With U.S. Bond Sanctions, Walls Close In on Venezuela's Regime

(Bloomberg) -- Fresh restrictions on trading Venezuelan debt have drawn the financial noose more tightly around the neck of the struggling nation.

The Trump administration on Friday barred the purchase in U.S. markets of new securities issued by the government and its state oil company and blocked dealing in some existing bonds owned by the country’s public sector to further clamp down on President Nicolas Maduro’s autocratic regime. The U.S., which will still allow the continued import of Venezuela’s lifeblood oil, acted in response to Maduro’s moves to consolidate authority amid a crippling recession and months of violent protests.

“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 measures follow sanctions on top officials, and decrease maneuvering room for a nation fast running out of money. Venezuela has $3.5 billion in bond payments coming due by November, which the government will struggle to pay as reserves dwindle. In the meantime, the country has been ravaged by shortage of food and medicine, and its people increasingly go hungry.

Maduro said in a Twitter post that he was undeterred.

“The people of Venezuela will respond with dignity and firmness to the imperialist attacks, to guarantee the economic sovereignty of the country,” he wrote.

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

“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.”

The White House said in a statement that the measures were calibrated to restrain the government while sparing a suffering people.

The Treasury Department will issue licenses for some transactions “to mitigate harm,” according to the statement. Trading will be allowed for most existing Venezuelan bonds in secondary markets and as short-term financing for most commercial trade, such as the import and export of petroleum.

The order also largely exempts Citgo Petroleum Corp., the U.S. subsidiary of the state-owned oil company Petroleos de Venezuela SA. Citgo contributed $500,000 to Trump’s inaugural fund, Federal Election Commission records show. The company hadn’t contributed to inaugurations in 2005, 2009 or 2013.

Calls to PDVSA weren’t immediately returned.

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

The order will prevent Venezuelan government entities that already own the country’s debt from selling it in the secondary market. It 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.

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.

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

Some institutions have already implemented similar measures. Credit Suisse Group AG this month barred 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 on Friday as concerns of a wide swath of trading restrictions were allayed. Venezuela’s 10-year bond rose 0.12 cent on the dollar to 41.24 cents, while PDVSA bonds due in November climbed to a three-year high of 92.2 cents. the end of trading Friday.

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.”

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, if Venezuela can’t pay its debt, a restructuring. Until now, the government has made repayment 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 without "specific licenses," 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. 

Risk-Reward

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 locally, including by government entities, according to Francisco Rodriguez, chief economist at Torino Capital. Other local holders include banks and insurance companies.

The Trump administration has refrained from 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 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.”