Much of the focus after the Trump administration’s dramatic seizure of Venezuelan president Nicolas Maduro has been on who’s got control of the country’s oil, rather than who lost it. Not surprisingly, those who lost access — China and Russia — aren’t happy.
They, most notably China, “bought” Venezuela’s oil in the form of interest and principal loans they had extended to the cash-strapped country.
The sovereign creditors, along with other more conventional creditors and a number of international big oil companies, may have hoped that the removal of Maduro and a US-led reconstruction of Venezuela’s ravaged economy might have improved their chances of getting their hands on at least some of what they’re owed.
Through some devious structuring, however, the US may have kept them at a very long arm’s-length from the cash that is already flowing from oil that was stranded on tankers and in storage facilities because of America’s embargo.
As it stands, at least in the medium term, China and Russia won’t be repaid their loans.
Cuba, which received oil in exchange for security and other services, as well as more conventional commodities like sugar, has lost access to the fuel source it sorely needs.
Other creditors can, in the immediate future, only whistle Dixie.
Last week the first sale of Venezuelan oil since the US seized Maduro occurred, with traders Vitol and Trafigura on-selling about $US500 million ($740 million) of crude at prices that the US said were 30 per cent higher than the Maduro government had been able to achieve while under sanctions from the US.
The proceeds from the sales – the majority of which the US had decreed must go to US buyers – went to a US Treasury bank account in Qatar.
Why Qatar? The US wants to keep funds flowing from the sale of Venezuela’s oil out of the reach of its $US170 billion of foreign creditors, which means it has to distance the money from the US legal system, which is the primary jurisdiction in which similar claims have been litigated.
On January 9, Donald Trump signed an executive order entitled “Safeguarding Venezuelan Oil Revenue for the Good of the American and Venezuelan People.”
The aim of the order was to prevent “the seizure of Venezuelan oil revenue that could undermine critical US efforts to ensure economic and political stability in Venezuela,” it said.
The order purports to protect funds raised from sales of the oil and the funds held in US government accounts from “judicial attachment,” saying the possibility of judicial processes constituted an “unusual and extraordinary” threat to the national security and foreign policy of the US.
It says the funds were the property of the Venezuelan government, with the US holding them solely in a custodial and government capacity rather than a market participant. It states that they would not be used for any commercial purpose in the US, which is again designed to try to ensure there can be no legal action taken by creditors.
While distancing itself from anything other than a custodial interest in the funds, it should be noted that Trump has said America will be the dominant supplier of imported goods to Venezuela in future. The US will benefit from Venezuela’s oil sales.
Venezuela owes money to everyone. It defaulted on about $US100 billion of government bonds in 2017, owes China at least $US10 billion to $US12 billion and has had various court judgements against it related to Hugo Chavez’s 2007 expropriation of foreign oil companies’ assets, including about $US14 billion to Chevron and Exxon Mobil.
Trump has made it clear that none of those creditors is going to get their hands on the petrodollars that will now flow out of Venezuela. Whether that’s a sustainable position in the longer term, if and when Venezuela’s economy recovers and its governance is normalised, is an open question.
The administration has also made it clear that the $US100 billion of investment it is seeking from US oil companies to rebuild Venezuela’s oil industry will be similarly insulated.
Most analyses say it will take $US10 billion a year for at least a decade to restore oil production from its current levels of about a million barrels a day to the more than 3 million barrels it produced before the mismanagement and corruption of the Chavez and Maduro governments and the lack of access to big oil’s technology, expertise and capital, degraded the industry.
Whether it gets access to that US capital that Trump is seeking – Exxon famously said Venezuela is “uninvestable” – will determine whether Trump’s audacious kidnapping of the country’s president leads to a successful rebuilding of the industry, which generates more than half the government’s revenue.
It may also determine whether there can be an eventual restructuring of the country’s debts that returns something to its creditors.
For the moment, while there’s talk about a debt restructure among the creditors, along the lines of that which occurred to Iraqui debt after the 2003 US intervention, it appears a distant possibility unless the creditors can find a jurisdiction other than the US to pursue their claims.
In the Iraq instance, George W. Bush signed a similar executive order to Trump’s, in tandem with a UN Security Council resolution that supported it, which effectively suspended mechanisms for creditor enforcement globally. It took five years, and some massive “haircuts” for creditors, before Iraq’s $US130 billion was finally restructured.
Of the sovereign creditors, China is both the largest and has the most reasons to feel aggrieved. For a quarter of a century – effectively after Chavez gained power – China has been investing in Venezuela.
Its state-owned companies are involved in oil and gas joint ventures. It has financed and built infrastructure. It has been the major buyer of Venezuela’s sanctioned oil and has lent the government about $US60 billion, being repaid in discounted oil.
Russia’s supply of oil industry expertise and security and Cuba’s engagements have been far smaller, but also paid for in oil.
Now, China and Russia have not just been shut out from Venezuela’s oil and what they are owed, but they’ve lost the influence they have built up over decades.
Of the sovereign creditors, China is both the largest and has the most reasons to feel aggrieved. For a quarter of a century – effectively after Chavez gained power – China has been investing in Venezuela.
For China, Venezuela was a key ally in Latin America because of its dependence. It was an important, albeit not critical, element of the sphere of influence it has built up in a region in which it has invested the best part of $US650 billion and where its bi-lateral trade has topped $US500 billion a year and is growing solidly.
If Mexico were excluded, China would displace the US as the biggest trading partner with Latin America, which supplies it with critical commodities like copper, lithium and soy beans and in which Chinese companies have built ports, rail lines and other infrastructure under the Belt and Road initiative.
China has also manoeuvred itself into a position of leadership in the loose BRICS and Global South coalitions of developing economies that is positioning itself as a rival to the (now faltering) longer established and US-dominated multilateral global institutions.
Losing influence over Venezuela, if that is what occurs – so far, apart from grabbing the oil cash, the Trump administration has been hands-off in terms of Venezuelan governance – won’t undermine China’s position in Latin America, but it will be concerned that the “Donroe Doctrine” Trump now espoused to justify his intervention in Venezuela might be expanded elsewhere in the region.
Trump has mused openly, for instance, about to desire to see regime change in Cuba, which will be weakened by the loss of the source of about a third of its energy requirements.
The demonstration effect of the brutal way the US intervened in Venezuela could, of course, bind the rest of Latin America closer to China.
There would be other leaders in the region, already angry about Trump’s tariffs, who would have been unnerved by the ruthless tactics the US employed against Venezuela and the sight of Madura doing the “perp walk.”
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
