The U.S. government recently stepped up its action against the Venezuelan government with a new round of sanctions in retaliation for attempts by Venezuelan President Nicolas Maduro to erode democratic institutions and consolidate power. On August 25, President Donald Trump issued an executive order prohibiting U.S. institutions from trading bonds with the Venezuelan government or the state-owned oil company PDVSA.
The U.S. government stopped short of a ban on oil imports from Venezuela, hoping to insulate U.S. refiners that depend on heavy crude from the South American country.
Unlike the previous actions, which only targeted individuals at the highest level of the Maduro government, the latest measures from the Trump administration take aim at the broader economy. It is a significant escalation, one that could only worsen Venezuela’s fiscal position.
At the same time, the U.S. government stopped short of a ban on oil imports from Venezuela, hoping to insulate U.S. refiners that depend on heavy crude from the South American country. But in the short run, Venezuela will have difficulty moving volumes to the Gulf Coast since the region has been swamped by Hurricane Harvey.
Tightening fiscal noose
The U.S. government’s actions are intended to prevent Caracas from restructuring or rolling over its debt with American banks. But without new financing or some sort of deal with creditors, a debt default is becoming increasingly likely. Worries over a debt default have swirled ever since the economy collapsed, but so far Venezuela has been able make its payments. That could change, however, with tighter financial sanctions and the country running out of cash.
The U.S. government’s actions are intended to prevent Caracas from restructuring or rolling over its debt with American banks.
The Venezuelan economy has been shattered by a deep, multi-year depression that is in large part the result of low oil prices and the country’s dependence on oil export revenue. Inflation could exceed 2,000 percent in 2018, according to the IMF, and there are widespread shortages of food and medicine. But the situation could deteriorate if Venezuela defaults on its debt, and the government will be put to the test in the next three months when large debt payments come due.
PDVSA and the sovereign government owe a combined has $3.63 billion in debt over the course of October and November, and they have less than $10 billion in cash to work with. Avoiding default this year would seem quite possible, but the situation only gets more difficult with more debt maturing in 2018. Without a restructuring of debt, Venezuela will run out of room, perhaps sooner rather than later. The one glaring problem is that many analysts believe that only $1 billion of Venezuela’s foreign exchange is in the form of liquid assets, according to the Wall Street Journal. In other words, PDVSA and the government could struggle to raise the money needed to pay bondholders.
The problem for Caracas is that the latest sanctions from the Trump administration prohibits Venezuela from engaging in the kind of financial maneuvering that it may need to avoid default. In 2016, Venezuela made a deal with creditors to stretch out debt payments over a much lengthier period of time, swapping out maturing debt for new bonds that have payments scheduled over the next several years. Now, Venezuela won’t be able to make a similar transaction, at least not with U.S. banks.
Venezuela could turn elsewhere, but because of the long shadow of sanctions from the U.S. Treasury Department, other banks might balk at engaging with PDVSA or the Venezuelan government. Credit Suisse, for example, has declined to trade certain types of Venezuelan bonds, the WSJ says. That threat is made larger by the fact that other nations are following in Washington’s example, with corresponding sanctions in the offing.
U.S.-Venezuelan oil trade continues
The U.S. government stopped short of banning the purchase of Venezuelan oil, a measure that would have likely pushed the country further into the abyss.
The executive order from the Trump administration exempts Citgo, a subsidiary of PDVSA, which owns refining assets and retail gasoline stations in the U.S. Although the order bars Citgo from sending profits back to its parent company, the company will still be allowed to issue new debt and engage with U.S. institutions.
In fact, despite the war of words between Washington and Caracas, the U.S.-Venezuelan energy relationship is the main economic lifeline for the South American nation at this point. In May, the most recent month for which final EIA data is available, the U.S. imported 767,000 barrels per day from Venezuela, about half of Venezuela’s total exports. Because much of the rest of Venezuela’s oil production is sent to Russia and China as repayment for past loans, the U.S. is one of the last large sources of revenues for PDVSA, and thus, the Venezuelan government.
While Citgo is the largest importer of Venezuela’s oil in the U.S., Valero Energy and Phillips 66 also buy large amounts of crude from the OPEC country.
The calculated response was made with an eye on major U.S. refiners, many of which depend on heavy oil from Venezuela, and the possibility of a spike in gasoline prices. While Citgo is the largest importer of Venezuela’s oil in the U.S., it is not far ahead of Valero Energy and Phillips 66, two companies that imported 57.5 and 46.2 million barrels of Venezuelan crude in 2016, respectively (see Bloomberg chart).
According to Bloomberg, Valero Energy’s Port Arthur, Texas refinery sourced a quarter of its crude purchases from Venezuelan in July, and Chevron’s Pascagoula, Mississippi refinery depended on the South American nation for 43 percent of its needs.
Because of this relationship, many Gulf Coast refiners lobbied the Trump administration this summer, hoping to prevent a ban on Venezuelan oil imports. The irony is that despite the Trump administration’s concession to protect U.S. refiners, many of them will be unable to import Venezuelan oil in the near term because they are offline after getting slammed by Hurricane Harvey. Valero Energy has reportedly shut down two units at its Port Arthur refinery complex, the same facility that heavily relies on Venezuelan oil. It is unclear how long the outages will last, but the refiners—as well as the Venezuelan government—surely hope the situation clears as soon as possible.
But the recent sanctions may not be the end. According to the Wall Street Journal, a senior U.S. official said that more actions would be forthcoming until “the Maduro regime holds free, fair, transparent and internationally-monitored elections, releases all political prisoners unconditionally and respects the authority of the legitimate national assembly.” There is no sign, though, that the Maduro government has any intention of acquiescing to those demands. It is also unclear of the Trump administration will pull that final—and most lethal—arrow out of its quiver, but doing so would have far-reaching consequences for Venezuela as well as U.S. refiners.