CITGO Key To Trump’s Venezuela Strategy

(Forbes, Ariel Cohen, 8.Oct.2019) — At last month’s United Nations General Assembly, the Lima Group, the U.S.-led coalition of 14 countries in the Americas seeking a solution to the Venezuela crisis, and the International Contact Group, reaffirmed its commitment to democracy and the rule of law.

The human rights record of the Maduro regime is among the worst on the planet. Venezuela’s “Special Action Forces” or death squads, supported by the Cubans, have murdered thousands of political opponents since 2018, the UNHRC announced. For their assistance, supplies of free Venezuelan crude pay for the Cuban Praetorian Guard to protect Maduro.

U.S. and its Latin American allies have the policy vision: getting rid of the Maduro regime. This is the right outcome to insist on, but getting there requires the precise decisions at each turn. Venezuela is a festering sore on Latin America’s body, a living proof of socialism’s economic failure. Since the Russian Revolution of 1917, few countries so conclusively demonstrated a wonton value destruction despite their incredible wealth.

Venezuela is number one in global oil reserves and derives 98% of its GDP from oil sales. It used to also be a prominent oil producer, pumping more than 2 million barrels per day (bpd) in 2016. Yet, today, 80% of crude production has been destroyed by the Chavista regime’s corruption and incompetence, with output hovering below 500,000 bpd. The tragedy of Venezuela’s energy sector, however, pales in comparison to the rest of society.

The military has turned into a narco-trafficking and money laundering cartel. The generals’ involvement in the cocaine business is one of the main reasons military leaders refuse to support the opposition, currently headed by Juan Guaidó.  For example, Tareck El Aissami, a key Maduro lieutenant, was sanctioned by the U.S. as a major narco-trafficker in 2017.

There was hope that these abuses would change when Juan Guaidó, supported by the U.S., declared himself the “acting president of Venezuela” earlier this year. In return, the Trump Administration has rolled out the red carpet providing maximum support to Guaidó, short of a direct military intervention. 

However, Guaidó’s anti-Chavez movement is losing momentum. The Moscow-Beijing-Havana axis continues to support the Maduro regime with effective economic, military and security assistance on a scale that the Guaidó coalition so far is unable to match.

Consequently, attempts by Guaidó to flip Venezuela’s generals with promises of amnesty have fallen flat. Top military leaders have rejected the promises of exoneration, preferring instead to maintain their positions of wealth and power as henchmen and drug dealers alongside the corrupt Maduro regime. There is also the struggle afoot for control of Venezuela’s energy assets, making the Trump Administration’s next moves critical to the success of its entire Venezuela strategy.

Oil – Key to Venezuela’s Recovery

Despite sitting atop trillions of dollars of oil assets, the Maduro regime and its state-run energy champion, Petróleos de Venezuela, S.A (PDVSA), have presided over the unprecedented misery of Venezuelan people.

In addition to the empty shelves and the lack of basic foodstuffs, medication and gasoline, the oil-rich country has accumulated $156 billion in foreign debt, including $55 billion to China, and $17 billion to Russia. Over $20 billion of debt was issued to institutional and private investors in the United States. But PDVSA’s relationship with the U.S. goes beyond simple debt.

The primary market for PDVSA’s heavy oil has historically been the United States. In the mid-1980s PDVSA was a well-managed state oil company and the envy of the oil industry. In 1986 it bought a 50% stake in CITGO, one of the largest oil companies in the United States (incorporated in Delaware) and purchased the remaining 50% in 1990. This afforded Venezuela a pipeline to the U.S. economy, and granted American refiners access to the largest oil reserves in the world. It appeared as a win-win symbiosis.

CITGO holds 5% of the U.S. refining capacity and has a lock on the processing of heavy Venezuelan crude, something other refiners are not technically equipped to do, as modern refineries are mostly designed to process the lighter crude found in American shale formations.  

PDVSA’s capacity to sell its oil to the markets is wedded to CITGO’s refineries. This makes this U.S.-based company far more than just a cash generator – it is a strategic energy security asset for both countries.

Will an APO Hurt or Help Trump’s Strategy?

Today PDVSA has two competing boards: one appointed by Maduro, and one by Guaidó. Debt-ridden PDVSA defaulted on the majority of its debt and bonds, with the exception of the 2020 bonds secured by 50.1% of its ownership shares in CITGO. PDVSA currently owes a staggering $24.7 billion to these lenders. However, cash strapped Guaidó and his coalition are trying to access CITGO’s resources to fund the struggle against Maduro. 

In order to get access to CITGO’s cash, Guaidó’s team is lobbying the Trump White House to issue an Asset Protection Order (APO), a quasi-judiciary instrument that would stop PDVSA from having to pay bondholders. The order would include protection of CITGO shares that are the collateral for the 2020 bonds, the next payment on which is due at the end of the month.

Under the terms of the bonds, if PDVSA defaults on its October payment, the CITGO shares go into foreclosure. The American lenders have said they want to reach a deal to help PDVSA avoid this, but so far, the board controlled by Guaidó has refused to renegotiate seriously, betting instead an APO will allow them greater maneuverability.

The approach taken by Guaidó’s team sets up an unintended trap for the White House. It would make CITGO far more debt-ridden and risky, and undermine future investment in PDVSA that will be desperately needed for a post-Maduro economic recovery. Moreover, an APO could inadvertently end up helping the very actor the U.S. is working to block from having a larger role in the country and region: Russia.

The Russian energy behemoth Rosneft is a creditor to PDVSA, and already holds 49.9% of CITGO’s shares as collateral. It is not hard to imagine Guaidó’s team eventually making deals in desperation with Rosneft, or third parties acting on Rosneft’s behalf, which could increase Russian involvement in the Houston-based company.

Rosneft has been a key ally of Maduro in seeking to evade U.S. sanctions. Earlier this year, the Russian energy company helped PDVSA skirt sanctions by serving as an intermediary for the Venezuelan company to receive payment for its oil from clients abroad.

The possibility of Russia’s influence in Western Hemisphere expanding as a result of an APO would be a threat to U.S. interests, and completely avoidable.

There is also an important property rights aspect to this imbroglio. Last summer, six leading American economic freedom NGOs, including Americans for Tax Reform, The National Taxpayers Union and Heritage Action, dispatched a letter to Secretary of the Treasury Steven Mnuchin. In it, they oppose an APO over CITGO.

Such an action, they agree, would have a chilling effect on future private investment in Venezuela, undermine the rebuilding of the country, and favor America’s enemies.  

The Trump Administration is right to pursue a robust anti-Chavista policy. The people of Venezuela deserve free elections, a competent government, a deep institutional and economic reform based on the rule of law. However, the U.S. Government should not sacrifice American investors’ constitutional property rights, including investments of thousands of retirees with a stake in CITGO.

Energy companies need stable management and long-term planning to succeed and generate high revenues. That was proven by PDVSA, being taken hostage to domestic politics under Chavismo, facing destruction today. The White House can’t let the same happen to CITGO.

Instead, Washington should be encouraging Guaidó to negotiate a commercial deal with the creditors. Guaidó’s recent firing of Richard Haussmann, who has long advocated a debt repudiation strategy, is a hopeful sign that negotiation is the better choice.

If and when the opposition succeeds to gain control over Venezuela, the question of CITGO-guaranteed bonds can be revisited, but not at the detriment of the American investors or U.S. energy security.    ***

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