Trump Targets New Venezuela Debt in Fresh Round of Sanctions

(Bloomberg) -- The Trump administration barred trade of new debt issued by the Venezuelan government and its state oil company in U.S. markets and blocked dealing in some existing bonds owned by the country’s public sector to further clamp down on President Nicolas Maduro’s regime.

The Treasury Department will issue licenses for some transactions “to mitigate harm to the American and Venezuelan people,” the White House said in a statement Friday. Trading would be allowed for the vast majority of existing Venezuelan bonds in secondary markets and will allow short-term financing for most commercial trade, such as the import and export of petroleum. But it will block the Venezuelan government from restructuring its debt with U.S. investors.

“Today’s executive order demonstrates the U.S. government’s condemnation of tyranny and dictatorship in Venezuela,” Treasury Secretary Steven Mnuchin said at a briefing. “The Maduro regime has consistently shown hostility to the rule of law, democratic institutions and the Venezuelan people. This has been a catastrophe for the country.”

The new restrictions, put in place through an executive order from President Donald Trump, are a bid to choke off funding to Maduro’s government, which is running out of money. The U.S. is acting in response to Maduro’s moves to seize more authority amid a crippling recession and months of violent protests.

Venezuela Chancellor Jorge Arreaza, speaking at United Nations Security Council, said the government was studying how to respond “to protect our people.”

“It appears the United States wants to govern Latin America,” he said. “Maduro has grown tired of calling for dialogue with the U.S. president. God willing, President Trump understands it’s time for dialogue.”

Calls placed to Venezuela’s state oil company, Petroleos de Venezuela SA, weren’t immediately returned.

The order is designed to prevent Venezuelan government entities that already own the country’s debt from selling it in the secondary market. Trump’s order also bans purchases of new equity and debt issued by Venezuela with a maturity greater than 30 days, and by PDVSA with a maturity greater than 90 days. The sanctions also prevent entities such as PDVSA’s Houston-based refinery arm, Citgo Petroleum Corp., from issuing dividend payments back to Venezuela.

Maduro “has financed his regime by hollowing out Venezuela, through economic mismanagement, corruption and the assumption of onerous debt,” Mnuchin said.

Existing Bonds

The existing bonds targeted by the sanctions are due in 2036 and were issued by Venezuela late last year to two government entities and had, in recent months, been shopped around in an effort to raise cash. Opposition leaders criticized a transaction in May in which Goldman Sachs Asset Management bought almost $3 billion of securities from the central bank through a broker, and have called for an investigation. Those bonds will be unaffected by the measures.

The Treasury Department’s Office of Foreign Assets Control issued a list of Venezuelan securities that can be traded.

Some institutions have already taken to implementing similar measures. Earlier this month, Credit Suisse Group AG barred its traders from buying or selling certain Venezuelan securities as well as any new notes. The lender also restricted business with Venezuelan private individuals and companies.

Venezuelan securities gained almost across the board Friday as concerns of a wide swath of trading restrictions were allayed. Venezuela’s 10-year bonds rose 0.12 cent on the dollar to 41.24 cents, while PDVSA bonds due in November surged to a three-year high of 92.4 cents at 1:43 p.m. in New York.

Still, it’s likely that sanctions will “still get ratcheted up,” according to Risa Grais-Targow, a senior analyst at Eurasia Group. “The administration’s preference seems to be for escalatory sanctions to keep increasing pressure, so I expect them to continue to build on these with additional measures.”

With Venezuela’s average borrowing cost at about 32 percent, it’s unlikely the nation would have tapped debt markets for fresh cash. But the ban is designed to prevent investors from engaging in liability management, and, ultimately, a debt restructuring, if Venezuela finds itself unable to keep paying its debt. Until now, the government has made paying its debt a priority, and has cut spending for crucial imports in order to do so.

The U.S. action will block any transactions with U.S. investors involving a debt restructuring or reprofiling without "specific licenses" being issued, Mnuchin said.

The Venezuelan government and PDVSA have about $67 billion in bonds outstanding. They’re among the most-traded securities in emerging markets and are widely held by some of the biggest mutual funds, like BlackRock Inc and Vanguard Group. 


Long deemed to be among the riskiest borrowers in the world, Venezuela has handed investors a total return of almost 700 percent since late president Hugo Chavez took office in 1999 to begin his so-called Bolivarian revolution.

An estimated 23 percent of Venezuela’s debt is held onshore by locals, including government entities, according to Francisco Rodriguez, chief economist at Torino Capital. Other local holders include banks and insurance companies and aren’t necessarily close to the government.

So far, the Trump administration has refrained from imposing sanctions that would affect the country’s oil exports to the U.S., though officials have said that’s one of many options on the table.

Vice President Mike Pence, speaking to Venezuelan exiles in Florida on Wednesday, said the U.S. “will continue to bring the full measure of American economic and diplomatic power to bear until democracy is restored in Venezuela.”