Venezuelan Financial Obligations Stretch Around the Globe
The last few weeks have made it clear that few resource-rich countries in the world have the troubles that Venezuela does today. Not only is the country embroiled in the midst of a devastating humanitarian crisis as its inflation spirals ever increasingly out of control. It is also now in a debt crisis with two of the world's most fearsome creditors— China and Russia. Venezuela's debt obligations now extend all the way to Asia and total over $100 billion.
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A Power Struggle In Venezuela Means Trouble for China and Russia
To say that Venezuela is in the midst of a climactic power struggle for its future would be no overstatement. The people outside of the country who stand the most to lose from this showdown are its two most steadfast financial and foreign allies— China and Russia.
This is because Venezuela is the owner of the biggest oil reserves in the globe. The socialist country has staved off collapse for over a decade now despite the endless corruption that has ravaged it economically. The countries that have saved it from complete financial failure since the death of former President Hugo Chavez are the governments of Beijing and Moscow. They made continuous lifesaving financial interventions through multi-billion dollar loans in the past ten years. This chart shows just China's financial commitment to Venezuela in recent years:
Venezuela repaid them somewhat in kind with really cheap crude oil for debt swaps. At the time, with Chavez's successor President Nicolas Maduro in firm command of Venezuela's military, these deals appeared to be reliable for all countries involved. Yet that is now all changing with the advent of a new challenger in the Venezuelan political arena.
How Will Russia and China Get Their Billions Back?
Today the United States and European Union are throwing their support solidly behind Venezuelan opposition leader Juan Guaido. They have named him the nation's only legitimate president in lieu of Nicolas Maduro. With the country's foreign reserves all tied up, it will mean longer and longer delays for China and Russia to regain the principle amounts on their loans. Worse still for Beijing and Moscow, they may not receive anything back on some of their loans.
Global Head of RBC Capital Markets' Commodity Strategy Helima Croft explained this with:
“I don't think they like regime change. I don't think they like the idea that the U.S. is seemingly declaring somebody president. Both Xi and Putin would be horrified if the U.S. got any ideas about trying to do this in any of their countries, or countries that they view as satellite states.”
Venezuela Has A Terrible Debt Crisis On Top of Everything Else
Venezuela has a staggering debt crisis that many investors are unaware of today. According to research posted by the CIA, The petro-state owes over $100 billion to its international creditors, the mainstay of whom are China and Russia. Other estimates from the BBC make the total debt higher.
Both China and Russia benefited from the resulting free-flowing cheap oil. They also loved the toehold this provided them with behind the American sphere of influence lines. Venezuela received the hard currency they needed to stay afloat.
The arrangement failed when oil production plunged in Venezuela. Today it amounts to a paltry one-third of its former glory back in 1998 when Hugo Chavez was first elected. This is bad news for any debtors of the petro-state as 98 percent of its foreign currency earnings come from the nation's once-vast oil revenues.
Consider Venezuela's present debts. The country still owes fully $20 billion to China. It owes Rosneft the Russian backed oil giant $2.3 billion more plus interest. In the end though, no one can say with certainty what happens to such obligations if Maduro loses his grip on power to Guaido.
Will China's Loyalty to Caracas Last Indefinitely?
The question of what debts the nation will honor and which it will not comes down to the legal interpretation of Guaido if the U.S. and EU have their way. The opposition president stated publicly that all legal agreements that the Venezuelan National Assembly approved will be considered valid. This is generally viewed as a peace offering to Beijing.
For now though, China continues to stand behind Maduro in public at least. Managing Partner Russ Dallen of Caracas Capital Markets investment bank explained the Middle Kingdom's position with:
“They're worried the opposition will come in and not necessarily want to honor their contracts, or find loopholes. The Chinese don't know what to do. They're not getting paid by Maduro's guys… and the situation keeps deteriorating.”
This is why Dallen admits there is a distinct possibility that the patience, and loyalty, of China will not hold up forever. Yet Guaido does have motivation to honor the country's debts to China. Beijing remains the largest market for Venezuela. According to Croft at RBC, no one in Venezuela wishes to be at odds with the nation driving worldwide oil demand. Nor does Guaido want to see his credibility evaporate over the issue.
Chief Investment Strategist Kathryn Rooney Vera of Bulltick Capital Markets put it this way:
“If the opposition comes in and defaults, it would hurt them. It would also hurt their future capacity to issue debt in terms of their credit. So I don't think that's going to happen.”
Besides this, Venezuela has another consideration. In the midst of the winner take all global trade war the U.S. is waging against China, the Middle Kingdom may be willing to switch support away from Maduro over to Guaido to keep the nation in its sphere of economic, trade, and financial influence.
Worse Still, Venezuela Needs Russia
Worse for Guaido yet, he has to make a clear position on the relationship with Russia. He has so far not made any encouraging offers to Moscow. Yet Russia is not eager to see its most recent deals with Venezuela scrapped either. Croft expounded:
“Not only are they getting oil, but they've also gained access to pretty good acreage in Venezuela. The question is, do they believe a couple billion more dollars can tide the country over? If not to preserve Maduro, to preserve some type of regime that remains loosely or closely aligned with Moscow.”
In fact the good will of Russia is now the key factor to Maduro surviving in the embattled socialistic country. Moscow has saved the day last minute on more than one occasion when Venezuela approached default. Should Russia continue to throw these financial lifelines to Caracas or to purchase their gold for a discounted price, Maduro could hang on in Venezuela for some time yet.
Should Venezuela default on Russian debts though, Moscow would have the rights to seize its lien assets on Venezuela's most valuable financial property— American headquartered petro giant Citgo. Maduro was able to obtain a new loan from Rosneft back in 2016 through offering them a 49.9 percent share of Citgo for loan collateral. Dallen from Caracas Capital says that this gives the Russians some useful leverage over the U.S.:
“It would not be unusual for the Russians to try and exercise the lien they have on the Citgo collateral, just because it would be very disruptive and chaotic to the U.S.”
What Hope Does Venezuela Have Financially?
One thing looks certain. Should Guaido gain control of the machinery of government in Caracas, a looming default will not be inevitable. It will ensure that bills do not quickly get paid though. It would be up to the International Monetary Fund to structure what would amount to among the most complex and biggest sovereign debt restructurings of all time. The nation would need to be rebuilt from the ground level up at this point.
An invaluable position that Venezuela does have is its claim to more than 300 billion barrels of oil. If that were not enough to give a sense of hope to the nation's future, they also have vast underground mineral reserves of gold, iron, diamonds, and more. As Dallen sagely puts the situation in Venezuela:
“What they have is a liquidity crisis, but not a solvency crisis. Everyone should be pretty sure they are going to get paid back.”
Right now it is more a question of when and for how long the nation's creditors will have to line up to get their investment dollars in the socialist country back. Your investment and retirement portfolios do not have to be among those waiting in line. Now is the time to look seriously at the Top Five Gold Coins for Investors and to start thinking about the Top Gold IRA Companies and Bullion Dealers.