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World View: Russia Considers Taking on a Huge Financial Burden: Venezuela

This morning’s key headlines from GenerationalDynamics.com

  • Russia considers taking on a huge financial burden – Venezuela
  • Maduro has ‘plans A, B and C’ if US imposes further sanctions

Russia considers taking on a huge financial burden – Venezuela

Starving teen in Caracas searches through garbage dump for food (Latin American Herald Tribune)
Starving teen in Caracas searches through garbage dump for food (Latin American Herald Tribune)

As Venezuela’s Socialist paradise sinks into an ever-deepening black financial hole, Russia’s president Vladimir Putin must decide in the next few days whether to take on the hugely expensive financial long-term burden of continuously bailing out Venezuela’s economy.

Venezuela has an estimated $63 billion of bond obligations. In the next two months, Venezuela has $3.5 billion in debt servicing payments due in October and November. About $0.6 billion of that will be owed to holders of Venezuelan government bonds, and $2.9 billion to holders of bonds issued by Venezuela’s nationalized state oil and natural gas company, Petróleos de Venezuela, S.A. (PDVSA).

In the past, Venezuela’s president Nicolás Maduro Moros or his predecessor Hugo Chávez would simply issue more bonds and borrow more money to meet debt obligations. (This is known as borrowing on your Visa credit card to make payments on your Master Card.)

However, that possibility has been blocked since August 28, when US president Donald Trump imposed sanctions that prevent further borrowing, either by the Venezuelan government or by PDVSA. Three days later, Fitch Ratings Service downgraded Venezuela’s bonds from CCC down to CC, meaning that even if Venezuela could borrow more, the interest rates would be significantly higher.

One option available to Venezuela is to default on its bond payments and turn to the International Monetary Fund (IMF) for future loans. However, the IMF would demand significant economic reforms that the maniac Maduro would never agree to. It is thought that this option would require Maduro to step down, which could result in violence in the streets.

So the other choice is to get Russia to bail Venezuela out – and not just today, but on a continuing basis. This would mean helping Venezuela make $3.5 billion in debt payments this year, $3 billion more in the spring, and another $3 billion more at the end of 2018.

Russia has helped Venezuela three times in the last 24 months to make billions in debt payments: in February 2016, October-November of 2016 and then again April-May of 2017. Then in August, Russia’s nationalized oil producer, Rosneft, loaned $6 billion to PDVSA in the form of pre-payments for PDVSA crude and other products to be delivered in the future.

One unnamed Trump administration official says that the US is just going to sit back and watch to see what happens:

Will they want to be throwing all sorts of money into a sinking ship. Frankly if they do, I’m not sure from a geopolitical perspective that we wouldn’t be happy to sit back and watch. For the Russians, it’s going to be bad money for them. It’s going to be a sinking investment that is going to derail Russia even more.

Maduro met with Putin in Moscow on Wednesday at the Russian Energy Week conference, and seemed to imply that the financial support would continue:

I thank you for all the support, political and diplomatic, in difficult times which we are living through. I‘m very thankful for the agreement on grain, it has helped keep consumption in Venezuela stable.

The administration official adds: “Essentially, you [Russia] take ownership of the situation if you come in and rescue them now.” Miami Herald and Deutsche Welle and Reuters and Latin American Herald Tribune (25-Sep)

Maduro has ‘plans A, B and C’ if US imposes further sanctions

The US administration supposedly has an “escalatory road map” that outlines a series of increasing sanctions that could be imposed, including the so-called “nuclear option” – oil sanctions – that could deprive the oil-dependent government of desperately needed cash.

In his speech to the UN General Assembly on September 19, president Trump suggested that plans are in the works for further sanctions:

We have also imposed tough calibrated sanctions on the socialist Maduro regime in Venezuela, which has brought a once thriving nation to the brink of total collapse. The socialist dictatorship of Nicolás Maduro has inflicted terrible pain and suffering on the good people of that country.

This corrupt regime destroyed a prosperous nation, by imposing a failed ideology that has produced poverty and misery everywhere it has been tried. To make matters worse, Maduro has defied his own people, stealing power from their elected representatives, to preserve his disastrous rule. The Venezuelan people are starving, and their country is collapsing. Their democratic institutions are being destroyed. The situation is completely unacceptable, and we cannot stand by and watch.

The United States has taken important steps to hold the regime accountable. We are prepared to take further action if the government of Venezuela persists on its path to impose authoritarian rule on the Venezuelan people. … The problem in Venezuela is not that socialism has been poorly implemented, but that socialism has been faithfully implemented.

From the Soviet Union to Cuba to Venezuela, wherever true socialism or communism has been adopted, it has delivered anguish and devastation and failure. Those who preach the tenets of these discredited ideologies only contribute to the continued suffering of the people who live under these cruel systems. America stands with every person living under a brutal regime.

Speaking at the Russian Energy Week conference in Moscow on Wednesday, Maduro said that he doesn’t fear further US sanctions on Venezuelan oil sales:

Big names are trying to negotiate at very high levels and avoid such decisions that are wrong and are quite unclear. Venezuela has its plan A, plan B and C, and other alternatives.

Oil is tradable, and if there is some decision to go after the oil of my country, I think the same will happen to the consumers in the US. And the companies who are our counter parties and have been such for the last 50 years will probably also suffer.

The biggest companies in the world are interested in buying our oil and oil products. Naturally we will be creating the conditions necessary to cover the needs and demands of those companies. I’m quite firm about this.

It is amazing how thoroughly Socialism has destroyed Venezuela’s economy. Venezuela is sitting on the largest oil reserves in the world, but oil production under the Socialist government has fallen almost 3 percent this year. The disastrous Socialist economy is in disarray, and its refineries run at less than 50 percent of the available capacity because debt-ridden PDVSA can’t afford proper maintenance.

In fact, PDVSA’s own experts say that its refineries were running at 45% capacity in July, dropping to 44% in August, because seven out of 12 crude distillation units were out of service due to extended maintenance work. S&P Global Platts and Reuters (1-Aug) and Oil Price (27-Sep)

Related Articles

KEYS: Generational Dynamics, Venezuela, Nicolás Maduro Moros, Hugo Chávez, Petróleos de Venezuela S.A., PDVSA, Fitch Rating, Rosneft, Russia, Vladimir Putin, International Monetary Fund, IMF
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