By Irina Slav
The United States announced new sanctions against Venezuelan government officials this week as the situation in the country that’s home to the world’s largest oil reserves continues to escalate. The latest sanctions, against four governors close to President Nicolas Maduro, came after clashes at the border prevented humanitarian aid from entering Venezuela and they will pressure not just the Maduro government but also Venezuelan bondholders and other creditors that rely on oil payments.
Reuters reported yesterday that U.S. Vice President Mike Pence had called on the Lima Group—a group of governments trying to resolve the Venezuelan crisis peacefully—to increase pressure on the Maduro government by seizing PDVSA assets as well as other government-owned assets of Venezuela and transfer the ownership to Juan Guaido’s interim government from the Venezuelan opposition.
The Lima Group, however, is reluctant to interfere so directly. Washington has taken the matter to the United Nations Security Council but it has as members Russia and China—allies and large creditors to Maduro—who can veto U.S. proposals. What this suggests is the crisis in Venezuela will continue with the resolution no closer in sight than it was a month ago.
This is probably making a lot of people and companies nervous: earlier this year, when opposition leader Juan Guaido became the focus of media attention after declaring himself interim president of the country, holders of Venezuelan debt had cause for optimism for the first time in a long while. The hope there will be a government change in Caracas pushed Venezuelan bonds to two-year highs and had some bondholders begin planning for the future and how a new opposition-dominated government would help them get their money back. Alternatively, they will get paid in oil, like China.
China is the largest creditor of the Maduro government. Over the last ten years, Beijing has dispensed some US$62 billion to the Venezuelan state and since the latter is unable to meet its obligations with cash, it is repaying the Chinese debts with crude oil.
The situation is pretty similar with Caracas’ number-two creditor, Moscow. PDVSA has given Rosneft the right to acquire 49 percent of Citgo as collateral on a debt the two agreed a few years ago and it has also agreed to supply crude oil to the Russian company. Now, with the new sanctions—and more to follow, as threatened by Washington—repaying these debts could become even harder, and bondholders’ optimism might fizzle out.
Last month, before the rise of Guaido to international media prominence, Bloomberg reported that a group of Venezuelan bondholders had sent an envoy to the government in Caracas to discuss options for repayment of the debt, on which Venezuela has largely defaulted. The most viable option, it seems, was the same old money-for-oil scheme the Maduro government is using with China and Russia.
However, as the political situation grows increasingly confusing, with two governments, two parliaments, and even two boards of directors for PDVSA, the chances of creditors getting their money in one form or another diminishes. It will diminish even more as Venezuela is forced to reduce its oil production under the weight of the sanctions. Even the oil it does produce cannot be used as payment by U.S. bondholders: they would be in violation of the sanctions if they take it in.