Llegó la hora … de pagarle a los chinos (Updated)

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Toro HardyA publisher friend (more on that later) sent me a copy of José Toro Hardy’s Llegó la Hora, and I found a piece of news that I wasn’t aware of. It turns out that the Chinese are not subsidizing us, but rather … it’s the other way around!

One of the cool things about Toro Hardy (full disclosure – he’s Quico’s uncle) is that he goes and reads the actual agreements the Venezuelan government signs as well as the documents chavista bureaucrats scribble their name on.

When he went into the fine print of the agreement with China, one of the things he points out is that the Chinese lend to us at favorable interest rates, and we have to ship oil to them in the future, which is in effect a loan taken out on public goods, something the Constitution explicitly prohibits.

Furthermore, a document uncovered by Miguel Angel Rodriguez a little more than a year ago shows Rafael Ramírez telling Chávez that the reference price for the oil we ship to China … is $40 a barrel.

Just so you understand, not only are the Chinese lending us money, but the oil we ship to them in return is valued far, far below market price. It’s like having to sell the crown jewels to pay your debts, only the pawn shop is giving you less than half the market price – and you have to take it!

In the end, the loans to China are not only unconstitutional, but they are an unacceptable subsidy to the Chinese. They are, in effect, lending us at prices far, far above market rates. If we took out a credit card loan and paid it with oil sold at market prices, we would probably be better off.

Of course, the details have not been confirmed so this may all be speculation, but all this  raises serious questions about the relationship with China moving forward. Nobody likes being gouged, and it’s even less attractive when you’re being gouged thanks to the guy that had your job before you.

(At any rate, the book is a fun read. It’s a compilation of Toro Hardy’s columns in the newspaper. I can see where Quico’s writing gene comes from …)

Update: Miguel Ángel Santos has a different take. Apparently we sell at market prices. The $40 is the money used to pay the loan. If the price is higher than $40, we keep the rest. But … (and here is where Miguel Ángel falls short) what if the price is lower than $40? Aren’t the Chinese basically guaranteeing we pay them back, even at the expense of having to borrow to do so?

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1 COMMENT

  1. Two questions 1) then why do they refuse to lend us more money 2) is it true half of these loans are in yuans, pretty much forcing us to spend that money in China?

    • Apparently! Yuans are not convertible, according to Toro Hardy.

      I think the reticence comes from doubts about Venezuela actually being able to deliver the cheap oil they have promised.

      • Reticence also from doubts that the current Venezuelan Government agreements could be declared illegitimate/illegal/null and void at some time in the future.

        • I think the Chinese are more savvy than that. The agreements are probably State to State, therefore harder for a future leader to nullify.

          • An illegitimate state, with a phony stamped presidential signature, made by post-mortem Chavez, doesn’t convince the Chinese.

      • You might not have asked that if you knew the Yuan currency is undervalued on purpose. Loans are in U.S. dollars, for sure.

  2. A one year example:
    Loan: 1,000,000
    Interest rate: 5%
    Capital + Interest: 1,050,000
    Barrels @ 40: 25,000
    Market prices in the future (one year from now): 90
    Net Profit: 25,000 Barrels times 90 minus Capital + interest equals to 1,200,000
    Net return: 114%
    Looks like a good deal to me.

    • You mean a good deal for the Chinese, right?
      It cannot be this bad. They cannot be this dumb. . .
      Using your numbers they are paying $2,250,000 per $1M borrowed. That’s is absurd. It is like paying with dollar bills that are worth less than half their nominal value.
      I imagine that the undervaluing of the oil shipped compensates approximately the lower rates, so that we end up paying market rates. And that there is some mechanism to adjust the reference price of oil based on what happens in the market.

  3. http://miguelangelsantos.blogspot.com/2012/09/mitos-y-realidades-del-fondo-comun.html

    […]”una proporción de la factura petrolera de los envíos a China se destina a servir la deuda de Venezuela con ese país. En principio, se estableció que por cada barril de petróleo, cuarenta dólares vayan a amortizar capital y pagar intereses, y la diferencia queda disponible para Venezuela en la cuenta de la ONT en el Banco de Desarrollo de China. De allí surgió la idea equivocada de que “esos barriles nos los compraron a cuarenta”, en lugar de a precios de mercado. Los efectos sobre nuestro bienestar no van por ahí.”

  4. There are many open questions to be answered before we can judge whether the oil used in the transaction is priced right , or rather whether it represents the alternative best suited to Venezuelan interests , for instance: who pays the v,ery costly freight for the transport to China or to wherever the oil is sent to (remember at least 25% of the oil cannot be refined in china and must be sold elsewhere and the resale price credited to Venezuela ) in the latter case does the resale price allow the chinese reseller a profit on the resale , how large is that profit? how long before the oil price is credited to Venezuela ( 30, 45 , 60 days from delivery ??) , the greater the period the less favourable it is to Venezuela . If the price of the oil is kept in a Chinese bank until it is made available for use in the funding of the projects , what is the average period of that deposit , how much does Venezuela get paid for the time in which the price is kept on deposit , Im fairly certain that the amount of oil price kept in deposit is not simply available for use in the funding of the projects but rather serves as a kind of financial buffer to guarantee the chinese the disbursements which the bank makes to the selected projects , how fat is this buffer ( the buffer is simply money which remains in chinese hands until the appropiate ratio is reached which allows the fund to be used . How much of the fund goes to fund projects located in China ( Chinese refineries controlled by China or the building in china of the ships used to carry the oil from Venezuela to china) . Compare the net back Venezuela gets from selling bls to China vs the net back it gets from selling the bbl to the USEC ( the most luchrative oil market in the world) or to the USGC ( only a 4 day trip from Venezuelan ports??). this is a complicated calculation , In the meantime how does Pdvsa pay for the cost of producing the oil or the taxes applied to the oil if most of the money is stashed away in a chinese bank ?? does it have to get financing to cover those costs ?? from whom ??on what terms??., the 40% figure is just a distraction.

    • Once it is on the tanker its their oil. It is not unheard of for a tanker load to be bought and sold 10 or 15 times before it reaches its destination which could change as many times. If its heavy crude it goes to the US at the market price who can refine it and ship some of it back to Venezuela to be given away. A tidy profit for all!

      • Roger: Prices vary depending on market destination , long term contracts dont allow for changes in destination because if the market is a high price market and the sale price is set at a low price market the middleman competes against your own volumes and gets an unjustified profit , a profit you could be getting . You-re thinking perhaps of spot sales , spot sales are for freewheeling speculative traders not for fixed customers nor for long term contracts. there are tanker tracking systems in place which allow the seller to follow the tanker to wherever it goes , its not quite as simple as your description makes up where a high volume long term contract is involved. Of course Pdvsa may be allowing the Chinese buyers to engage in side business with the oil sold them which are not acceptable under ordinary oil marketing rules!!

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