China
and Russia loaned billions to Venezuela — and then the presidency went up for
grabs, by MacKenzie Sigales, 2/7/19.
China and Russia have kept Venezuela
afloat by lending billions to the economically crippled petro-state, sometimes
with cheap oil thrown in as a sweetener for the two creditors.
Those deals were struck with
strongman Nicolas Maduro, whose leadership is facing a serious challenge from
Juan Guaido, and it’s not clear what happens to that debt if Maduro is kicked
out of office. Venezuela is indebted to external creditors by a total of
something close to $100 billion.
Venezuela is in the middle of a power
struggle at the highest level, and that could mean trouble for its two biggest
foreign allies: China and Russia.
The
socialist petro-state is home to the largest oil reserves on the planet, but
endemic corruption has devastated its economy. Beijing and Moscow have helped
the country stave off collapse by repeatedly extending financial lifelines to
the tune of tens of billions of dollars over the last decade.
For
the most part, those oil-for-debt swaps were good for all parties involved. But
that may be changing.
They’re worried the opposition will come in and not
necessarily want to honor their contracts or find loopholes by
Russ Dallen, Managing Partner, Caracus Capital
Markets.
With the United States and others backing
opposition leader Juan Guaido as the country’s legitimate president over
dictator Nicolas Maduro,
it could take longer for Russia and China to get their money back. And in the
case of some loans, they may not get anything back at all.
“I
don’t think they like regime change. I don’t think they like the idea that the
U.S. is seemingly declaring somebody president,” says Helima Croft, global head
of commodity strategy at RBC Capital Markets. “Both Xi and Putin would be
horrified if the U.S. got any ideas about trying to do this in any of their
countries, or countries that they view as satellite states.”
Venezuela’s debt emergency - Venezuela owes around $100 billion to its external
creditors,
including China and Russia. Some reports put the figure higher.
Those
agreements gave Russia and China relatively cheap oil and a foothold in the backyard of the United States and they supplied Venezuela with
much-needed cash.
But
Venezuela’s oil production has plummeted. It is a third of what it was
when Hugo Chavez was
elected in 1998, which is especially troubling given that oil revenue accounts
for about 98 percent of its hard currency earnings.
Venezuela
still owes Beijing $20 billion, and Russia’s state-backed oil company Rosneft
another $2.3 billion, excluding interest. However, the question remains whether
those debts are valid if Maduro is thrown out and replaced by Guaido.
‘The situation keeps deteriorating’
Guaido
has said all lawful agreements approved
by Venezuela’s National Assembly will be honored, a statement widely seen as an
olive branch to China. Thus far, Beijing is still publicly backing Maduro.
“They’re
worried the opposition will come in and not necessarily want to honor their
contracts — or find loopholes,” said Russ Dallen, managing partner of
investment bank Caracas Capital Markets.
But
Dallen acknowledged that Beijing’s loyalty may not last. “The Chinese don’t
know what to do. They’re not getting paid by Maduro’s guys ... and the
situation keeps deteriorating.”
Guaido has incentive to make good on
Venezuela’s debts to Beijing. China is Venezuela’s biggest market. RBC’s Croft
pointed out that Guaido doesn’t want to get on the bad side of the country that
drives global oil demand.
Failing to repay China would also
erode Guaido’s credibility.
“If the opposition comes in and
defaults, it would hurt them,” said Kathryn Rooney Vera, chief investment
strategist at Bulltick Capital Markets. “It
would also hurt their future capacity to issue debt in terms of their credit.
So I don’t think that’s going to happen.”
A desire to avoid antagonizing the
United States during an already complex, high-stakes trade war may encourage
China to consider a change of allegiance from Maduro to Guaido, according to
Dallen.
Maduro
needs Russia - Though Guaido is signaling he
intends to honor Venezuela’s obligations to China, he has made no such
overtures to Russia. Moscow’s latest deals with Venezuela are something they
don’t want to risk losing, either.“Not only are they getting oil, but they’ve
also gained access to pretty good acreage in Venezuela,” said Croft.
Moscow is considered the linchpin to
Maduro’s survival. Russia has come in with cash at the eleventh hour a few
times to help Venezuela avoid default. If the country gave another financial
lifeline or even continued to buy gold at a discounted rate, the situation
could become a protracted crisis.
“The
question is, do they believe a couple billion more dollars can tide the country
over? If not to preserve Maduro, to preserve some type of regime that remains
loosely or closely aligned with Moscow,” said Croft.
Ironically,
if Moscow lets Venezuela default on its debts, then Russia would actually be
able to exercise its lien on Venezuela’s most valuable asset: U.S.-based oil giant Citgo. In 2016, Maduro secured a fresh loan
by giving Rosneft a 49.9 percent stake in Citgo as collateral.
“It
would not be unusual for the Russians to try and exercise the lien they have on
the Citgo collateral, just because it would be very disruptive and chaotic to
the U.S.,” said Dallen of Caracas Capital.
Where Venezuela goes from here - If Guaido wrests
control of the government, there won’t be widespread default, but nobody is
going to get paid immediately.
The
International Monetary Fund will likely take the lead in what would be one of
the largest and most complicated sovereign debt restructurings ever. Venezuela
will essentially have to be rebuilt completely.
The
good news for Venezuela is that it sits on 300 billion barrels of oil, as well as underground reserves of
gold, iron ore and other resources.
“What
they have is a liquidity crisis, but not a solvency crisis. Everyone should be
pretty sure they are going to get paid back,” said Dallen.
Norb Leahy, Dunwoody
GA Tea Party Leader
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