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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Putin's Push For Energy Dominance In Latin America

A reawakened Russian bear is seeking to reassert the former superpower’s clout by extending influence in Eastern Europe, the Middle East and Latin America. This has seen Putin’s administration support an assortment of pariah regimes and separatist movements as it pushes to extend its international influence. While much of this has been portrayed by Moscow as an attempt to aid allies and extend Russian influence in order to ensure the integrity of its borders, the core motivation appears far more hard-nosed, the desire to gain greater control over lucrative global energy reserves.

Russia’s success in Syria, where it supported President Bashar al-Assad’s beleaguered government, saw it secure considerable political influence and access to valuable oil and natural gas reserves. That success has provided a guiding structure for Moscow’s plans to extend influence within Latin America and gain greater control of the region’s extensive hydrocarbon reserves. It is Venezuela and the embattled dictatorial regime of President Maduro which is attracting the lion’s share of attention. The reason is quite simple; the petrostate, which once had Latin America’s most advanced economy, possesses the world’s largest oil reserves of over 300 billion barrels. If Moscow gains measurable influence over Caracas, it can obtain control of those copious reserves extending its regional political standing and ability to influence global oil prices.

For Russia, which is a nation where oil and natural gas are around 60% of exports and responsible for generating up to 30% of gross domestic product (GDP), the benefits are decidedly apparent. Even more so, when it is considered that Putin’s government is facing an economic crisis triggered by oil’s prolonged slump. Moscow has taken a surreptitious approach to extending its influence in a region long considered to be the U.S.’s sole domain. Venezuela’s economic collapse and failing oil industry, which is the nearly insolvent petrostate’s only source of export earnings and hard income, has forged the ideal environment for Russia to extend its influence in Latin America.

Moscow has stepped in as a financier of last resort for Maduro’s embattled regime, providing last minute loans, arms and cash bailouts in exchange for acquiring interests in local oil fields and the crown jewel, Venezuela’s national oil company PDVSA. Russian state-controlled energy company Rosneft has extended billions of dollars in loans to PDVSA that need to be repaid through the provision of oil supplies by the end of this year. There are signs that sharply declining production and ongoing mismanagement at PDVSA will derail efforts to meet those obligations, providing Rosneft with the opportunity to take over the beleaguered oil producer. In order to ensure the repayments are met Rosneft is already the top trader of Venezuelan crude and is acting as a key facilitator to allow Caracas to avoid U.S. sanctions to access global oil markets.' Related: US Refiners Reduce Crude Processing For First Time Since 2009

If Rosneft takes control of PDVSA, it would provide Venezuela with another means of avoiding U.S. sanctions that have forced its tankers to go dark by turning off their transponders to cloak their cargoes of crude. Caracas, upon finding itself in dire economic straits, has reportedly considered handing control of PDVSA to Rosneft in exchange for further financial aid and having a large portion of its debts extinguished.

There have been claims that Maduro wants to hand PDVSA over without going through the hassle of privatizing the company, but for such a deal to proceed it would need to be approved by the opposition controlled National Assembly. While Rosneft has stridently denied that it plans to take control of PDVSA, doing so would give Moscow considerable political leverage, not only regionally, but also over OPEC and international oil prices. This comes at a time where Russia is looking to boost oil production to make up for a fiscal shortfall and bolster an already fragile economy.

There are indications that Moscow won’t agree to deepen cuts to its oil output at a meeting with OPEC nations next month, making it imperative to gain greater influence over the cartel, which can be achieved by controlling greater quantities of oil.

Russia’s plans don’t stop with Venezuela, political and economic crises are erupting across the region engulfing Nicaragua, Argentina, Bolivia, Chile and Colombia, providing ample opportunity for the Putin administration to extend its influence. This forms part of Moscow’s calculated plans to erode U.S. influence in its traditional stronghold of Latin America. Russia has established a solid foothold in the region outside of Venezuela, having made considerable investments in the energy industries of Bolivia, Mexico and Argentina.

Russian political consultants allegedly provided support to recently ousted Bolivian President Morales during the hotly contested and reputedly fraudulent elections which saw him elected to a fourth term last month. The return of a leftist Peronist government in Argentina in place of the business-friendly centrist administration of President Macri has created an opportunity for Moscow.

Peronist governments in the economically unstable Latin American nation have long held an antagonistic attitude to the U.S. Related: 5 High Yield Oil & Gas Stocks For 2020

Then there are Argentina’s pressing economic issues including ousted President Macri’s failed reforms, a worsening balance of trade and deepening economic crisis which is pressuring Buenos Aires to urgently tap the nation’s abundant unconventional oil and natural gas reserves. Those factors have created an ideal environment for Russia to boost its influence in Argentina providing it with the prospect of strengthening ties with Latin America’s fourth largest economy.

Rosneft’s extensive expertise and capital could act as a powerful force to unlock the considerable unconventional hydrocarbon reserves held by the Vaca Muerta shale formation. That would be very enticing for Argentina’s economically hard-pressed government which is desperately seeking sources of fiscal revenue to prop-up the country’s increasingly fragile economy.

Moscow’s behavior in Latin America mirrors that of the Soviet Union at the height of the Cold War. While Russia lacks the economic muscle to wield the same influence as China, it is seeking to capitalize on anti-U.S. sentiment in the region that will allow it to build profitable trade relationships to bolster a weak economy. Russia’s steady progress indicates that it is determined to gain greater control over Latin America’s vast oil and natural gas reserves which it can use as an economic weapon to influence U.S., Chinese and OPEC policy and global energy prices.

By Matthew D. Smith for Oilprice.com

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  • Mamdouh Salameh on November 26 2019 said:
    Russia is the world’s superpower of Energy with sharp nuclear teeth. Under the inspired leadership of President Putin, it is regaining the clout and influence that the former Soviet Union once had aided by its strategic alliance with China, the world’s largest economy based on purchasing power parity (PPP).

    President Putin is taking advantage of a growing global disenchantment with the United States and is therefore trying to fill a vacuum created by an erosion of the United States’ economic, geopolitical and moral influence. From the shifting sands of the Middle East to Venezuela’s defiance to the rising power of China in the Asia-Pacific region and Russia’s in the Middle East, the United Sates is starting to look like a spent force while the strategic alliance between China and Russia is on the rise.

    Despite intrusive sanctions, Iran has won the Middle East war without even firing a shot in anger. Its allies, the Houthis of Yemen, have taken the Saudi oil industry hostage. As a result, Saudi Arabia is working now on ending the war in Yemen and seeking some form of a rapprochement with Iran.

    And despite the most intrusive US sanctions against Venezuela, the United States has failed to effect a regime change and install its puppet there. Russia and China are openly defying US sanctions and buying Venezuelan crude oil thus preventing the collapse of Venezuela’s economy. Furthermore, Russia is helping Venezuela sell its crude oil around the world and get paid for it.

    Moscow’s and China’s vested interest in Venezuela is undermine US sanctions against Venezuela and recover the billions of dollars they have extended to the Venezuelan government against the oil collateral. Moreover, Russia is not interested in acquiring PDVSA nor would the legitimate leader of Venezuela President Maduro offer it.

    Of course Russia is trying to extend its influence in Latin America on the back of a disenchantment with the United States among Latin American nations to the mutual benefit of both sides. That is part and parcel of global power play.

    Moreover, China has already won the trade war with the United States. Therefore, it will only accept an end to the war on its own terms including the lifting of US tariffs on its exports.

    Russia is absolutely right in not agreeing to OPEC+ deepening production cuts. Such a move is deemed futile since it will cost OPEC+ a loss of market share with no positive impact on oil prices. In so doing, OPEC+ will be treating the symptoms rather than the real cause of the depressed global oil demand and prices. The real cause is the trade war between the United States and China which has widened an already existing glut in the oil market from a relatively manageable 1.0-1.5 mbd before the war to an estimated 4.0-5-0 mbd. Moreover, Russia’s economy can live with an oil price of $40 a barrel or less compared with $80-$85 for members of OPEC.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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