Rogue Trader Skirts U.S. Sanctions to Buy Maduro Regime's Oil

(Bloomberg) -- U.S. efforts to drive Venezuelan President Nicolas Maduro from power by sanctioning Americans who buy and finance his country’s oil have failed so far partly due to people like Dragoslav Ilic, a Serb with a Panamanian business who’s trading Venezuelan oil in the shadows and helping to prop up the embattled regime.

In the five months since Washington applied sanctions to Petroleos de Venezuela SA, the state oil company, major players have withdrawn from the market, depriving the Caracas government of badly needed cash. But half a dozen unknowns like Ilic and his MS Internacional Corporation have stepped into the breach. According to four people in the industry, Ilic has made deals worth $130 million with PDVSA, shipping the crude mostly to Asia.

The new traders avoid sanction tripwires in the global financial system by bartering for the oil and reselling to third parties. MS Internacional exchanges the oil for gasoline and gasoline components, effectively helping Maduro keep his followers loyal through supply of heavily subsidized fuel. Until recently no one in the industry had heard of Ilic or his company.

Through a lawyer, Ilic declined to be interviewed or comment on his business with Venezuela.

“Bottom line, Venezuela needs cash and diluents and gasoline because they are short on fuels,” says Jacques Rousseau, managing director at Clearview Energy Partners LLC.

Tiny Trading Houses

Francisco Monaldi, a professor at Rice University’s Baker Institute, said the new traders remind him of those who helped the regime get past a crippling oil strike in 2002-3. “These tiny trading houses are doing the same, helping out the regime to either get cash or gasoline or diluents to produce crude oil,” he said by phone from Houston.

Historically, PDVSA’s refining arm, Citgo Petroleum Corp., and independent refiners Valero Energy Corp. and Phillips 66 were the biggest U.S. buyers of Venezuelan oil.

In addition to the new traders, Russia’s state-controlled oil company Rosneft, Indian refiners and China are also helping PDVSA survive. China and Rosneft have together loaned about $60 billion to PDVSA over the past decade in exchange for future deliveries. Most of the barrels they are receiving are resold to refiners in India and independents in China.

Ilic made headlines in Argentina a dozen years ago when he was accused -- and acquitted -- in a drug-trafficking scandal known as Vinas Blancas, or White Vineyards in which some of the accused were smuggling Colombian cocaine to Europe in wine bottles.

((Click here to watch Locked up Abroad: Narco Wine Bust on National Geographic, the show telling the story about the White Vineyards case))

The Argentine court documents reveal Ilic’s earlier dealings in casinos as the source of his fortune. In 1997 he spent four years and seven months in prison in the Netherlands for taking part in preparing an attempted homicide.

Oil to Cuba

The Maduro regime is highly dependent on oil which accounts for 95% of all Venezuelan exports. Oil also goes to Cuba which provides agents who protect the president and supply him with key intelligence, according to U.S. officials. While Venezuela cut supplies to almost all its allies in the Caribbean, Cuba continues to get at least three cargoes of oil per month. Vessels headed to Cuba switch off their transponders and sail the Caribbean under the radar to avoid detection by the U.S. government, shipping reports and ship-tracking data show. China and Russia also continue to receive oil in payment of old debts.

Venezuela, a founder of OPEC and among the globe’s two dozen richest countries in the 1970s, has more proven oil reserves than any other nation. Two decades ago amid popular disillusionment, Hugo Chavez was elected president and began moving the country toward crony socialism, using PDVSA income for political campaigns and pet projects. He neglected to reinvest in equipment and infrastructure. Corruption, always a plague in Venezuela, increased.

Oil output has fallen from a high of 3.71 million barrels a day to 741,000 as the country has descended into a dystopia of violent crime and hunger, 4 million have left and international concern has risen.

The U.S. has led a group of more than 50 nations to recognize Juan Guaido, leader of the national assembly, as the legitimate interim president as part of efforts to push Maduro aside. But Maduro appears still firmly in control.

Once a Privilege

At one time, buying oil from Venezuela was almost a privilege, according to longtime traders. Buyers were required to follow a set of rules and weren’t allowed to resell the cargoes to other traders. They had to provide proof, like a contract, showing which refiner would ultimately process the oil. And you could deliver the oil to anywhere in the world, except for the U.S.; the U.S. market belonged to PDVSA, its bread and butter, by far the largest importer.

Today, buyers have the upper hand. Rules about where and to whom PDVSA sells are ignored. U.S. refiners, including Valero, Phillips 66 and Chevron Corp., stopped buying its oil. Big trading names like Trafigura Group Ltd. and Lukoil PJSC also severed ties. Deals with MS Internacional and other firms are filling the void, traders and opposition officials say.

“We are aware of companies buying and selling Venezuelan oil despite the U.S. sanctions,” Jose Ignacio Hernandez, special prosecutor for the interim government, said in an interview in New York. “Maduro is using support he’s getting from companies transacting Venezuelan oil to buy loyalty from companies and countries, including Cuba,” he said.

--With assistance from Ben Bartenstein and Caleb Mutua.

To contact the reporter on this story: Lucia Kassai in Houston at lkassai@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Ethan Bronner

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