Treasury Tug-of-War on Venezuela Stirs Confusion on Wall Street

(Bloomberg) -- Donald Trump’s executive order last week to shield Venezuelan assets in the U.S. was supposed to be a blow to the Maduro regime. Instead, it’s left Treasury officials grumbling and investors more puzzled than ever.

The source of the confusion is Houston-based refiner Citgo Holding, Venezuela’s crown jewel abroad, which isn’t even mentioned in the three-page directive. Advisers to National Assembly President Juan Guaido, recognized by the U.S. and more than 50 nations as Venezuela’s rightful leader, had urged the White House for months to issue such an order -- to no avail.

Guaido’s nightmare has been that state oil giant Petroleos de Venezuela defaults in October on a $913 million bond payment and creditors seize the collateral -- a 50.1% stake in Citgo. The threat has intensified due to declining political support from Venezuelan lawmakers and a deepening cash crunch as the months-long power struggle against Nicolas Maduro’s government drags on.

So after the order on Monday, the 35-year-old opposition leader immediately claimed victory: “CITGO and all its assets are protected,” he wrote in a tweet. His attorney general, Jose Ignacio Hernandez, took it a step further, saying it didn’t make much sense to make the bond payment now that Citgo was safe. Guaido’s team had been privately assured by Treasury officials that the refiner was protected, according to four people familiar with the matter.

But some inside the Office of Foreign Assets Control, Treasury’s sanctions arm, weren’t pleased. OFAC officials told creditors that they could still foreclose on the Citgo shares if PDVSA defaults on its 2020 bonds, as previous licenses made clear, two people familiar with the matter said.

A Treasury spokesman said the department’s guidance on the PDVSA 2020 bonds wasn’t impacted by the executive order. He declined to comment on disagreements within the Treasury Department.

The conflicting messages have spurred a series of dueling phone calls as Guaido’s advisers and PDVSA bondholders each demand more explicit guidance from Washington. In meetings last week, some Guaido representatives prepared for the possibility that OFAC has the final say, although they still want Trump to take additional actions, three of the people said. One argument is that the OFAC licenses were written before Guaido’s rise to power and have become obsolete by virtue of the changing political backdrop.

Meantime, attorneys at Cleary Gottlieb Steen & Hamilton, which is advising a Venezuelan creditor group, are taking comfort in OFAC’s reading. They point to a line on the Treasury’s website that says PDVSA 2020 bondholders “would not be limited from gaining access to their collateral.”

“The executive order is at best ambiguous and that may reflect that the administration hasn’t made up its mind on how to deal with Citgo,” said Francisco Rodriguez, the chief economist at New York-based Torino Capital. “The latest doubts and concerns may force them to take a firmer stance.”

©2019 Bloomberg L.P.

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