Venezuela Horror Is Warning for Russia Traders Mulling Sanctions

(Bloomberg) -- Investors in Russian assets can look to Venezuela for an idea of what may be in store for them after the Trump administration levied sanctions against some of the country’s richest men.

If Venezuela’s experience serves as a guide, the impact could stretch on for a while as companies confront the fallout from restrictions on international banking, communications and even the currencies they use for business. The move to impose penalties hit Russia’s stock and bond markets hard Monday, with an index of corporate notes sinking the most in three months as securities with ties to the penalized individuals took a nosedive.

Here are some lessons Russian investors can take away from the saga faced by bond investors in Petroleos de Venezuela SA, the state-owned oil company known as PDVSA, which is currently behind on $730 million of interest payments:

Payment chain:

Investors typically pay little attention to financial institutions that help process bond payments. But Venezuela traders were forced to learn the names of all these intermediaries -- even having them on speed dial -- as payments came under extra scrutiny and some were ultimately held up on concern they might run afoul of sanctions. A similar ordeal in Russia would be a headache for overseas holders of its corporate notes.


Restrictions on U.S. dollar transactions could increase borrowers’ reliance on alternate currencies such as the Chinese yuan. Venezuela started publishing its weekly oil basket price in yuan rather than dollars last year, and now hold auctions for its currency in euros instead of the greenback. Nicolas Maduro’s government has even gone so far as trying to issue a sovereign cryptocurrency, an idea also floated by Russia.

Venezuela Horror Is Warning for Russia Traders Mulling Sanctions

Communication restrictions:

Sanctions targeted at individuals limit, and in some cases prevent, money managers from meeting with company officials. When Venezuelan Finance Minister Simon Zerpa invited bondholders to Caracas for restructuring talks in November, many declined for fear of running into trouble with the U.S. Treasury, which had sanctioned Zerpa. That’s in effect made it impossible for the company to restructure its debts.


Venezuelan sanctions have also made PDVSA increasingly reliant on other pariah nations for financial assistance. Zerpa’s globetrotting has included recent trips to Russia, Turkey and China in a bid to drum up support.


Bondholders who haven’t exited their positions may be stuck for the long haul as they await some kind of resolution. For PDVSA, it’s due to the mix of defaults and a restructuring ban. Already we’re seeing something similar in Russia, where debt from United Co. Rusal -- whose owner came in for sanctions -- is being removed from many bond-trading platforms.

©2018 Bloomberg L.P.