In light of recent events in Venezuela, and particularly the elections of May 20, President Donald Trump issued an Executive Order (the third one so far), further tightening financial restrictions for the Venezuelan government and PDVSA in the U.S. financial system.
Quick recap: the Executive Order prohibits any transaction by U.S. citizens, permanent resident aliens or entities either organized, or operating under U.S. jurisdiction, involving:
(i) Purchase of any debt owed to the Government of Venezuela, including accounts receivable;
(ii) Any debt owed to the Government of Venezuela that is pledged as collateral after the effective date of this Order, including accounts receivable; and
(iii) The sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent, or greater ownership interest.
One critical aspect of all this is that the “Government of Venezuela” term is broadly defined to include any political subdivision, agency or instrumentality of the government, including the Central Bank, PDVSA and any entity owned, controlled or acting on behalf of the government. Of course, these prohibitions could severely impact Venezuela’s exports to the U.S.
Private companies like Valero, Chevron and Phillips 66, sometimes undertake oil purchases assuming short-term debts in favor of PDVSA or other government entities. Although the prohibitions in the Executive Order are also applicable to CITGO – the largest Venezuelan oil importer into the US – it’s not yet clear whether they actually will be (the Executive Order does provide the possibility to issue licenses which grant exceptions to its compliance).
The “Government of Venezuela” term is broadly defined to include any political subdivision, agency or instrumentality of the government, including the Central Bank and PDVSA.
What is apparent is that the importation of oil diluents sold by U.S. entities to PDVSA will face heavy limitations. The government is now barred from buying necessary ingredients to dilute the Venezuelan extra-heavy crude, unless they’re paid in cash, a possibility virtually ruled out (such diluents will have to be bought from alternative sources, like Nigeria or Algeria).
Also, the mention of “accounts receivable” prohibits factoring operations, whereby any entity of the regime, including PDVSA, was able to sell its accounts receivable (i.e. invoices) to a third party at a discount, allowing the government to obtain fast cash in exchange for invoices which, if collected regularly, would have meant greater income to the Venezuelan treasury.
The fact right now is, Maduro’s rule is short on cash and willing to sell assets at a discount to gain money quickly.
This isn’t a first: In 2015, both the Dominican Republic and Jamaica repaid 100% of their debt with PDVSA’s PetroCaribe oil program with a discount of over 50% of its nominal value. PetroCaribe, as is, was a terrible business agreement for Venezuela, since it offered preferential financing that allowed countries to receive oil with payment deferred over 25 years, at an interest rate as low as 1%. Now, if you were to sell, for example, Valero’s invoices at a hefty discount, it’d be a major blowout for PDVSA’s future cash inflow – Valero, the largest U.S. refinery by capacity, received over 200,000 bpd of Venezuelan crude between March and April 2018, the largest monthly volumes since December 2016.
Following the issuance of the Executive Order, Trump published a statement saying that the objective here is to prevent “the Maduro regime from selling or collateralizing certain Venezuelan financial assets, and to prohibit the regime from earning money from the sale of certain entities of the Venezuelan government”, hindering the possibility of collateralizing or receiving as guarantee any equity interest in any entity in which the Venezuelan government has at least a 50% stake. This limits the possibility of selling, transferring, assigning, or pledging as collateral the shares of CITGO or joint ventures PDVSA or Corporación Venezolana de Petróleo (CVP) have with foreign companies, such as China’s CNPC, Italy’s ENI, Norway’s Statoil, Russia’s Rosneft, Spain’s Repsol and the U.S.’ Chevron.
It’s no surprise, then, that Venezuela’s Foreign Ministry issued a statement declaring that Trump’s latest Executive Order was “arbitrary and unilateral”, and a “crime against humanity”.
Notice that, in September 2017, PDVSA reported that its president, Manuel Quevedo, had work meetings with President Maduro, Chevron’s president for the Americas, Clay Neff, and Chevron’s CEO’s assistant, Ali Moshiri, “with the aim to explore mechanisms allowing to continue the successful ‘win-win’ trade relationship between PDVSA and Chevron before the economical blockade imposed by the U.S. government against Venezuela, with special emphasis on American companies’ business operations in our country.” This new Executive Order will, undoubtedly, maim such “mechanisms.” Chevron has four exploration and production joint ventures PDVSA: Petroindependencia, S.A. (34% share), Petroboscán, S.A (32.9% share), Petropiar, S.A. (30% share) and Petroindependiente, S.A. (25.2% share).
It’s no surprise, then, that Venezuela’s Foreign Ministry issued a statement declaring that Trump’s latest Executive Order was “arbitrary and unilateral”, and a “crime against humanity”, with Maduro going ever farther, declaring top U.S. chargé d’affaires, Todd Robinson, and deputy chief of mission, Brian Naranjo, persona non-grata. They have to leave the country in the next 48 hours.
Every sanction and prohibition imposed over Venezuela and PDVSA will add fuel to the fire that is slowly, but surely, asphyxiating the Maduro government. And after the results of the May 20 electoral event were not recognized by an important part of the Western Hemisphere, chavismo is running out of options to finance its major fiscal constraints. The regime is in need of a financial miracle.
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