Venezuela debt talks: Caracas plays its last cards
Restructuring negotiations will feature a complex geopolitical poker game involving the US, Russia and China
John Paul Rathbone in Miami and Robin Wigglesworth in New York
Last week, at the invitation of President Nicolás Maduro, a group of international financiers flew to Caracas to begin what has been called the world’s most complicated debt restructuring, also one of its biggest, and certainly one of the strangest.
In a capital city blighted by the highest homicide rate in the world, investors filed into a white ice-cream cake of a building opposite the Presidential Palace. Heightening the unreality of a socialist economy underpinned by the world’s largest oil reserves, but mismanaged into near-collapse, the government rolled out a red carpet for its guests and laid on a ceremonial guard.
Venezuela seeks a “win-win” solution for all, Tareck El Aissami, the vice-president, told the investors. The country would continue to service its $150bn of foreign debt, the 43-year-old socialist militant stressed — although rating agencies issued a slew of default notices even as he spoke. The speech ended half an hour later. Participants left with gifts of coffee and fine chocolate, but none the wiser. The government, meanwhile, declared the meeting a success.
“We’re all just trying to figure out if there is a method to the Venezuelan madness,” says Peter West of boutique advisory EM Funding. “If you are a little confused . . . don’t feel bad,” added Russ Dallen of Caracas Capital, a Venezuela debt specialist.
In part, the confusion stems from the complexity of Venezuela’s debts, which have been issued by various entities, with varied legal clauses, to multiple parties. It owes $64bn to bondholders, more than $20bn to allies China and Russia, $5bn to multilateral lenders such as the InterAmerican Development Bank, and tens of billions to the importers and service companies that keep the all-important oil industry pumping and the regime afloat.
Mostly, though, the uncertainty results from the notion that Venezuela has embarked on a classic “restructuring plan”. Caracas is not beginning a callisthenic exercise in the debt reprofiling, sustainability and other technical metrics that typically mark sovereign debt workouts. Rather it has started a grim poker game, with no betting limits.
With the exception of bondholders, for the other five players sitting around the table — the government, the opposition, the US, Russia and China — the prize goes far beyond money. At stake are the political survival of a government, the fate of 30m Venezuelan citizens and the competing geopolitical interests of three superpowers.
“It’s a complex game with many players, so it could lead to a bad outcome,” says Robert Kahn, a former International Monetary Fund staffer and veteran of sovereign debt crises. “Moreover, a lot of the players don’t know or understand the others’ incentives.”
PetroChina chairman Wang Yilin and the Venezuelan oil minister Eulogio del Pino sign an agreement while President Maduro looks on © Reuters
The government simply wants to survive. It fears that bondholders, which only want to be paid, could seize its exported oil cargos in the event of a default, cutting off Caracas from its sole source of revenue. Then there are the superpowers. Washington wants to curtail an increasingly rogue regime, implicated in global drugs trafficking, that sits on $15tn of oil reserves only a three-hour flight from the US.
Moscow, meanwhile, seeks to parlay Caracas’ distress into a stronger foothold in the Americas. China’s interests are more commercial: having loaned $60bn to Caracas over the past decade it wants continued access to Venezuela’s vast energy reserves.
Adding to the complexity are the house rules; there may not be any. All of Venezuela’s foreign bonds are governed by New York law. But the presence of Russia and China at the table further complicates a restructuring that will be least partly be conducted outside the IMF or the Paris Club of creditors.
Then there is the fact that the two Venezuelans in charge of the process, Mr El Aissami and economy minister Simon Zerpa, are sanctioned by the US for alleged drug-trafficking and human rights abuses. Their appointment is the clearest sign that Caracas imagines itself operating in a parallel legal universe — as may the ensuing poker game.
One of the few things that is clear in this bluffers’ exercise is that Venezuela can no longer afford its debts. Ten years ago, amid the commodity price boom, Venezuela enjoyed a petrodollar windfall worth an estimated $1tn. When Wall Street offered the prospect of more money still, Caracas issued over $50bn of bonds. Alongside Chinese lending and other loans, this quadrupled foreign debt in 10 years. Much of the money was wasted or stolen — as much as $300bn, according to former ministers. Now Caracas has run out of funds.
Foreign reserves hover below $10bn, near 20-year lows. Imports have been crushed by 85 per cent in five years, far worse than the most austere IMF programme. The black market exchange rate has soared to 7,000 times the official rate, and average daily oil output — the sole source of foreign exchange — has shrunk by 20 per cent from last year.
Just as decisively, Venezuela slipped into hyperinflation last month, with prices rising faster than 50 per cent. No economy can survive hyperinflation for long, and only one political regime has done so — Robert Mugabe’s Zimbabwe, at least until last week. With debt default on the cards, change may be coming to Venezuela, too.
Tareck El Aissami, vice-president of Venezuela, talks about the problem of sanctions at a news conference this week © Bloomberg
Certainly that is what the opposition hopes. Although battered and divided, it has one potentially strong card to play. Recent sanctions bar US institutions from dealing with refinanced Venezuelan debt issues, effectively making the debt restructuring that Caracas seeks impossible. The only exception is if debt is authorised by the opposition-controlled National Assembly.
In theory, this opens the possibility of a political bargain that could herald deeper change. The opposition could approve a debt refinancing. In return, the government would allow free, fair and internationally monitored presidential elections next year — which the opposition and its supporters like the US and the EU hope it would win.
“It is not clear that anything resembling a debt restructuring can be achieved under the current regime, at least in the absence of a rapprochement between the Maduro administration and the National Assembly,” says Lee Buchheit, a senior partner at Cleary Gottlieb and an experienced sovereign debt-restructuring lawyer.
If the government is worried, though, it so far shows little sign of strain. “We are the great hope of a people who have waited for centuries,” Mr Maduro exhorted in characteristic fashion last week. Such apparent insouciance may be due to the pervasive unreality that often grips dictatorial regimes. But there are also good reasons why Mr Maduro feels he can call the bluff of the US, the opposition and bondholders.
Advised by Cuban intelligence officials, in turn schooled by the Soviets, Mr Maduro’s domination of the country is Orwellian. Apart from the National Assembly, all institutions are under his control — including the Supreme Court, the media, the electoral authority and the military.
A long series of street protests by opponents of the Maduro regime have had little effect © AFP
Food is in short supply — and much of what is available is dispensed via a subsidised state programme that Mr Maduro can use to coerce public support. The opposition is exhausted after mass protests this year produced no change, despite more than 100 deaths. A “faithful opposition”, co-opted by the government, is even emerging.
“All this leaves President Nicolás Maduro in a comfortable position,” Risa Grais-Targow of Eurasia, the risk consultancy, wrote in a note to clients last week. It also “significantly reduces the chances of regime change.”
Indeed, this may be why Mr Maduro initiated the debt talks in the first place. Even default need not spell the end. He could use the $9bn of debt payments otherwise due in 2018 to double current import levels, thereby boosting his chances in presidential elections held next year. Legal counsel, retained by Caracas, would meanwhile work to confound investor claims in the courts.
“The government is never going to negotiate until it feels that is its best option,” says one western intelligence official close to the situation. “And that moment has not yet arrived.”
Nor, indeed, has a formal bond default. Caracas continues to pay bondholders, albeit irregularly, partly thanks to Moscow’s and Beijing’s largesse.
Last week, Russia restructured its $3.5bn bilateral debt with Venezuela, freeing resources for Caracas to pay other creditors. China, although reluctant to increase its roughly $20bn exposure to Venezuela, also seems to prefer the political status quo.
“Venezuela is a quagmire for China,” says Margaret Myers, a China expert at the Inter-American Dialogue in Washington. “But the general feeling is that it will disburse another $4bn or so to Venezuela this year via their joint venture fund — although not go far beyond that.”
It promises to be an exhausting poker game. But there will be a reckoning. Venezuelan hyperinflation and the continuing slide in oil production will see to that. Nor will Moscow and Beijing indefinitely restructure their debts while bond investors continue to be paid. When that moment comes, the other players will have to go all in, or fold.
The US may raise the stakes first. It can escalate travel bans and asset freezes on officials. It can also issue secondary sanctions on the Russian oil companies and Chinese banks that deal with Venezuela, just as it has done with companies trading with North Korea. Washington’s biggest sanction would be the “nuclear option” of banning the 600,000 barrels a day of oil imported from Venezuela. Argentina’s president Mauricio Macri suggested Latin America would support such a move.
As for the bondholders, sometime soon they will “have to decide whether to be passive or active. Passive means waiting to receive restructuring proposals from the Venezuelan government. Active would involve . . . developing their own proposals,” says Mr Buchheit.
In extremis, that means using court orders to seize oil cargos in the event of an accelerated default. If that strategy is successful, Mr Maduro, who was last week accused by his former attorney-general of crimes against humanity in The Hague, would face a dark choice.
He could fold and escape to exile in Cuba — an exit already suggested by Latin American diplomats to Havana. Or, as export revenues crater, he could stand ground and repress the growing social unrest. The role of the military would then be key: it remains loyal to Mr Maduro but may not always be — as Zimbabwe has showed.
The green baize table is set, the antes are due. The play will be rough, but the returns potentially huge. That is especially so for investors prepared to wage the kind of battle that produced outsized profits for several vulture funds that snapped up debt in Argentina’s $100bn bond restructuring and then suedfor full repayment at par. Someone is going to take a bet.
“Ultimately, there is going to be more money made in Venezuela than even in Argentina,” says Hans Humes, head of Greylock Capital, which is forming an investor committee. The geopolitical and humanitarian consequences are likely to be larger still.
Additional reporting by Jonathan Wheatley
The Russia connection: Moscow’s Latin America push balances US influence
Many western and even Chinese creditors have been scratching their heads over why Russia was building a massive exposure to Venezuelan debt.
Moscow’s generosity and patience with Caracas come amid a broader push into Latin America. Since Vladimir Putin’s first presidential term in 2000, Russia has pursued a return to countries in the region with which the Soviet Union had close ties. First and foremost, this happened through arms deals: Russia has sold more than $15bn in weapons to Latin American customers since 2000, with exports accelerating over the past five years with Venezuela one of the top customers.
The armed forces and security services have followed suit: the Kremlin has rebuilt ties with Cuba and Nicaragua, and is pursuing the restoration of listening posts aimed at the US in both countries.
At the same time, Russia has pursued closer ties with the continent’s largest economies and political heavyweights: “It is inaccurate to claim we are just restoring the Soviet Union’s footprint. We have built a stable relationship with Brazil through our joint work in Brics [also with India, China and South Africa], we are rapidly expanding co-operation with Argentina,” says a former Russian ambassador to the region. Indeed state-owned Gazprom is looking at shale projects in Argentina, and Rosneft is prospecting for oil in Brazil.
Moscow also sees “a lot of new potential” with Mexico, the ambassador says. “There are open doors there against the background of their difficulties with [Donald] Trump.”
Such opportunism is typical of Moscow’s foreign policy. Russia often seeks to move in where Washington is in retreat and increase its weight globally versus the US.
Kathrin Hille
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