Venezuela needs cash, and Russia has it. Venezuela has oil, and Russia wants it. According to a special report at Reuters, the socialist meltdown in Venezuela is likely to end with Moscow controlling a good deal of that tormented country’s most valuable asset: its oil fields.
According to Reuters, Russia’s giant state-owned oil company Rosneft has been holding secret negotiations with its opposite number in Venezuela, PDVSA, to purchase “ownership interests in up to nine of Venezuela’s most productive petroleum projects.”
The number of Venezuela projects Russia would have substantial or ownership stakes in would jump from five to 14 if these deals go through. The new acquisitions would include projects in some of Venezuela’s richest oil and natural gas fields.
The article goes on to note that Rosneft has already floated a billion dollars to PDVSA for promised future oil shipments, and the regime of socialist dictator Nicolas Maduro used Russian money to avoid defaulting on bonds at least twice. Russia announced one of these seemingly risky advance payments immediately after the United States announced a new round of sanctions against Maduro at the beginning of August.
Barron’s explains that Russia’s advance payments for Venezuelan crude are essentially a stealth strategy for buying the oil fields themselves. Russia writes huge checks for barrels of oil, Venezuela is unable to deliver the product or pay the debt, and Russia swaps the debt for equity in the oil projects.
Rosneft is currently buying and reselling about 13 percent of Venezuela’s oil. China used to be another big customer, but the Chinese have been cutting Venezuela’s credit due to “payment delays and the corruption and crime faced by Chinese firms operating there.” Russia, on the other hand, saw Venezuela’s disintegration as a prime opportunity to grab oil assets at bargain-basement prices. Among other measures taken to protect its investment, Rosneft has hired away some of the PDVSA’s best officials. The endgame may very well see China renewing purchases of Venezuelan oil managed and distributed by Moscow.
Quoting a number of Venezuelan officials and foreign diplomats, Reuters contends that Maduro’s lust for Russian cash drove one of the power plays that launched riots and violent crackdowns across the country: Maduro transferring the powers of the National Assembly, Venezuela’s elected parliament, to the Supreme Court. In short, Maduro engineered the Supreme Court takeover in March because the opposition-controlled National Assembly was opposed to his oil deals with Russia. Maduro made his move soon after the National Assembly voted to reject a $500 million deal with Rosneft.
The National Assembly got most of its powers back, at least for a little while, but only after the Supreme Court certified those sales to Rosneft and gave Maduro perpetual legal authority to cut similar deals.
“Pressure from Russia has played an important role in Nicolas Maduro’s decisions,” a high-ranking Venezuelan official told Reuters. The article goes on to suggest Russia’s interests may have driven Maduro to make the ultimate power grab in July by creating a new “constituent assembly” stuffed with loyalists that effectively neuters the National Assembly.
“Russia is taking everything they have,” warned an oil trader. That pretty much sums up the Venezuelan opposition’s view of the oil asset fire sale. One opposition politician described the Russians as “sharks” taking advantage of a “weak government desperate for cash.”
The number one customer for Venezuelan oil happens to be the United States, and that is where Russia’s gambit gets interesting. In theory, Moscow should be worried about American sanctions reducing or destroying the value of its Venezuelan investments, but in practice the Russians know America is very reluctant to directly sanction the oil industry, because that “nuclear option” of sanctions would bring the tottering Venezuelan economy and political system crashing down in flames.
If Venezuela does collapse, Reuters notes that Rosneft would “likely will be one of the entities at the front of the queue as a creditor because of its large collateral stake in U.S.-based Citgo.”
That probably makes Moscow feel like it has some protection if the worst-case scenario comes to pass. In fact, some U.S. lawmakers are worried that Russia is deliberately maneuvering to take control of Citgo. “We cannot give Putin any opening to affect the flow of oil or toy with Americans’ prices at the pump, and we cannot play Russian roulette with America’s energy infrastructure,” Senator Bob Menendez (D-NJ) said at a press conference in April, after writing the Treasury Department to warn that Venezuelan default could leave Moscow with control of Citgo.
On the other hand, Russia’s smartest play might be getting rid of Maduro and stabilizing Venezuela after it finishes shaking the socialist strongman down for his oil assets. Assuming Venezuela does not collapse entirely, the optimum moment to remove Maduro from the equation would be right before a significant rebound in world oil prices. Stratfor speculated in July that Russia has been working on an exit strategy to give Maduro asylum, motivated in part by Russian interest in protecting its purchase of oil, gas, and mineral assets.
As an added bonus, Stratfor noted Russia could even gain “leverage in their broader negotiations with the United States on other contentious topics, such as Syria, Ukraine or the European borderlands” by helping the United States yank Nicolas Maduro out of Caracas, simultaneously fulfilling explicit Trump administration foreign policy goals and implicit Russian financial objectives.