US Sanctions May Play into China’s and Russia’s Hands, by Kent Moors

If the US backs Venezuela further into a financial corner, China and Russia may end up with a lot of cheap oil assets. From Kent Moors at oilprice.com via wolfstreet.com:

Venezuela is going to have one heck of an “Oil Fire Sale”

Venezuela is now on the brink of total collapse. As you’ve seen before here in Oil & Energy Investor, most recently only last weekend, national oil company PDVSA looms large in this unfolding crisis. The focus is the company’s ability to pay bond interest due in two months. Doing so is crucial. But as of this morning, that prospect is dwindling.

Along with it goes the ability of the central government to administer an entire population and avoid the country descending into outright civil war. And PDVSA is at the center of it all. Now, there’s talk of U.S. sanctions on PDVSA in particular. Here’s how that may play right into Russia’s and China’s hands…

This is Venezuela’s Oil Supermarket

PDVSA is the vehicle for about 90% of Venezuela’s trade revenue and has served as a primary outside purchaser of all manner of staple commodities essential for the literal survival of a domestic economy rapidly sliding into oblivion.

While charismatic Hugo Chávez was in power, PDVSA was required to spend foreign hard currency export proceeds held outside the country to acquire food for import into Venezuela. It prompted a colleague of mine at PDVSA to lament: “I thought we were an oil company, not a supermarket.”

Paying for the purchases abroad was supposed to minimize the adverse impact of exchanging currency under oppressive domestic inflationary pressures and a fractured infrastructure.

What it actually did was undermine any ability to use PDVSA’s revenues to buttress an increasingly insolvent central budget. It also wasted money, as food was purchased and then transported through intermediaries at exorbitant prices. PDVSA, after all, operates oil tankers, not cargo vessels.

Nicolás Maduro, Chávez’s successor, complicated the matter even further by regularly raiding PDVSA coffers to pay for a wider range of imports, tied fundamentally unstable sovereign debt issuances to PDVSA bond futures, and relied on accelerating heavy-handed responses to local unrest.

To continue reading: US Sanctions May Play into China’s and Russia’s Hands

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