I come not to bury IMF Conditionality, but to praise it!

Nicolás Maduro, still believing in cigüeñitas preñadas...
Nicolás Maduro, still believing in cigüeñitas preñadas…

We may hate to admit it, but Nicolás Maduro’s Chinese junket has, as far as we can tell, been a success. He gets to leave with a headline figure of $20 bn. dollars worth of new deals with the Chinese.

Of course, only an unknowable-portion of that number will end up finding its way into Venezuela in dollar form, with the also-unknowable remainder basically staying in China either to finance oil-facilities there or as financing for Chinese products and services to be sent to Venezuela.

But some portion of that figure will find its way into Venezuela’s Central Bank, used to buy the bolivars it takes to pay for the activities of Chinese contractors in-country. And so the deals certainly buy the Venezuelan government some respite from a Balance of Payments crisis that, depending on whose back-of-the-envelope, not-based-on-official-data-because-official-data-isn’t-published calculation, is either imminent or merely “looming”.

One upshot of this is that it puts Maduro’s likely best-alternative-to-a-Chinese-deal option off the table – at least for now. We do know that initial feelers had been sent out from the Venezuelan government to the IMF in case the Chinese froze them out, though of course the government would obviously not go there unless they were totally out of options. (That, incidentally, is also how it’s supposed to work:  Lord Keynes originally designed the IMF as the place you go when you’ve placed yourself beyond the pale of literally all other sources of finance.)

Of course, Maduro prefers China to the IMF because China won’t demand the IMF’s dreaded “conditions” for a bailout. Said differently, China won’t demand that he undo any of the crazy policies that have brought a major petro-economy to the doors of a BoP meltdown. China won’t press him to get rid of exchange controls that introduce distortion after distortion in the domestic market, wasting huge resources and pissing away our oil legacy. China won’t press him to rationalize a fiscal policy that spends an order of magnitude more money subsidizing gasoline than healing the sick in hospitals. China won’t put its foot down and say no, we won’t keep giving you $20 bills if you intend to sell them for 10 bucks each.

The Chinese won’t, in other words, use their leverage to push the Venezuelan government into a less self-destructive policy stance. And why should they? Every time the Venezuelan government gets into trouble, they go back to China to beg for more money on more and more concessionary terms, beseeching them to take more and more of our oil. Economic imperialism has never had it this easy!

Nope, China will not press Nicolás Maduro to run Venezuela minimally competently in Venezuela’s best interest; China will just let Nicolás Maduro to run Venezuela as incompetently as he wants, in China’s best interest.

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  1. The more Maduro plays the China card, the riskier it becomes for China to keep pitching. Why? because Maduro will be forced to give more economic and political independence away and this is an increasingly political hot potato in Venezuela. China will have to weigh the pros and cons very carefully every time Maduro begs for more, as a change in government might spell disaster for this cozy arrangement.

    • “China will have to weigh the pros and cons very carefully every time Maduro begs for more, as a change in government might spell disaster for this cozy arrangement.”

      Surely they, like the Cubans, are doing much to ‘assist’ the current regime in its attempt to maintain a firm grip on power. If they are not, they are not protecting their investments.

  2. Well, Mark Antony, it’s indeed in China’s best interest to keep shelling out greenbacks, but to a point. Even the Chinese must have a sense of limits. No? I sure as hell would like to think so but have no idea where those limits are. As oil production reaches 1 million b/d? 500,000 b/d?

  3. I am not so sure. It is in China’s best interest to have Venezuela be run with at least a minimum of competence. Otherwise they risk not getting its money back. Incidentally, that is the reason why it has been so difficult for the Venezuelan government to strike this deal. China has been reluctant to lend Venezuela more money for awhile. It strikes me as interest, at the very least, Maduro’s announcement, last Thursday, about implementing a new foreign exchange mechanism right after coming back from China. I smell conditionality… Why is this then better than the IMF for Maduro? Two reasons: ideologically and politically palatable and much less transparency.

    • I think your analysis here is spot-on. The Chinese would have been fools to loan such large sums of cash without ‘conditionality.’ We just don’t know yet what those conditions are. He’s coming back from China/US in a week with a supposed ‘new’ foreign exchange mechanism to be announced, but has no new dollars to show for it. As Shakespeare would note, something is fishy in Denmark.

    • The Chinese need the govt to be competent only in so far as : 1. it gets paid whatever loans it makes ( which is ensured through the mortgaging of future oil deliveries) and 2. their oil businesses in Venezuela can be run profitably which basically means Pdvsa as its partner in the Faja joint ventures either gets out of the way ( and lets Chinese managers run these joint ventures) or at least learns how to operate with minimum efficiency .
      They have developed an economic model that works for them and which they might like to be copied by Venezuela but I dont think they believe that the Chavistas in the regime are competent enough to emulate it with success . and they would be right !!.
      Even if Maduro and his coterie wanted to do the right thing , do they have the human and organizational resources to pull any required reforms through ?? Very much doubt it !! Fact is maybe even an opposition govt made up of the best would be hard put to carry out the measures needed to straighten up the economy !!

      • There is something else, something Roy mentioned and something I also heard from Chinese themselves:
        the Chinese government is happy with the way Chinese immigration to Venezuela is taking place. Particularly they are more than happy with the amount of single Chinese males from the Provinces who can be sent abroad. China is a pressure cooker now.

    • especially much less transparency. IMF lending with all its requirements and on-time policing of accounts is the equivalent of having the government’s filthy underwear pinned to the laundry line, from where it blows in the wind for all to see.

  4. You’ve got to figure that, whatever the constitutionality, that these loans are structured in a way to limit Chinese exposure as much as possible. China might be willing to throw money into a black hole in North Korea for strategic reasons, but none of those exist in Venezuela. There has to be some “we’ll take over your customs house if you don’t pay like the gringos used to do” kind of clause in there somewhere.

  5. it’s incredible that the leftists actually take the reality and put it upside down, the fmi just cares for the country to become productive again (in a painful way) so you can pay them and don’t have to ask them again for money, china only cares about their national interest either by grabbing national resources as guarantees or lending so you can buy their services, they actually believe it is the other way around, my only hope is that the minimally rational people in vzla can make the
    deduction that borrowing = bad thing.

    The most enraging aspect of the chinese deals is that they actually bring their own workforce to build the houses and trains here, don’t know why the so “nationalist” chavists are not upset by that, because it’s not just “experts” it’s the whole workforce, the us would never go that far.

    The chinese loans are not like the marshall plan at all, when the gringos lended europe so they could buy american machinery to rebuild their destroyed factories after ww2, a deal that actually bennefitted both sides of the atlantic in many ways.

  6. What we musnt forget is that these are loans , the money has to be paid back with interest , basically in terms of future oil deliveries , the price of which never makes it to Venezuela , so that not only does part of the loan stay in china to pay chinese suppliers and contractors but we also have to pay it back by giving up the oil income which otherwise Venezuela would be receiving in the future . The oil deliveries may be priced on terms which are not the most favourable to Venezuela as compared to the oil sold to other destinations , not only are the transport logistics costly to Venezuela ( freight is expensive , you have to build special terminals with loaned money to allow for the oil to be taken by very large crude carriers which dont fit into any conventional venezuelan ports ) but because the oil is extra heavy china cant take all ( it doesnt have the refineries to refine it ) and must resell part of it in the international market at a price which must leave them a profit margin which means the price must be low enough to allow them that resale benefit . Someday some one should have a look at the economics of these chinese deals taking account of all factors to see to what extent they are beneficial to Venezuela . The fact that the regime keeps all this data secret is a sign that they fear that if the details where known they would be subject to criticism ti

    • As I’ve said before, these deals, for all the reasons you mention, and some not mentioned, are bad for Venezuela, vs. the alternative of cash sales to a closer U. S. As for FT’s desired BOP positive effect, the parallel market says none really so far, and, probably there will be little positive effect even with the new forthcoming dollar auction/sale mishmash. Once again, the IMF option would be accepted by this Government only with a gun to its head (quite literally).

      • Ought to be because extra heavy crude handles easier than tar sands but profitability of bitumen extracted from each source depends on many factors , one factor is the recovery rate which I understand is higher for tar sands than for EHC (70% vs 9%) , Cost of extracting one bl of bitumen from tar sand varies from 16 US$ to 40 US$ , dont have any figures for the cost of extracting one bls of EHC in Venezuela but generally costs in Venezuela are much higher than in Canada because of special transaction costs , lower productivity , taxes etc.. In any event both are much cheaper than extracting oil from shale formations which I understand can reach 70 US$ oer bl.and tend to experience very rapid depletion .!!

  7. To the extent it’s true, I’m not sure it’s in China’s best interest not to demand any changes in the policy front. Unless all the loans will be repaid in oil, China needs the government/cb to be able to generate enough FX revenues eventually. Continuing with the status quo clearly does not help in this regard. That’s one reason why, in general, both private and public sector lenders in mismanaged countries typically like IMF-type programs: they increase the chances they will be repaid. Preferential treatment may not suffice.

  8. Interesting to note that as of 12.45 PM the announcement has had no visible effect on the parallel market.

    One would think that if looming exchange control changes & $20 billion in new financing are announced the price of the Bolivar would improve a little.

    That it’s not happening (as of now) indicates that most experts don’t believe that this will bring improvements.

    • either that, or the exercise of taking 100 people on a Vz-China junket via Cuba, is merely resulting in memorandums/a of agreement, with nothing written in stone.

    • During the night (?) one of the main Cúcuta price quote websites updated their price quote with a 10% fall in the exchange rate (a difference of -Bs.4).

      Don’t know if this is correct or an error but we’ll find out later this morning.

      None of the other websites are showing this change as of this hour.

    • Other websites are now showing the new lower quote.

      Looks like the “announced” changes are having some effect.
      Only time will tell if the expectations will be justified.

  9. A few months ago, I did some research and made a comment on CC about the concept of International Law definition of “illegitimate debt” vis-a-vis a non-duly-elected Maduro et. al. taking on public debts without the required transparency and the authority of a constitutionally elected assembly. I’m thinking that in the long term onerous responsibility of repaying all this debt should not fall on the public who have been disenfranchised from the democratic process.

  10. I think it’s dangerous to think that if the chavistas leave power, we aren’t obligated to pay their debts. If the idea you want to salvage is one of a country with a rotating head of state, even the bad desicions have to be binding from one to the next. Otherwise, you’re just a colony with a figurehead.

    • There are dozens of ways in which a sovereign govt can bring on renegotiation of better terms for the payment of past debts without flatly declaring them non payable on legal grounds . Besides if you havent got the money you cant pay whatever your willingness to do so . What are we expecting from Cuba and other favoured countries when their debts fall due,? understand they already owe Pdvsa the price of oil deliveries which the agreements bind them to pay inmmediatelly , What will happen to the payment of the huge arms purchases Chavez made to Russia !!


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