Colombia—not traditionally thought of as a major oil producer.

Venezuela, a founding member of the Organization of the Petroleum Exporting Countries, has lost its ability to sway the market because it is widely assumed that its output will continue to shrivel. The main resource its industry lacks isn’t diluent but dollars. Longtime observer Russ Dallen of Caracas Capital says that international reserves have now dipped below $8 billion compared with over $42 billion a decade ago.

Economic deprivation has forced an estimated 4 million Venezuelans abroad and there are dayslong gas lines in the petrostate, yet President Nicolás Maduro remains in power. The upshot is that despite threats, the U.S. has done nearly all it can do to squeeze the country’s main industry. Now the U.S. can only watch it slowly rot from lack of investment.

Deutsche Bank’s Best Shot May Not Be Enough

The German lender is right to focus on serving corporate clients, but its new restructuring plan leaves little room for error

By Stephen Wilmot

In theory, Deutsche Bank ’s DB -5.85%▲ strategic reset is as sensible as it is overdue. In practice, it will require flawless execution and may not go far enough.

Germany’s top lender laid out a radical restructuring plan on Sunday. It will shutter key elements of the global investment-banking operation, notably equities trading, and shift about a fifth of its assets into a new “bad bank” to be wound down. The basic idea is to shrink back to its historic core: serving the treasury needs of big companies and German savers.

This addresses one of the reasons for Deutsche Bank’s woefully low profitability: the losses it makes in global investment banking operations that cannot compete with those of far larger U.S. rivals. Equities trading is a scale and technology game increasingly dominated by J.P. Morgan , Morgan Stanleyand Goldman Sachs .

It doesn’t address another reason: Retail banking in Germany has never made much money. Hundreds of savings banks and state-backed lenders compete against commercial banks like Deutsche for customers. And the emphasis is on saving rather than borrowing, leaving banks with excess deposits to invest at the European Central Bank’s negative interest rates.

The problem is illustrated by Deutsche Bank’s local rival and failed merger partner Commerzbank. Commerzbankhas already walked the stony restructuring path Deutsche is now contemplating, yet its shares still only fetch 0.29 times book value, compared with 0.24 times for Deutsche. Being a focused German lender just isn’t an attractive prospect for investors.

However, there isn’t much Deutsche can do about this. It needs the deposit base provided by its German retail bank to fund a more lucrative business serving corporate clients.

The new targets announced Sunday leave very little room for error. Estimated restructuring charges of €7.4 billion by the end of 2022 will cut its core tier-one equity ratio to 12.7%, according to brokerage Berenberg, from 13.7% at the end of the first quarter. That is just a fraction above Deutsche Bank’s new minimum targeted ratio of 12.5%.

Christian Sewing, CEO of German bank Deutsche Bank, is pictured during the company's annual general meeting in Frankfurt on May 23. Photo: daniel roland/Agence France-Presse/Getty Images

It is also unclear just how committed Chief Executive Christian Sewing is to getting out of investment banking. He may be quitting equities trading, but he is keeping the U.S. leveraged finance division, which lends money in private-equity deals. Presumably this is because the business is making good returns, but it is also at risk of overheating and has little to do with the new strategy. Credit Suissehas sent similarly mixed messages by keeping U.S. structured finance even as it tries to refocus on fast-growing Asian wealth management. Both companies would do better to sell the units while they can get good prices.

Hidden within Deutsche Bank is a solid business serving big companies’ banking needs. For the industry, revenue from these clients should grow at four times the rate of revenue from money managers what during the period through 2021, according to a report by Morgan Stanley and Oliver Wyman. Deutsche Bank needs to do everything it can to tap this growth—free of distractions.

Free exchange

How compatible are democracy and capitalism?

Economic stress and demographic change are weakening a symbiotic relationship

OF LATE THE world’s older democracies have begun to look more vulnerable than venerable.

America seems destined for a constitutional showdown between the executive and the legislature. Brexit has mired Britain in a constitutional morass of its own. Such troubles could be mistaken for a comeuppance. In recent years political economists have argued that rising inequality in the Anglo-American world must eventually threaten the foundations of democracy; a book on the theme by Thomas Piketty, a French economist, has sold well over a million copies. That argument channels a time-worn view, held by thinkers from Karl Marx to Friedrich Hayek, that democracy and capitalism may prove incompatible.

As powerfully as such arguments are made, the past century or so tells a different story. The club of rich democracies is not easy to join, but those who get in tend to stay there. Since the dawn of industrialisation, no advanced capitalist democracy has fallen out of the ranks of high-income countries or regressed permanently into authoritarianism. This is not a coincidence, say Torben Iversen of Harvard University and David Soskice of the London School of Economics, in their recent book, “Democracy and Prosperity”. Rather, they write, in advanced economies democracy and capitalism tend to reinforce each other. It is a reassuring message, but one that will face severe tests in years to come.

Economists and political theorists have imagined all sorts of ways capitalist democracies might fail. The oldest is the worry that grasping masses will vote to expropriate the wealth (hard-earned or not) of entrepreneurs and landowners—and without secure property rights there can be no capitalism. Hayek thought that the governments of the early 20th century, in responding to the concerns of the masses, had over-centralised economic decision-making, a road that led eventually to totalitarianism.

Other thinkers followed Marx in reckoning that it was the greed of the capitalists that would do the greatest harm. Joseph Schumpeter feared that as firms grew more powerful, they might push a country towards corporatism and clientelism, winning monopoly rights that would generate profits they could share with politicians. Mr Piketty and others say that inequality naturally rises in capitalist countries, and that political power becomes concentrated alongside economic power in an unstable way. Other economists, like Dani Rodrik, have argued that full participation in the global economy forces a country to give up a degree of either national sovereignty or democracy. Lowering barriers to trade means harmonising trade and regulatory policies with other countries, for instance, which reduces each government’s ability to accommodate domestic preferences.

But if capitalism and democracy are such uneasy bedfellows, what explains their long co-existence in the rich world? Mr Iversen and Mr Soskice see capitalism and democracy as potentially mutually supporting, with three stabilising pillars. One is a strong government, which constrains the power of large firms and labour unions, and ensures competitive markets.

Weaker countries find it harder to resist the short-term expediency of securing power by protecting monopolies. The second is a sizeable middle class, forming a political bloc that shares in the prosperity created by a capitalist economy. A bargain is struck in which the state provides mass higher education on generous terms, while encouraging the development of frontier industries that demand skilled workers. Middle-class households thus reckon that economic growth is likely to benefit them and their children. (Rising inequality is not a threat to capitalist democracies, the authors reckon, because middle-class voters care little about the poor and do not support broader redistribution that could raise their tax bills.)

Providing the education, infrastructure and social safety net that support a prosperous middle class requires substantial tax revenue. For the system to hold a third pillar is needed: large firms that are not very mobile. Before recent rapid globalisation that was no problem. Yet even now firms are more rooted than commonly thought. Though multinationals are adept at shifting production and profits around the world, in a knowledge economy leading firms cannot break their connections to networks of skilled individuals like those in London, New York or Silicon Valley. Their complex business plans and frontier technologies require the know-how developed and dispersed through these local networks. That increases the power of the state relative to firms, and allows it to tax and spend.


Quibble with the details, but the overarching story—immobile companies giving governments a degree of sovereignty, which they self-interestedly use to boost the middle classes—seems a plausible account of the stability of advanced capitalist democracies. It leaves plenty to be concerned about, however. It hinges on the middle classes feeling confident about the economy.

A sharp slowdown in growth in real median incomes, as in America and Britain in recent years, might not send voters rushing to the barricades, but could strengthen the appeal of movements that threaten to disturb the status quo. Governments, too, are becoming less responsive to middle-class priorities. America’s is too dysfunctional, and Britain’s too distracted by Brexit, to focus on improving education, infrastructure and the competitiveness of markets.

Demographic change might also take a toll: older and whiter generations may not much care whether a would-be middle class that does not look like them has opportunities to advance or not. Then, too, the authors may have underestimated the corrosive effect of inequality.

Threatening to leave is not the only way the rich can wield power. They control mass media, fund think-thanks and spend on or become political candidates. Proud democracies may well survive this period of turmoil. But it would be a mistake to assume survival is foreordained.

The US Economy’s Dirty Secret

Relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict. But persistently low interest rates and weak inflation bring multiple benefits to American firms and consumers, while the adverse impact of the global slowdown on US exports should not be overstated.

Todd G. Buchholz


SAN DIEGO – There is a dirty little secret in economics today: the United States has benefited – and continues to benefit – from the global slump. The US economy is humming along, even while protesters in the United Kingdom hurl milkshakes at Brexiteers, French President Emmanuel Macron confronts nihilist yellow-vested marchers, and Chinese tech firms such as Huawei fear being frozen out of foreign markets.

Last year, the US economy grew by 2.9%, while the eurozone expanded by just 1.8%, giving President Donald Trump even more confidence in his confrontational style. But relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict.

Whatever happened to the tightly integrated world economy that the International Monetary Fund and the World Bank have been advocating – and more recently extolling – since World War II?

The US economy is in a temporary but potent phase in which weakness abroad lifts spirits at home. But this economic euphoria has nothing to do with Trump-era spite and malice, and much to do with interest rates.

Borrowing costs are currently lower than at any time since the founding of the US Federal Reserve in 1913, or in the UK’s case since the Bank of England was established in 1694. The ten-year US Treasury bond is yielding about 2.123%, and in April, the streaming service Netflix issued junk bonds at a rate of just 5.4%.

If a Rip Van Winkle economist were to wake up today after a decades-long sleep and see only those numbers, he or she would assume that one-fifth of Americans were unemployed and standing in lines outside soup kitchens. Instead, the US jobless rate is at its lowest level since Neil Armstrong took his famous first step onto the Moon’s surface 50 years ago.

The idea that the US wins in a global slump might sound like the sardonic musing of some unreconstructed Marxist in the dingy corner of a faculty lounge. But such a view is not ideological. Rather, global interest rates are scraping the floor because GDP growth outside the US is so sluggish.

Persistently low interest rates and weak inflation bring multiple benefits to the US economy.

For starters, American consumers, whose real (inflation-adjusted) wages are finally increasing after decades of stagnation, are seeing all sorts of bargains. When I visited an Apple store a few days ago, an employee at the repair counter told me that I could finance a new iPhone at 0% interest. Car dealers are offering zero-interest financing, too.

Moreover, the US stock market has soared because yields on bank certificates of deposit (CDs) look so puny. When I was a kid in the 1970s, my mother placed our family savings in a bank and received not only a 6% return, but also a blender. Today, a six-month bank CD might pay only one-third of a percentage point. And my mother can no longer expect a blender or even a lollipop from the bank in return for parking her money there.

Finally, low interest rates mean that US businesses can obtain nearly free financing when they purchase equipment. As a result of low borrowing costs and new tax write-offs, the US economy added 215,000 new machine manufacturing jobs in 2018. And foreign investors realize that new equipment will make US companies more competitive.

But surely, the textbooks insist, a hobbled global economy will squeeze US exports. That is true – especially when combined with China’s new tariffs on American goods and a strong dollar, which makes US exports more expensive internationally.

Still, exports make up only 12% of the US economy, and nearly one-third of them go to Canada and Mexico, whose economies have been doing okay. Moreover, many of the most valuable US exports are “must-have” items (or oligopolistic goods made by only a few companies), such as Boeing jets, Qualcomm chips, or Apple iPhones. It is hard even for dejected Frenchmen or angst-ridden Germans to do without these.

The buoyancy of the US economy worries policymakers in other countries. They would prefer if the US stumbled along beside them and was forced to concoct cooperative ways of boosting global growth. Instead, Trump needles rather than wheedles for trade deals, and happily pockets the benefits to the US economy that result from doldrums abroad.

No one knows when Trump’s trade needling will stop, of course. But as long as inflation remains a distant specter, America’s economy will continue to enjoy this unusual type of growth.

Todd G. Buchholz has served as director of economic policy under President George H.W. Bush and as managing director of the Tiger hedge fund. He was awarded Harvard University’s Allyn Young Teaching Prize in economics and is the author of New Ideas from Dead Economists and The Price of Prosperity.

Waldorf Astoria to Sell Condos, as Chinese Owners Shrug Off Glut

Anbang moves ahead with marketing of 375 luxury units despite oversupply and political strains

By Keiko Morris

Chinese officials took control of the Waldorf-Astoria hotel in New York in 2018. Photo: Justin Lane/EPA 

Luxury condos at the Waldorf Astoria hotel are expected to go on sale in the fall, as the historic property’s Chinese owner advances its redevelopment plans despite a market glut and political tensions with the U.S.

Beijing-based Anbang Insurance Group Co. bought the Waldorf for $1.95 billion in 2015, a record price for a U.S. hotel. In 2017, it shut down the property to renovate and convert hundreds of the more than 1,400 guest rooms into private residences.

Chinese officials took control of Anbang in 2018 after saying they suspected illegal activity by the insurer. Now, Anbang has hired Douglas Elliman Real Estate to sell 375 apartments at the Waldorf, according to the firm. The broker said it was working with London-based Knight Frank Residential to help find buyers abroad.

The Waldorf condos will range from studios to five bedrooms. Hilton Worldwide Holdings Inc.will manage the residences and the hotel. The residences are expected to be ready for move-in and the hotel to reopen in 2021.

Douglas Elliman declined to discuss how much they will ask for the apartments. But other brokers suggested the listing prices would likely be on par with the city’s highest-priced condos, around $3,500 a square foot or more.

Douglas Elliman is looking to highlight the rich history of the 88-year old Waldorf. The landmark property occupies a full city block on Park Avenue, and it gained world-wide attention for its luxury suites, lavish parties and famous guests. It has been a New York home to Gen. Douglas MacArthur, Frank Sinatra, and the Duke of Windsor after he abdicated his throne to marry American socialite Wallis Simpson.

The lobby of the Waldorf Astoria features wood paneling and black pillars made of marble. Photo: Mark Lennihan/Associated Press

“It’s a chance to own a piece of New York history and all the stories that go with it,” said Susan de França, chief executive of Douglas Elliman Development Marketing. In a statement, Andrew Miller, executive director of development at Anbang, called the Waldorf “one of the most special addresses in the world.”

The move at the Waldorf comes at a challenging time for Manhattan luxury apartments. The number of unsold new Manhattan condos, which have prices typically skewed toward the top 10% of the market, more than doubled to 7,983 in 2018 compared with 2015, according to real-estate appraiser Miller Samuel Inc.

The Waldorf condos will hit the market as the supply of new luxury apartments is expected to be at a peak.

“There is over building, and there is too much supply,” said Donna Olshan, head of Olshan Realty Inc., a New York brokerage firm that tracks luxury real- estate sales.

At the same time, demand for luxury condos has been falling. Wealthy Chinese buyers have pulled back under pressure from the Chinese government to keep capital in the country. Other international buyers have retreated during periods of uncertain politics at home. Owners have had to discount prices to sell their luxury condos.

Recent changes to U.S. tax law have also reduced the incentive for Americans to own property in high-tax states like New York, while stock-market volatility has made many hesitant to spend money on expensive real estate.

Simmering tensions between Beijing and Washington also could complicate sales in a building controlled by the Chinese government, some brokers say. U.S. officials recently have escalated their warnings about Chinese spying intended to steal government secrets and the heist of intellectual property from corporations and academia.

“There’s uncertainty how this is going to shake out,” said appraiser Jonathan Miller of the tensions between the U.S. and China. “So it makes it a challenging environment until that is stable, because the one thing all purchasers don’t like is uncertainty.”

Ms. de França said the Waldorf condos would appeal to buyers because of the hotel’s glamorous past and because the property would provide residents with access to hotel amenities such as room service, its spa and venues for dining and entertaining.

“It’s uniqueness puts us in a class of our own and the wide array of unit sizes and types opens up the universe of buyers,” she said. “Some properties only appeal to the $30 million buyers.”

The Waldorf Astoria hotel occupies a full city block on Park Avenue in Manhattan. Photo: Richard B. Levine/Levine Roberts/Newscom/ZUMA Press

—Katherine Clarke contributed to this article.