US Sanctions May Play into China’s and Russia’s Hands

Venezuela is going to have one heck of an “Oil Fire Sale”

By Ken Moors,

Venezuela is now on the brink of total collapse. As you’ve seen before here in Oil & Energy Investor, most recently only last weekend, national oil company PDVSA looms large in this unfolding crisis. The focus is the company’s ability to pay bond interest due in two months. Doing so is crucial. But as of this morning, that prospect is dwindling.

Along with it goes the ability of the central government to administer an entire population and avoid the country descending into outright civil war. And PDVSA is at the center of it all. Now, there’s talk of U.S. sanctions on PDVSA in particular. Here’s how that may play right into Russia’s and China’s hands…

This is Venezuela’s Oil Supermarket

PDVSA is the vehicle for about 90% of Venezuela’s trade revenue and has served as a primary outside purchaser of all manner of staple commodities essential for the literal survival of a domestic economy rapidly sliding into oblivion.

While charismatic Hugo Chávez was in power, PDVSA was required to spend foreign hard currency export proceeds held outside the country to acquire food for import into Venezuela. It prompted a colleague of mine at PDVSA to lament: “I thought we were an oil company, not a supermarket.”

Paying for the purchases abroad was supposed to minimize the adverse impact of exchanging currency under oppressive domestic inflationary pressures and a fractured infrastructure.

What it actually did was undermine any ability to use PDVSA’s revenues to buttress an increasingly insolvent central budget. It also wasted money, as food was purchased and then transported through intermediaries at exorbitant prices. PDVSA, after all, operates oil tankers, not cargo vessels.

Nicolás Maduro, Chávez’s successor, complicated the matter even further by regularly raiding PDVSA coffers to pay for a wider range of imports, tied fundamentally unstable sovereign debt issuances to PDVSA bond futures, and relied on accelerating heavy-handed responses to local unrest.

As the crisis worsened, life in the streets became unbearable. Contacts tell me that the few retail establishments in Caracas that managed to remain open often wouldn’t decide on the actual price of goods and services until you reached the counter.

Inflation was just that high, and the effective market value of the bolivar, the local currency, moved that quickly. It reminded me of when I was living through Russia’s currency devaluations. A dollar went a long way in Moscow then, and in Caracas now.

As Maduro’s repression increased, America launched some initial sanctions. Another, more concerted round came in response to Maduro replacing the National Assembly (controlled by the opposition) with a new legislature more bound to his will.

As I’ve sketched in some detail here in Oil & Energy Investor, Washington is now eyeing PDVSA specifically for sanctions, threatening, among others, to restrict or eliminate U.S. exports of lighter oil to PDVSA. These exports are required to allow the processing of the much heavier oil from Venezuela’s Orinoco oil basin.

This area on either side of the Orinoco River may hold the largest oil reserves in the world. But this is very heavy oil. I can personally attest to this. Years ago, I put some of this in the palm of my hand, turned the hand over, and it just sat there. This oil makes molasses set speed records. It’s much more expensive to extract and process, requiring expertise and technology generally available only in the West.

If Venezuela were to lose the ability to process its oil products, the country’s domestic markets for gasoline, diesel, and other distillates would collapse. The resulting knock-on effect is certain to escalate inflation and make basic life intolerable.

And that’s not the only way in which PDVSA is under increasing pressure…

Russia is Silently Taking Over

The company has been delaying payment of vendors and in some cases even wages. It’s also been unable to meet contract obligations at terminals in the Caribbean, forcing the introduction of storage and transit agreements that further increase costs and reduce revenues.

That has set the stage for one heck of a fire sale.

Russian companies have been moving in to cherry pick PDVSA assets. So far, the biggest prize – the large refinery complex on the island of Curaҫao – remains in PDVSA hands. But it’s unknown for how long the company will be able to maintain an increasingly onerous working capital requirement.

Meanwhile, Rosneft, Russia’s largest and state-controlled oil producer, has been acquiring upstream and midstream assets inside Venezuela in return for a combination of straight payment and/or assumption of debt. PDVSA desperately needs the funds, but Rosneft’s largess is not inexhaustible. And all of this still requires the expensive development of the Orinoco and its heavy oil.

Neither PDVSA nor Rosneft can shoulder this burden for long, especially at today’s global oil prices. Nonetheless, control of upstream operations in Venezuela can provide Rosneft with contract swaps and targeted market penetration.

Years ago, five Russian oil majors set up their own joint venture to participate in the Orinoco along with PDVSA. There was also a joint investment bank established in Caracas for the same purpose. The venture collapsed and the bank languished. But they remain and can be resurrected on short notice.

The other likely outside beneficiary of this fire sale is China.

U.S. Sanctions May Play Into Russia’s and China’s Hands

Chinese companies have moved into Venezuelan upstream activities as well. However, here the primary play has been to control oil export revenues.

Beijing does this through repayment of large loans provided both PDVSA and the Venezuelan government. In an approach already used in Brazil and especially in Ecuador (the smallest OPEC member, where the Chinese now control oil payments), exports no longer return to the Chinese mainland.

Rather, they move anywhere national oil company Petroecuador (in the case of Ecuador) can attract the best price. But most of the sale proceeds are transferred into accounts under Chinese control. Here as well, the Chinese may make use of the oil investment bank in Caracas. Both China and Iran were parties in the bank’s creation, although aside from some Chinese correspondent accounts, foreign use of the bank has largely been Russian.

Washington needs to keep this in mind when determining the next sanctions. Coming down on both Maduro and PDVSA by assaulting oil may simply further Russian and Chinese plans already underway, pushing Venezuela further into their arms. By Ken Moors,

Behind the hype, US shale drillers have entered a vicious circle. Read…  Are More Bankruptcies Next for US Shale Oil Drillers?

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  30 comments for “US Sanctions May Play into China’s and Russia’s Hands

  1. Mugsy says:

    Germany wanted to conquer Europe and now that they have, they have nothing but problems….. Sounds to me like China will have nothing but headaches, and oil nobody will want for years to come, if they move on Venezuela…. Good riddance to bad rubbish.

    • intosh says:

      Well, the US has been shale fraking their own land, contaminating soil and water. So I’d take what you call “headache” China supposedly will have with Venezuela any day over the former.

    • intosh says:

      And for Germany, really? Nothing but problems? Sure there are problems but Germany benefitted enormously, arguably the most, with its dominance of Europe via the euro. And I’m pretty sure most Germans agree.

      • cdr says:

        “Germany wanted to conquer Europe and now that they have, they have nothing but problems”

        I especially like the negative rates out to 7 years and insignificant rates out to 30 years. This is one way the ECB collects for all the QE it provides. Germany subsidizes it. Can’t … stop … laughing …

        • cdr says:

          Or – more to the point — German savers – German citizens – subsidize it by accepting negative rates on their savings.

        • intosh says:

          Why do you think Germany agrees to subsidizes it? Because it’s been good for business for them.

          Sure German citizens subsidize that. So what? Isn’t that the whole point of this game — a wealth transfer? German corporatists grabbing the lion’s share of the benefit. So what you show doesn’t disprove the fact that Germany benefitted in this whole deal.

      • Kf6vci says:

        Nope. Read up on “Target 2” and the upcoming “Banking Union”. The Krauts will never see those 885 bn € repaid nor will they avoid losing over 2 tr € when the system will collapse. They have been suckered into granting Cyprus & Malta the same voting rights as themselves with their 27% stake in the ECB. Imagine the Treasury doing the same following a monetary union with Venezuela.

        • intosh says:

          You benefit and you pay. That’s the deal for ordinary citizens. There is no free lunch, unless you are a banker. But still, that’s hardly “nothing but problems”. Germans benefitted the most, relatively speaking.

  2. VarAway says:

    To my knowledge, the Curacao refinery ( formerly Shell ),
    is an outdated facility that badly needs upgrading.
    It is owned by the Curacao Government and leased to
    PDVSA. ( until 2018 ? )

    As stated over and over again by various commenters: Venezuela, never has there been a country that could
    have been SO rich, SO poor.

    • Kent says:

      The American Way:

      American companies developed Venezuelan Oil with the help of the Venezuelan Oligarchy. The USA bought the oil, sent the money to the Oligarchy, which then sent it on to Wall Street. The vast wealth of Venezuela never benefited the Venezuelan people.

      Venezuela also has one of the largest forest tracks on earth. And they can’t even produce their own toilet paper.

      • 2banana says:

        Except they used to have food, gas, electricity, toilet paper, jobs, health care, vacations, running water, etc.

        Today, not so much.

        Given the choice….


        The vast wealth of Venezuela never benefited the Venezuelan people

        • Kent says:

          All imported and benefiting American companies. Imagine if the Oligarchy had used that money to build thriving industries in Venezuela. The Socialists would never have had a chance.

    • cdr says:

      I can only imagine Venezuela treating China and Russia in much the same way as the carnivorous plant in Little Shop of Horrors acted.

      Venezuela to China / Russia: Feed Me!

      Bless their hearts.

  3. Flying Monkey says:

    You get what you reap, and what you sow may not be the crop you later want. Life is just a trade off of bad options.

    Life is a plate of unexpected consequences. As I gather from listening to Jordan Peterson (phycology professor… on your tube), your ability to have bravery and courageousness to be strong, play by societal rules and solve your OWN problems is the key to a meaningful life. Nobody can solve YOUR problems and if they do, they are stealing your ability to learn about yourself, grow and mature.

    Technological advancement and complexity cause new problems themselves for instance. There is no utopia. Each advancement brings with it unforeseen and hidden problems.

    I am happier with using the “very uncompleted bicycle” for transportation (I live in Europe) instead of using an immensity complex system for the support of an automobile. Sure there is some miserable weather in the winter, but you just deal with it. It makes you all around stronger anyway.

    If you can earn good money in a highly complex economy, yet live uncompleted, you can have more freedom to do what you please.

    • TJ Martin says:

      Absolutely … hear hear … two thumbs up .. preach it brother and a hearty Amen regardless of one’s beliefs .

      Though I do believe you meant to type .. uncomplicated .. not uncompleted . As an addendum to your brilliant comment . A quote from the late philosopher Jacques Ellul ;

      ” For every one benefit gained by technology there are at least three consequences that follow ” ( ” The Technological Bluff ” ; by Jacques Ellul )

      His later stating that the real question in the end that we ask all too infrequently is .. in regards to any given technology .. does the benefit outweigh the consequences ? Cause sometimes they do … but many times they do not

  4. matt says:

    Imports from Venezuela are up 54 pct this month alone . The East coast is one of the largest importers of its oil and the refineries are set up to refine it. I have read the some oil companies in the Gulf States have been refusing it due to the high salt content. Even though the PHila , N J area is the largest refining area outside the Gulf only 20 pct of all Gasoline for the east coast is refined here. Almost all is pipeline in from the Gulf. We are about to feel how bad we depend on it when almost every single refinery is shut down from the Hurricane

    • Gershon says:

      Oil companies will use Harvey as a pretext to jack up prices at the pump regardless of the hurricane’s actual impact. And their congressional hirelings won’t make a peep.

  5. Meme Imfurst says:

    The USA practiced ‘use other countries resources’ before your own for as long as I can remember. Oil was and is the biggest target, so why shouldn’t Russia and China target the same?

    Somehow the USA has decided that fracking oil is more important than potable water….I read that so called ‘technology’ will take care of any ‘pollution from fracking’ We shall see, but what will we do about the ever increasing number and intensity of earthquakes that surround these fracking operations, call it the hidden cost. Just look at Oklahoma, Colorado, Texas, Utah, to name a few.

    • TJ Martin says:

      ” Just look at Oklahoma, Colorado, Texas, Utah, to name a few ”

      .. as well as Kansas , S.Dakota , Pennsylvania etc . FYI; I’ve had the distinct displeasure of witnessing first hand the effects of fracking on earthquakes with a USGS friend in both KS and CO . The very bad joke being … as the USGS continually states unequivocally that the recent rash of previously unheard of ( even in the depths of Native American lore and story telling ) earthquakes across the plains and eastern states are due directly to the effects of fracking … the local government , oil companies etc remain in complete abject albeit volitional denial as towns , homes and lives are ruined . Emphasis I might add on … ‘ volitional ‘

      • mean chicken says:

        Also, it really should be against the law to produce a natural resource nobody wants, especially at a loss.

  6. TJ Martin says:

    May play into Russia and China’s hands ? More like .. will !

    Cause thats how the games being played these days . This administration threatens trade deals with Mexico and Canada ? China jumps in offering to pick up the slack and them some if they happen . We place sanctions on an oil / resources rich country we do not agree with ? China and Russia show up with checkbook in hand .

    And its not just China and Russia ! As an example ? As we try to declare another war on drugs eliminating any hope for real and genuine research into the potential benefits and consequences of many currently illegal substances ? Israel opens its doors to US Big Pharma with them now bringing money and jobs there in order to do the research we will not allow ( full discloser I am no fan of complete legalization but do support research )

    So as we continue to bloviates , threaten and sanction … the rest of the world benefits … to our overall financial loss

    Brilliant !

  7. so I can drive my Cadillac Limo Pickup Truck to the store and buy Venezuelan bananas for sixty nine cents a pound.

  8. polistra says:

    Other countries (Cuba, Persia, Russia) have responded to US sanctions by developing their own sets of skills and using resources to best advantage. Venezuela’s government has been so totally dependent on Exxon that it lost the ability to adapt.

    100 years ago Venezuela used its resources smartly. It produced all sorts of valuable and unique materials.

    For instance, coffee. In 1898 Venezuela produced 3 x as much coffee as similarly sized Colombia. Now it produces 1/27 as much coffee as Colombia. An 81-fold decrease, a completely lost skill and lost income.

  9. Petunia says:

    Here’s a story about a Venezuelan tanker stranded off our coast for lack of credit:

    In Florida the most expensive gas, by a lot, was always at the Venezuelan gas stations Valero. The price difference was sometimes as much as $1 a gallon. I always thought the gas stations were a front for something else because I couldn’t conceive that much incompetence in business. Maybe I was mistaken about the incompetence.

    • mean chicken says:

      Outside of Florida perhaps the opposite MAY have been the case, Valero was one station I frequented in the past due to price competition. FWIW

  10. Frank says:

    Valero is a Texas based oil company,and not owned by Venezuela. However Citgo is Venezuelan.

    • Petunia says:

      At the time, Valero was getting its oil from Venezuela and selling it at noncompetitive prices. For all practical purposes, they were not selling gas. Regardless of where Valero is incorporated their business relationship with Venezuela looked like it ran deep.

  11. mean chicken says:

    “expertise and technology generally available only in the West.”

    It’s my observation globalists are in the business of exporting these subsidized technologies and intellectual property, not manufactured products.

  12. Maximus Minimus says:

    Unintended consequences. China and Russia have no interest in keeping their wealth fund in US treasuries where it had been watered down, abused by QE. If they have to loose money, they prefer to do it Venezuela.

  13. raxadian says:

    China needs oil for thir industry, but the bigger buyer of Venezuela oil is still the US. If Venezuela colapses fuel prices in the US will skyrocket.

    In Argentina president Peron renounced during his second presidency to avoid a civil war. Maduro is not so generous.

Comments are closed.