Russia has closer eye on Venezuelan oil than China, House panel told

Russia probably has a stronger interest now than China in propping up President Nicolas Maduro’s regime to gain more access to Venezuela’s massive crude oil deposits, two witnesses told a US House Foreign Affairs subcommittee on Sept. 13. But China has more financial leverage over the South American country’s government, with up to $60 billion of loans since 2007 in exchange for 500,000 b/d of Venezuelan crude, they said.

Russia probably has a stronger interest now than China in propping up President Nicolas Maduro’s regime to gain more access to Venezuela’s massive crude oil deposits, two witnesses told a US House Foreign Affairs subcommittee on Sept. 13. But China has more financial leverage over the South American country’s government, with up to $60 billion of loans since 2007 in exchange for 500,000 b/d of Venezuelan crude, they said.

“The principal risk regarding Russian and Chinese activities in Venezuela in the near term is that they will exploit the unfolding crisis, including the effect of US sanctions, to deepen their control over Venezuela’s resources, and their [financial] leverage over the country as an anti-US political and military partner,” observed R. Evan Ellis, a senior associate in the Center for Strategic and International Studies’ Americas Program.

With respect to finance, China has become Venezuela’s principal banker, Ellis said in written testimony before the House committee’s Western Hemisphere Subcommittee.

In August 2014, national oil company Petroleos de Venezuela SA (PDVSA), which is legally more vulnerable to seizure of its global assets than the government, moved its primary banking relationships for petroleum current accounts from the Banco Espirito Santo, in Portugal, to China’s CITC Bank, Ellis said. In addition, it is believed Venezuela’s government has maintained at least part of its gold reserves in China since 2011, he said.

“Both actions partially protect Venezuela’s assets from international legal claims, but also give China influence over Venezuela through how it handles such claims,” Ellis said. “Thus, as international legal judgments against PDVSA accumulate in international courts, Chinese financial institutions (with the commitments they have made to follow the rules of the international banking system), will face important decisions regarding how to respond to legal claims regarding assets.”

A second witness noted that China now finds itself in the frustrating position of being unable, despite its investments and loans, to achieve its preferred outcome of increased Venezuelan oil production.

Instead, that production has declined every year under Maduro, and it is falling more rapidly in 2017 because of poor maintenance, underinvestment, incompetent leadership at PDVSA, and corruption, said Harold Trinkunas, a senior research scholar at Stanford University’s Freeman Spogli Institute for International Studies.

Effectively, a partial default

“Venezuela’s declining oil production, economic crisis, and difficulty in meeting its international financial obligations have forced the Chinese to live with what is effectively a partial default, including an agreed-upon moratorium on debt repayment until January 2018 to allow the Venezuelans to market oil initially allocated for delivery to China to clients who can pay full price, such as the United States,” Trinkunas said in his written testimony.

While the Chinese government has hesitated to criticize the Maduro regime openly because it might signal other economic partners in the developing world that it is unreliable, Chinese banks have been much less forthcoming with new money in recent years, and Chinese officials have been talking quietly with the Venezuelan opposition to establish a basis of good relations no matter what the outcome is of the country’s current crisis, Trinkunas said.

Russia, meanwhile, has moved opportunistically to acquire Venezuelan oil assets as Rosneft, one of the country’s bigger oil companies, has worked with PDVSA to develop ultra-heavy crude deposits, but with limited success because it does not have the technology and experience to deal with such challenging oil fields, Trinkunas said.

In 2017, the desperate need of the Maduro regime for foreign currency to pay international debts led it to conduct a fire sale of state-owned oil assets, initially using Citgo, a US-based oil company that Venezuela’s government owns, to guarantee a $1.5 billion loan from Rosneft, Trinkunas said.

“When it appeared that the US government might challenge this deal, Rosneft also sought to guarantee its loans via assets located inside Venezuela, principally shares in existing joint venture companies. It is also considering shares in new joint ventures the Venezuelan government proposes to create,” Trinkunas said.

Rosneft consequently is providing a critical lifeline to the Maduro regime during 2017, with $6 billion of outstanding loans, much of which are officially considered prepayment for future oil deliveries, Trinkunas pointed out. “However, we should keep in mind that Russia has nowhere near the level of financial resources available to China to bail out Venezuela. The Russian interest in Venezuela at this time appears to be largely transactional: purchasing oil assets on the cheap and ensuring that loans are repaid,” he said. “The geopolitical effect of propping up an anti-American regime in Venezuela is a welcome, but decidedly secondary, benefit.”

Contact Nick Snow at nicks@pennwell.com.

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