Special Report: Vladimir's Venezuela -
Leveraging loans to Caracas, Moscow snaps up oil assets
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[August 12, 2017]
By Marianna Parraga and Alexandra Ulmer
CARACAS/HOUSTON (Reuters) - 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
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.
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
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
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.
For a graphic detailing the decline of Venezuela's oil industry, see:
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
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
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
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
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
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.
RUSSIAN OIL DEALS UNDERMINE DEMOCRACY
Maduro’s need for Russian cash played a key role in a move by his
political allies earlier this year that destabilized Venezuela’s already
teetering democracy, the top Venezuelan government official told
In March, the nation’s Supreme Court - whose members are loyal to Maduro
- took over the powers of the opposition-controlled National Assembly. A
majority of elected Assembly members opposed any new oil deals with
Russia and insisted on retaining power to veto them.
Days later - after fierce national protests against the action - the
court returned most powers to the national legislature at Maduro’s
public urging. But the court allowed the president to keep the legal
authority to cut fresh oil deals with Russia without legislative
The episode was pivotal in escalating daily street protests and clashes
with authorities that have since caused more than 120 deaths.
Maduro needed sole authority to cut new oil deals to clear the way for
Rosneft's expansion, the top Venezuelan government official told
"Pressure from Russia has played an important role in Nicolas Maduro's
decisions," the official said, speaking on condition of anonymity
because he was not authorized to make public comments.
Rosneft said this month that it has lent a total of $6 billion to PDVSA.
In total, Russia and Rosneft have delivered Venezuela at least $17
billion in loans and credit lines since 2006, according to Reuters
calculations based on loans and credit lines announced by the
Venezuela does not publish the full details of the debts it owes Russia.
Maduro has sought to limit the power of congress since the opposition
won a majority in 2015.
In late July, he created a legislative superbody called the Constituent
Assembly in an election that was widely criticized as a sham. Allies of
the Socialist Party won all 545 seats in the new assembly, which has the
power to rewrite the nation’s constitution, dissolve state institutions
- such as the opposition-run Congress - and fire dissident state
[to top of second column]
Head of Russian state oil firm Rosneft Igor Sechin leaves after an
agreement signing ceremony with Venezuela's President Nicolas Maduro
at Miraflores Palace in Caracas, Venezuela October 7, 2016.
REUTERS/Marco Bello/File Photo
SPIRAL OF DEBT, DEPENDENCE
Venezuela's oil-based economy has collapsed since international
prices crashed to a low of $24 per barrel in early 2016 from more
than $100 in 2014. Prices now hover at about $50, which hasn’t
proven high enough to pull Venezuela out of its tailspin.
Nearly all of the nation’s export revenue comes from oil, so income
has fallen sharply and a shortage of petrodollars has left Maduro's
government unable to finance the generous subsidies of food,
medicines, fuels, power and other public services instituted by his
The erosion of subsidies has contributed to rapid inflation, which
is forecasted to top 700 percent this year by the International
Monetary Fund. Venezuela’s currency, the bolivar, has become nearly
Government spending cuts have also slashed budgets for maintaining
the nation’s oilfields, refineries, ports and tankers, causing
Venezuela's oil output in the first half of 2017 to fall to nearly
its lowest level in 27 years.
PDVSA is repaying a growing portion of its mounting debts to Russia
with oil, according to internal PDVSA trade data reviewed by
Reuters. The oil payments are choking off the cash flow from its
petroleum business - thereby creating the need for more loans.
CIRCLING OIL ASSETS
The nation’s downward spiral has put Rosneft in a position to
acquire Venezuelan oil assets on the cheap.
Of the package of stakes PDVSA has offered to Rosneft, the most
valuable is a 10 percent stake in Petropiar, a multi-billion dollar
project to produce and upgrade extra heavy crude in the Orinoco
The value of the stake is likely between $600 million and $800
million, based on the valuations of similar deals.
The rising volumes of Venezuelan crude that Rosneft receives have
made the Russian firm a middleman in sales to refiners that once
bought directly from PDVSA. The oil payments have also helped
Rosneft grow a major oil trading business to complement its massive
In the process, the Russian firm has appropriated some of PDVSA's
hard-won international supply deals and valuable trading
relationships with refiners as far afield as China, the PDVSA
At today’s prices, the Venezuelan oil exports that flow to Rosneft
would be worth about $3.6 billion annually. And the flow of PDVSA
crude to Rosneft is expected to keep increasing, according to the
internal PDVSA documents.
Most of it is sold into the United States, according to the
Rosneft also will soon start selling Venezuelan crude to India’s
refiner Essar, taking PDVSA’s second largest customer in the Asian
"Russia is taking everything they have," said an oil trader who
regularly deals with PDVSA.
A DICEY INVESTMENT
The Russian strategy has its risks. Many of the world's top energy
firms took a hit when Chavez nationalized their assets, and an
opposition-led government could later reverse or revise any deals
Maduro cuts without their blessing.
Venezuela's bond yields are among the highest in the world because
of the nation's high default risk. The bonds pay nearly 30
percentage points more than benchmark U.S. treasuries.
PDVSA’s many connections to the United States oil industry also
raise the specter that the deals now under negotiation could run
afoul of U.S. economic sanctions already in place against Russia and
threatened against Venezuela.
The Petropiar project, for instance, is 30 percent owned by U.S. oil
major Chevron Corp <CVX.N>.
Should Rosneft take a stake in the project, it could be complicated
for Chevron to ensure it is not violating U.S. sanctions. In the
meantime, Chevron has sent guidelines to executives to ensure they
comply with sanctions, an employee at Chevron told Reuters.
The guidelines advise staff, for instance, to avoid one-on-one
meetings with sanctioned entities or officials, the employee said.
In a statement, Chevron said it abides by "a stringent code of
business ethics" and complies with applicable laws.
For now, Russia’s status as chief lender to PDVSA has put Rosneft in
a position to supercharge its holdings and profits in the region.
If Venezuela's government defaults on its debt payments - an
increasingly likely scenario - Rosneft likely will be one of the
entities at the front of the queue as a creditor because of its
large collateral stake in U.S.-based Citgo, according to a
confidential independent analysis of its debt commissioned by an
investment fund and seen by Reuters.
Representatives of Citgo, PDVSA'S largest foreign asset, did not
respond to requests for comment.
GUNS FOR OIL
Rosneft's involvement in Venezuela can be traced back to a $4
billion arms-for-oil deal in 2006 that cemented the bond between the
governments of Chavez and Putin. Chavez, a former military officer,
signed the deal himself in Moscow.
Shunned by the United States - which since 2006 has refused to
supply spare parts for Venezuela's fleet of U.S.-built F-16 fighter
jets - Chavez bought Russian Sukhoi fighter jets, helicopters, tanks
and guns from Putin.
Top executives from Rosneft and PDVSA were later involved in
negotiations related to the military purchases because Rosneft was
the Russian entity receiving the Venezuelan oil cargoes used to pay
for a portion of the weapons, the top Venezuelan government official
They included Rosneft President Igor Sechin, a powerful long-time
advisor and deputy to Putin. Sechin is a trained linguist who began
his career as a military interpreter and has a passion for the
history of Latin America's revolutionaries, according to two people
who worked with him.
He had a direct line into Chavez until the former president's death
in 2013, the Venezuelan official told Reuters. Sechin has maintained
close ties with Maduro and the two meet regularly, the official
Speaking to reporters in at a hydroelectric plant in Russia last
week, Sechin called Rosneft’s growing investments in Venezuela an
obvious and essential play.
“This is a country with the world’s hydrocarbon reserves,” he said,
referring to a central component of oil and natural gas. “Any energy
company should aim to work in this country ... No one could force us
Russia was swift to defend Maduro's government from international
criticism after the Supreme Court moved to nullify congress, with
Moscow issuing a statement saying foreign governments should not
meddle in Venezuelan domestic politics.
Sechin was Maduro's guest of honor at a ceremony last October to
unveil a Russian-made granite statue of Chavez erected in the late
president's hometown of Sabaneta.
In the sweltering heat, a Russian choir dressed in black sang the
Venezuelan anthem in heavily accented Spanish before Sechin
addressed the crowds of mostly red-shirted Socialist Party
"Thank you for trusting us,” Sechin told the crowd in Spanish during
the speech, broadcast on Venezuelan state television. “Russia and
Venezuela, together forever!”
(Reporting by Marianna Parraga in Houston and Alexandra Ulmer in
Caracas; Additional reporting by Polina Nikolskaya and Ekaterina
Golubkova in Moscow; Editing by Simon Webb and Brian Thevenot)
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