The woes of Venezuela's state-owned oil company PdVSA exploded onto the Washington, DC political scene this week, when doubts surfaced that it could meet a $2.2 billion bond payment due on April 12.
Part of that total due last Wednesday included a payment on a $1.5 billion loan from Russian oil giant Rosneft. The Venezuelans put up a 49.9% stake in their US subsidiary Citgo as collateral. Had the Venezuelans not made that payment, the Russian government could have suddenly found itself the proud owner of 4% of America's oil infrastructure.
A PdVSA default on the Rosneft loan would also have many other Citgo bondholders eager to sell, making it child's play for Russia to take control of the company. This would give Russian president Vladimir Putin the ability use "accidental" disruptions in fuel and heating oil movements along the eastern half of the US as leverage to push the Trump administration to lift sanctions on Russia put in place over the seizure of Crimea.
Venezuela's US Operations
Citgo is the largest foreign owner of US oil refinery capacity, controlling roughly 4% of all US oil infrastructure. Their Lake Charles, Louisiana refinery is the 6th-largest in the United States, processing 425,000 barrels a day.
In addition to three refineries and 48 oil terminals, the company has three wholly-owned pipelines in Texas and six jointly-owned pipelines that run throughout the eastern US. According to Citgo, roughly 10 billion gallons of fuel transit their network each day.
Not included as collateral for the Russian loan are the approximately 14,000 independently owned and operated Citgo gas stations.
Caracas Cannibalizing Citgo
This is only the latest move by the failing socialist regime of Venezuela's Nicolás Maduro to use Citgo assets to prop up the battered government. The other 50.1% of Citgo was offered in 2015 to holders of maturing PdVSA bonds, if they swapped those bonds for new, longer-dated Citgo bonds. The government was able to swap out $2.8 billion of those bonds, in a move that Standard & Poors rating service called a "coercive" deal that was "tantamount to default" by PdVSA.
There are other ways the Maduro government has stripped Citgo bare. They took out as many loans as possible under Citgo's credit rating, using the company's refineries and pipelines as collateral. Parent company PdVSA then moved all that money into its own coffers and used it to meet debt obligations.
Additionally, Citgo has shipped between 900,000 and 1.2 million barrels of fuel and naphtha to Venezuela each month, for free. (Technically, PdVSA pays for it with thick, sour Venezuelan crude oil it ships to Citgo.)
Last Wednesday, the same day that Venezuela successfully made that $2.2 billion bond payment, in part presumably by draining Citgo's bank accounts, the New York Times reported on another scheme to milk the last remaining dollars from the company. The idea was to transfer ownership of a PdVSA oil field in Venezuela to Citgo, to improve its credit rating so that more loans could be taken out.
The Times quoted Diego Ferro, co-chief investment officer at a hedge fund specializing in distressed bonds, on the scheme: “They are trying to get any cash that they can. And over the next year and a half until elections, they will go to more absurd ways of monetizing things.”
Another Claim On Citgo Assets
The dismemberment of Citgo to support the regime in Venezuela has run into more opposition, this time in the US court system. Canadian miner Crystallex has asked a US District Court to issue an injunction against PdVSA, forbidding it from draining any more Citgo assets or using the company's infrastructure as collateral for loans to the parent company.
Crystallex charged that the actions of PdVSA are aimed at stripping Citgo of any value before Crystallex can receive a $1.4 billion judgement it won against the Venezuelan government. The verdict, reached by a World Bank arbitration panel and reaffirmed in US courts, is compensation to cover the loss by Crystallex of its $1.2 billion of investment in the Las Christinas gold project, plus interest. The mine was seized by the Chavez government in 2008. Situated on one of the world's largest untapped gold deposits, it was the Crystallex's flagship operation.
The Trump Administration could use Crystallex's claim as a factor in favor of denying any Russian attempt to seize Citgo assets, in the event of a default by Venezuela on the $1.5 billion Rosneft loan. The president has the ability to block acquisitions of US businesses or infrastructure by foreign entities if he believes it would jeopardize national security.
Starving Its Citizens To Pay Banks
The socialist regime in Venezuela came to power under Hugo Chavez in 1998, proclaiming itself the champion of the poor. The party, under the control of Chavez successor Nicolás Maduro, now starves those same people, as it uses everything it can to keep current with bond payments to foreign banks and hedge funds. The unilateral sales of national assets to keep these debt dishes spinning is running into growing outrage in the Venezuelan Congress. There is little that representatives can actually do, as the Supreme Court is packed with Maduro party loyalists.
Maduro attempted to stage a coup in late March by having the Supreme Court strip the legislature of the ability to pass laws. Riots erupted across Venezuela, but more concerning to the government was overseas investors becoming alarmed at the action. This led to Maduro ordering the Supreme Court to "clarify" its ruling and return some powers to the legislative branch of government. This is merely symbolic, as the Maduro administration has ignored everything the National Assembly has done since opposition parties came to power last year.
The Russian Connection
This isn't the first time, and likely not the last, that the Maduro regime in Venezuela has hocked national assets to Russia in exchange for much-needed cash. Reuters reports that Rosneft has lent PdVSA between $4 billion and $5 billion, in return for stakes in, or liens against, Venezuelan oil assets.
Speaking to CNBC, Steve Hanke, director of the Troubled Currencies Project at the Cato Institute said, "If anything goes off the rails, the Russians will call the tune and pick up the pieces. The Russians are very smart and know how to structure air-tight deals in cases like this."
No matter how airtight the contract between government-controlled Russian oil company and the government-controlled Venezuelan one is, Citgo's assets are located in the US. A Trump administration attempting to deflect rumors that it is too cozy with Moscow may take a hardline approach to any attempts by Rosneft to collect on its collateral.
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