Wall Street's Venezuela Bet Rests in Hands of These Seven People

(Bloomberg) -- Venezuela bond investors had a rough 2017, with their holdings posting the world’s worst losses amid economic and political turmoil that culminated in U.S. sanctions against the country and President Nicolas Maduro’s plan to restructure the debt.

As 2018 gets underway with the government and its state oil company behind on more than $1.5 billion of payments, creditors are wondering what’s in store for them as an additional $9 billion comes due over the next 12 months.

Will the nation continue to muddle through, eventually paying investors even if not quite making the due dates? Or has the country reached the point where it just doesn’t make sense to continue servicing more than $60 billion in overseas debt as the population suffers from a severely contracting economy, surging inflation and a sharp deterioration in quality-of-life measures?

Venezuela’s one-year default probability has climbed to a world-leading 93.4 percent, according to a Bloomberg model that weighs a nation’s external debt load, economic growth forecast and political risks. With so many variables at play in Maduro’s calculations for the next year, it’s worth looking at seven of the most important people from Caracas to Beijing who could determine the outcome for money managers.

1) The Money Man

Simon Zerpa, Venezuela’s finance minister and Petroleos de Venezuela’s chief financial officer, is one of Maduro’s most powerful confidants. The 34-year-old holds the keys to the vast and secretive world of Venezuelan finances, pitching deals to Chinese, Russian and Turkish officials. That diplomacy, which he learned from his father, Venezuela’s ambassador to China, will be crucial to raise funds for the cash-strapped nation.

2) The Sanctions Czar

As chief counsel at the U.S. Treasury’s Office of Foreign Assets Control, Brad Smith is among those responsible for measures against Maduro and Vice President Tareck El Aissami as well as a ban on new debt offerings. With the U.S. seeking to force regime change or a change in the Maduro administration’s behavior, harsher sanctions, perhaps targeting the all-important oil industry, are a possibility. The Trump administration is closely monitoring Venezuela and retains options to increase sanctions, a Treasury spokesperson said.

3) The Influencer

As the most vocal U.S. politician on Venezuela, Florida Senator Marco Rubio has Donald Trump’s ear as he lobbies to build pressure on Maduro’s regime. His political clout gives him influence. Trump won Florida in 2016 by 112,911 votes, a number that’s smaller than the state’s Venezuelan residents, many of whom live near Rubio’s local office in Doral and support a hard line against their homeland. The senator has called Venezuela one of his top priorities in 2018.

4) The Financier

David Martinez, the billionaire distressed debt investor and chief executive officer of New York-based Fintech Advisory, has a direct channel to El Aissami after making a $300 million loan to the government backed by bonds with a face value of $1.3 billion. He reportedly urged Venezuela’s government to default on its foreign debt days before Maduro’s surprise restructuring speech. With his vast Rolodex of Caracas contacts, the dual Mexican-British citizen figures to be at the center of any debt deal.

5) The Chinese Oil Man

Loans from China -- often tied to oil shipments -- have been one of the biggest sources of funding for Maduro while he’s remained locked out of conventional capital markets. Dai Houliang’s recent rise to chairman at China Petrochemical Corp., Asia’s largest oil refiner, could upend that. While PDVSA recently settled a multi-year legal dispute with Sinopec, the state oil firm said it did so only to end the controversy, not to accept responsibility for any alleged wrongdoing. Lost financial ties with China would probably trigger a hard default, according to the oil and gas consultancy FGE.

6) The Military Liaison

Diosdado Cabello, a high-ranking socialist party official with deep connections inside the military, holds sway over the unpopular Maduro. Locals own about 28 percent of Venezuela’s debt, according to Torino Capital, much of which is believed to be in the hands of top military officials whose support Maduro relies upon to stay in power. If military associates chose to sell their debt holdings, there would be even less incentive for the government to continue paying.

7) The Russian Benefactor

Russian President Vladimir Putin has been a longtime supporter of Maduro, most recently reaching a deal to restructure $3 billion of debt owed by the South American nation. Venezuela will rely on the cushy relationship to continue as Putin seeks to gain influence in the Western Hemisphere. State-owned refiner Rosneft PJSC could be a fresh source of Russian investment in Venezuela. The company already holds a lien backed by an almost 50 percent stake in the U.S. refining arm Citgo as well as its oil ventures with PDVSA.

Honorable mention: The Flipping Witnesses

If anyone could help the U.S. build its case against the Maduro government, it’s Luisa Ortega Diaz, who was ousted from her post as the country’s top prosecutor in August. She told Bloomberg that Maduro and other top officials have long known about graft at PDVSA and other state firms but quashed investigations. Former PDVSA President Rafael Ramirez, also in exile after getting booted from his UN post, is another ex-official who could lend a hand. The information they might provide to the U.S. may tip the scales to harsher penalties.

To contact the reporter on this story: Ben Bartenstein in Lima at bbartenstei3@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Brendan Walsh, Alec D.B. McCabe

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