Venezuela’s debt crisis is only expected to grow worse this year, and the government could be without one of its most important benefactors, raising the odds of yet another default.
China has sent around $50 billion to Venezuela over the years, loans that were repaid in oil shipments. China needed oil and Venezuela needed cash, and the relationship worked for a period of time. But as Venezuela’s economic situation took a turn for the worse, China slowly backed away. Or, more accurately, China allowed Venezuela more lenient repayment terms while at the same time slowly closing the door on new loans.
According to a new Reuters report, with an agreement expiring this year, China will likely extend a financing arrangement that has already been in place that stretches out Venezuela’s debt payments. With little to no cash on hand, China is allowing Venezuela to only pay interest on its debt.
However, while that arrangement will continue, Reuters reports that China will likely cut off Venezuela from new loans. “Given Venezuela’s falling oil production, it’s natural for Chinese banks not to renew loans,” a source within the Chinese oil industry told Reuters.
Much of Venezuela’s oil is still earmarked for these obligations, which means that Caracas is not taking in any revenues from those exports. Reuters says that Venezuela still owes China $19.3 billion, half of which originated from a 2010 deal. The problem for Venezuela is that the principle on these payments is not declining since only interest payments are being made.
The odds of repayment are shrinking. The Venezuelan government has less than $10 billion in cash reserves, with maturing debt payments this year that exceed that level. Moreover, Venezuela’s oil production is in freefall, and because China lays claim to a large slice of that output, dwindling output means an ever shrinking source of revenue. China is unlikely to be repaid, but it will continue to take as much oil as it can while it still can. Related: China’s Gas Storage Capacity Can’t Keep Up With Demand Growth
Venezuela sends about 500,000 to 600,000 bpd to China and Russia as repayment for past loans, according to The Atlantic Council. Another 400,000 to 450,000 bpd is sold domestically at rock bottom prices at a loss for PDVSA. That leaves only about 850,000 bpd that Venezuela can earn revenues from, a figure that could continue to fall this year.
Reuters also reports that China has declined to renew a financing arrangement with Venezuelan state-owned oil company PDVSA that would translate into oil investment. Beijing is apparently not taking Caracas’ calls.
In an eye-opening and revealing statement, one source told Reuters that Chinese officials are beginning to put Venezuelan President Nicolas Maduro in the same category as Robert Mugabe, who led Zimbabwe for four decades but was ultimately forced out of power.
In other words, China sees Maduro as a petty dictator, one whose perch is looking increasingly wobbly. China’s support is transactional and the Chinese government would not bother themselves with propping up Maduro if his grip on the country started to slip. “China looks at Venezuela as another Zimbabwe: a poor return on its investment,” a source in Beijing told Reuters.
With few allies left, Venezuela’s last source of support is Russia. Time reported this week that Russia actively assisted Venezuela in setting up the country’s new cryptocurrency, the “petro.” The cryptocurrency was launched in order to deal with hyperinflation, which has rendered Venezuela’s official currency, the bolivar, largely worthless. Maduro has claimed that the petro would help raise billions of dollars in new revenues, but those claims have been put forth without evidence and most analysts don’t take them seriously. Related: Egypt: The Next Natural Gas Hotspot
In any event, the Trump administration just announced sanctions on the petro, barring U.S. citizens from engaging in any transactions with the cryptocurrency. It is unclear what practical effect this might have, although it could undercut whatever interest there is in the petro.
It is uncertain if Russia will come to Maduro’s aid. The Venezuelan government owes about $3 billion to Russia, with PDVSA owing an additional $5 billion to Russia’s Rosneft, according to The Atlantic Council. That came at a steep price – Maduro’s government has been trying to hand over oil assets in the country in exchange for assistance. Rosneft took a 49 percent collateral stake in PDVSA-subsidiary Citgo and is looking to gain a foothold in the country’s oil reserves. This is another source of great discontent among the Venezuelan people and the opposition-controlled National Assembly, who accuse Maduro of illegally selling off the nation’s oil assets.
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It isn’t as if China and Russia are benefitting enormously from Venezuela’s crisis – they may not be paid back in full for all of their loans. Venezuela is a major risk for them. But with the country in crisis, and Venezuela crushed underneath a mountain of debt, China and Russia will hope to lay claim to the shattered pieces that remain.
By Nick Cunningham of Oilprice.com
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