Russia Shores Up Venezuelan Ally But Lifeline May Not Be Enough

(Bloomberg) -- Venezuela may be sanctioned, abandoned and starving, but it still has Russia.

Other creditors are turning on the autocratic Latin American nation as it faces default thanks to U.S. measures cutting it off from the global financial system. Russia, though, is trying to shore it up with an agreement to reschedule its debt, essentially admitting it won’t be repaid soon, if at all.

The question is how long the lifeline -- which covers $3.15 billion in loans -- will sustain Venezuelan strongman Nicolas Maduro, given the country still has some $140 billion in outstanding financial obligations.

“Basically you’re giving Venezuela money to pay Wall Street,” said Francisco Monaldi, a fellow in Latin American energy policy at Rice University in Houston. “You can postpone the inevitable, but how long can you do that for?”

For years, the Kremlin cultivated the anti-American government in Venezuela with loans, visits and trade deals, relishing the chance to build an outpost deep in the U.S. sphere of influence. Now that both Moscow and Caracas are feeling the pain of falling oil prices and U.S. sanctions, the Kremlin is trying to bring its geopolitical ambitions into line with its straitened finances.

“Three billion dollars is serious money, but if we compare it to the potential losses for Russia if Maduro is overthrown in terms of our assets there, Moscow made a pragmatic decision,” said Dmitry Rozental, a Venezuela expert at the Latin America Institute of Russian Academy of Sciences. While the restructuring isn’t enough to sustain Maduro forever, Russia can’t offer a bigger bailout because “we just don’t have the financial means and it would be far too risky.”

Trade Ties

As part of Wednesday’s debt deal, Russia is also trying to rebuild trade ties with Venezuela, including with supplies of wheat to help ease food shortages. But no details of those plans have yet been announced.

There are few other indications of support. Russian state oil company Rosneft said this summer that it has no plans at present to make more advance payments for supplies from Petroleos de Venezuela SA after the $6 billion it already sent. That debt wasn’t included in this week’s restructuring. Rosneft is hoping PDVSA will swap the collateral it holds in that deal -- an almost 50 percent stake in U.S. refining arm Citgo -- for assets in Venezuela that would harder for the U.S. to reach with sanctions.

China, which made about $50 billion in prepayments to Venezuela for oil supplies in the past decade, has been reluctant to offer new financing, said Agata Ciesielska, an analyst at Eurasia Group.

“The Chinese have seen the writing on the wall,” said Ciesielska. “Russia has a much lower level of exposure.”

A mixture of ruinous economic stewardship and U.S. sanctions levied as the regime’s repression increased have cornered Maduro, forcing him to choose between feeding citizens or paying creditors. In a hastily convened meeting with bondholders this week, the regime’s top economic authorities tried to soothe investors after late payments prompted ratings companies to declare the country in a technical default. 

After a full default, the government would face embargoes, and creditors could start going after its foreign assets -- including refineries, gas stations and oil tankers.

"Our people!"

Officials vowed Venezuela would make good on its dues, but provided little insight on a plan they hoped would refinance its debts.

With the walls closing in, Maduro’s socialist regime has been paying conspicuous homage to its Russian patrons. Maduro this month headlined a raucous parade through the capital, Caracas, celebrating the 100-year anniversary of the Bolshevik revolution. “We are going to tell Lenin, these are your people! Trotsky, these are you people!” Maduro called out to his supporters. Last week, a statue of Vladimir Lenin was installed downtown on live state television.

The symbolic repayment may be all Moscow gets for its support.

“Russia understands very well that the loan right now wouldn’t be paid back,” said Viktor Kheifets, an expert on Venezuela at St. Petersburg State University.  “The Venezuelan government simply can’t do it.”

©2017 Bloomberg L.P.