Vladimir's Venezuela: Leveraging Loans to Caracas, Moscow Snaps up Oil Assets

Venezuela’s unraveling socialist government is increasingly turning to ally Russia for the cash and credit it needs to survive – and offering prized state-owned oil assets in return, sources familiar with the negotiations told Reuters.

As Caracas struggles to contain an economic meltdown and violent street protests, Moscow is using its position as Venezuela’s lender of last resort to gain more control over the OPEC nation’s crude reserves, the largest in the world.

Venezuela’s state-owned oil firm, Petroleos de Venezuela (PDVSA), has been secretly negotiating since at least early this year with Russia’s biggest state-owned oil company, Rosneft (ROSN.MM) – offering ownership interests in up to nine of Venezuela’s most productive petroleum projects, according to a top Venezuelan government official and two industry sources familiar with the talks.

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Moscow has substantial leverage in the negotiations: Cash from Russia and Rosneft has been crucial in helping the financially strapped government of Venezuelan President Nicolas Maduro avoid a sovereign debt default or a political coup.

Rosneft delivered Venezuela’s state-owned firm more than $1 billion in April alone in exchange for a promise of oil shipments later. On at least two occasions, the Venezuelan government has used Russian cash to avoid imminent defaults on payments to bondholders, a high-level PDVSA official told Reuters.

Rosneft has also positioned itself as a middleman in sales of Venezuelan oil to customers worldwide. Much of it ends up at refineries in the United States – despite U.S. sanctions against Russia – because it is sold through intermediaries such as oil trading firms, according to internal PDVSA trade reports seen by Reuters and a source at the firm.

PDVSA and the government of Venezuela did not respond to requests for comment.

The Russian government declined to comment and referred questions to the foreign ministry and the ministries of finance and defense, which did not respond to questions from Reuters. Rosneft declined to comment.

Russia’s growing control over Venezuelan crude gives it a stronger foothold in energy markets across the Americas. Rosneft now resells about 225,000 barrels per day (bpd) of Venezuelan oil – about 13 percent of the nation’s total exports, according to the PDVSA trade reports. That’s about enough to satisfy the daily demand of a country the size of Peru.

Venezuela gives Rosneft most of that oil as payment for billions of dollars in cash loans that Maduro’s government has already spent. His administration needs Russia’s money to finance everything from bond payments to imports of food and medicine amid severe national shortages.

See a graphic detailing the decline of Venezuela’s oil industry.

Venezuela’s opposition lawmakers say Russia is behaving more like a predator than an ally.

“Rosneft is definitely taking advantage of the situation,” said Elias Matta, vice president of the energy commission at Venezuela’s elected National Assembly. “They know this is a weak government; that it’s desperate for cash – and they’re sharks.”

Matta echoed many others in the opposition-majority congress who have blasted corporate deals they say are underpinning Maduro’s efforts to establish a dictatorship.

The Venezuelan government has said previously that Russia’s investment in its oil industry shows confidence in PDVSA’s financial stability and the nation’s business opportunities.

Maduro’s administration has grown increasingly dependent on Moscow in the past two years as China has curtailed credit to Venezuela because of payment delays and the corruption and crime faced by Chinese firms operating there, according to Venezuelan debt analysts and two oil industry sources.

Many multinational firms worldwide, meanwhile, have all but written off their Venezuelan operations amid the nation’s tanking economy and chronic shortages of raw materials.

Rosneft is making the opposite play – using Venezuela’s hard times as a buying opportunity for oil assets with potentially high long-term value.

“The Russians are catching Venezuela at rock bottom,” said one Western diplomat who has worked on issues involving Venezuela’s oil industry in recent years.

As other companies shutter operations here, Rosneft has expanded to an additional floor of its office tower and added staff. The Russian firm has poached PDVSA professionals and brought in more Russian executives, two sources close to Rosneft told Reuters.

The corporate expansion provides a striking contrast to the scene on the streets below these days, in the once-thriving business district of Caracas.

As Rosneft staffers work in swanky offices alongside posters of Russian President Vladimir Putin and a bust of Hugo Chavez – the late Venezuelan leader and socialist icon – crowds of young men outside often throw rocks and Molotov cocktails in escalating protests of Chavez’ successor.

Rosneft currently owns substantial portions of five major Venezuelan oil projects. The additional projects PDVSA is now offering the Russian firm include five in the Orinoco – Venezuela’s largest oil producing region – along with three in Maracaibo Lake, its second-largest and oldest producing area, and a shallow-water oil project in the Paria Gulf, the two industry sources told Reuters.

In a separate proposal first reported by Reuters last month, Rosneft would swap its collateral on 49.9 percent of Citgo [PDVSAC.UL] – the Venezuelan owned, U.S.-based refiner – for stakes in three additional PDVSA oil fields, two natural gas fields and a lucrative fuel supply contract, according to two sources with knowledge of the negotiations.

Under the proposal, Rosneft would also take increased management control over all the joint oil projects between the two firms.

Rosneft secured the collateral late last year on a loan of $1.5 billion to PDVSA.

The negotiations over a collateral swap are driven in part by a recent threat from U.S. President Donald Trump to sanction Venezuela’s oil sector as punishment for Maduro’s efforts to undermine the nation’s elected congress.

Rosneft has already been sanctioned by the United States over Russia’s annexation of Crimea from Ukraine in 2014. Such actions require U.S. firms to end business relations with sanctioned entities.

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Vladimir’s Venezuela: Leveraging Loans to Caracas, Moscow Snaps up Oil Assets. Venezuela’s unraveling socialist government turning to ally Russia for cash.