The US finally did “something” in response to Venezuelan president Nicolas Maduro’s noncompliance with the Democracy Agreement signed last fall that led to partial sanctions relief on energy, select debt and gold trade. In recent weeks the Venezuelan government has imprisoned opposition members, and the Supreme Court ruling that banned joint opposition Candidate Machado from running among many other issues including War mongering with Guyana. So far that ‘something’ is threats about non-renewal of the energy sanctions exemption and a rescinding of the exemption on trade with state-owned gold company Minerven. The gold move seems more symbolic – a signal that the US hopes shows they are serious about the energy threat which remains their main source of leverage. It seems unlikely that the regime will do enough policy change, which will raise the question how far the US is willing to go in snapping back sanctions.
The energy exemption (General license 44) currently runs through mid-April, suggesting that USG hopes to use its limited leverage to encourage some moves closer to a freer election in the coming weeks. It seems unlikely Maduro will comply enough for anything resembling a really fair election, but the question is whether he will try to play for time, get an extension and bring this up to the wire and whether the US will be flexible on terms or stick to their newly announced redlines. Arguably, Maduro missed the window for a fig-leaf solution of trying to anoint an alternate opposition candidate he thought he could beat, though it remains to be seen if this was ever any option. The US has criticized both the blocking of Machado and the process which did not allow her to answer allegations.
This energy exemption allowed Venezuela to engage in a wide range of energy trade with American persons (and thus many others). New investment has understandably been limited, given the risk of such a rescindment and also the impact of the layers of debt and arrears which Venezuela has accumulated which limit PDVSA’s ability to participate in new joint ventures. I’ve written elsewhere that companies which stayed in Venezuela are best positioned for expansion (Chevron notably but also some others), but that the short nature of the sanctions relief and payment issues and large infrastructure and development needs would limit medium term growth. The main impact of sanctions relief has been a shift in the destinations where Venezuela’s oil went, with trade volumes increasing to the US and Western Europe and also the Americas and even India. The share going to China was reduced and Venezuela was allowed to sell at market prices (not just the discount demanded by China). Like Iran, most of the Venezuelan energy trade relied on dark fleet illegal trade.
The Biden administration really didn’t want to be in the position of having to reinstate the energy sanctions. This reflects not just their desire for oil volumes to keep gas prices low (which some in the marketplace drives more policy), but also the domestic political issues associated with the migrant crisis, of which fleeing Venezuelans have had a major role. Moreover, the administration had been looking for a sufficient enough concessions to lessen sanctions which have exacerbated Venezuela’s humanitarian crisis. Many, including me, were skeptical about whether the incentive of sanctions relief would be enough. So far it hasn’t been. However, there will likely be a lot of discussion about how the US struggles to lift sanctions.
What now? A new verification process of the Barbados framework was announced and negotiations may restart. Overall, the net impact on the oil market may be limited given the small volumes of additional oil on the market so far, but these developments would have a major impact both on medium-term energy output and on the debt holders who hoped for high recovery values. While I don’t expect the US to return a secondary trading ban on the debt (since it was distortionary), the risk is growing that the energy sanctions will be clawed back, perhaps back to the level of late fall 2023 or possibly. Even if the general licenses allowing oil cargos to pay back debt to Western countries.
Any return to sanctions will likely be accompanied by wind-down period that allows American persons to finalize transations that were legal when they began. Its highly possible that this will have a longer phase in period that allows for the time of shipping and delivery. Effectively the USG is putting energy traders on notice that they may need to prepare for this eventuality for April delivery. Given the lags in the energy market, such contract deadlines will come up quickly.
These dynamics also make any debt restructuring deal near impossible given that the expectations of the government and the bond holders will be even more out of alignment. Bond holders hoping to strike an agreement with the government before the election (without an IMF country review and debt sustainability analysis ) were still hoping for a much higher return on their effectively defaulted bonds.
A further wrinkle (and perhaps contributing factor to the Venezuelan government’s hard line) is the planned auction of Citgo assets. The auction is planned for later this spring with creditors exceeding the likely value of the assets. The loss of these assets, several times securing PDVSA debt and now a target for other Venezuelan government creditors, was felt strongly both by the government and the opposition which tried to shield the assets from seizure for many years. These assets provide the best chance for creditors to recoup some of their money, but also add to the net negative asset position of the Venezuelan country and people as they come to addressing the pile of debts and extensive rebuilding costs.
Ziemba Insights 