Photo: Semana

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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17 COMMENTS

  1. I think this set of sanctions was very cleverly crafted and may be just as effective at cutting off the rents as an “in your face” oil embargo. Between this and the Conoco actions, I would expect to see results very quickly. Of course they could ramp up drug smuggling and formalize the colonization by Cuba or sell the country to Russia. I do not think China will throw good money after bad. Either way, do nothing by Madura may not be an option.

    • But maduro’s murder army, the colectivos, gnb, pnb, sebin, conas, people’s guard and others should care for one very simple thing:

      THEY WON’T HAVE THAT MUCH MONEY TO BUY TANKS, GRENADES AND BULLETS TO SLAUGHTER THE PEOPLE THAT WILL KEEP PROTESTING.

  2. “The regime is in need of a financial miracle.” Hell, I buy a few lottery tickets when the jackpot gets large enough, it is of course wishful thinking but not an actual plan for retirement. Good luck to the regime, hope their odds of surviving the year are the same as mine with the lottery.

  3. But from your article there’s more than accounts receivable involved. Pledging Citco shares in exchange of cash makes them a debtor, not a creditor. So, are there sanctions aimed specifically at their needs as debt issuers? Maybe you only indicated some of the sanctions?

    • I understand debt owed to Venezuela to be transactions in which Venezuela is the creditor. How many American companies are indebted to Venezuela? How many are selling their debts to Venezuela? How many American companies are buying this kind of debt? And who gets a license to carry on this kind of activity?

      I tend to think all crimes against humanity declared by the regime have consistently been pure fictions. But if this measure isn’t more than the banning of angels dancing on the heads of pins, perhaps somebody can please explain what real thing has specifically changed now to the detriment of the Maduro regime because of this.

      Not criticizin’. Just askin’.

      • The sanctions prohibit buying any debt from the govt of Venezuela and incurring any debt with the govt of Venezuela. Nothing owned by the VZL govt can be pledged as collateral. Hence a supplier cannot sell on credit to VZL or in exchange for oil, all transactions must be by cash.

        Why isn’t this effective for a cash strapped govt?

        • I’m still baffled by the Caracas Chronicles analysis. It says that petroleum exports from Venezuela could be severely affected, as could the purchase by Venezuela of oil dilutants. That makes no sense to me from the actual language of the order.

          I’m not the only one who thinks this language is bafflingly narrow in scope. The NYTimes is reporting that oil exports are not affected, and CITGO is carved out.

          Chevron, which I understand is the largest foreign interest in Venezuela, would not as I understand it, be affected.

          • Oil trade carried out in cash – as Kenny says – is not affected; if you want to use any debt (in US$ or in the US) to finance that trade, that’s forbidden.

  4. Its become common practice for Pdvsa to ask its business partners (in faja companies) or trade relations to buy stuff in their behalf , like cargoes of light crude or nafta or gasoline which needed in Venezuela for local consumption or to blend with local heavy crudes against the payment in kind of future crude supplies , these operations are key for Pdvsa to continue its operations and recieve income it would othewise not be able to generate on its own , also to buy materials and equipment needed to keep their operations going but which they dont have the cash to pay for , I suspect these new sanctions would prevent these transactions in so far as they involved any business with a US presence …..tightening the financial noose around the regimes neck ever so narrowly ……China would not be happy about putting more money than they already have to compensate for the consequences of these measures and the russians I suspect dont like having to assumme the role of economic saviours of the Venezuelan regime with little prospect of seeing their money back in the mid term future……(they already refused Cubas request for oil shipments to replace those which Venezuela can no longer make , unless Cuba has the hard currency to pay for them ) . Trump is a man who likes being conspicously brutal and visceral in his positions and does not carry the burden of inhibitions that more refined political leaders have in the west …in a way he is more like maduro than most other past US presidents ….so Maduro should really watch out how he responds to Trumps measures .
    Do note that these sanctions were announced not by someone from trumps gabinet or just any high ranking washington official but by Trump himself, he is making this conflict personal …….thats suggestive of something potentially ominous that Maduro should consider !!

    • Bill, the language of the order does not prevent the regime or its affiliates from being indebted to a US entity. Nor as I read it, does it prevent the sale of product to a US entity.

      I am beginning to think the thing that Trump and Maduro have in common on this one is not what you indicate, but that they are both wanting people to think this is a major development, when it isn’t.

      Having said that, the regime continues its headlong economic collapse and that itself is going to continue to discourage business with the regime. I just think that people should not lose sight of the fact that a key source of financing for this dictatorship remains in place, and I’m not talking about China or Russia.

      • I agree with Bill’s understanding. Section 1. (ii) of the order prohibits the pledge as collateral of debt owed to PDVSA including accounts receivable. Bartering refined oil products or components for future oil sales would be captured by the prohibition herein

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