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Trade & Investment

China ups Venezuelan oil investments, but refuses Chavista leaders’ plea for a cash bailout


PDVSA

PDVSA

Back in April, Brazil’s Folha de SaoPaulo ran an article entitled: “The Future of Venezuela Depends on China“ and highlighted this quote:  Translation: “If Maduzo wins, he’ll have to regain the confidence of the Chinese.” – TOM O’DONNELL, petroleum consultant

Indeed, it is now clear that the short-term strategy of the post-Chavez Maduro-Cabello administration was to escape the country’s severe dollar crisis by convincing Beijing to extend it a $5 billion cash loan alleviating food-import shortages before 8 December elections.  In particular, the cash was to fund a new dollar exchange system (see El Nacional,25 Sept 2013).

President Maduro, oil chief Rafael Ramirez and other Chavista leaders went to Beijing in late September with high expectations.  Their logic was that,  after first giving CNPC, Sinopec, CITIC and other Chinese firms huge new contracts to develop Faja heavy-oil-fields and a gold mine, Beijing would be in the mood to hand over $5 billion in cash.  They were wrong.

The expectation of a favourable response from Beijing was a major miscalculation by Caracas. Beijing had already made it perfectly clear to the late-Hugo Chavez’–as readers of GlobalBarrel.com knew long ago–that China would never again simply hand over cash to the Bolivarian state.

Context for China’s refusal: Chavismo had been warned

When China granted Chavez a record-sized $20 billion loan for oil in 2010, Beijing made it clear that this money would only be doled out piecemeal for projects specifically reviewed and pre-approved in Beijing. Furthermore, Beijing would only approve projects that enhanced China’s  ”access to oil.”  (A senior Chinese diplomat explicitly told me this at the time, as did sources in Venezuela.)   The funds could for example be spent for infrastructure projects, but never again would China give cash to support Chavez’ many poorly organised populist schemes only to have large parts disappear.

Consistent with this, in the summer of 2011, businessmen working with PDVSA in Caracas told me how any proposals for projects drawing on this Chinese loan were first being sent for approval to the Chinese embassy in Caracas, then passed to Beijing and,  if approved, the money would be closely watched over when it was sent to Venezuela.

Not to put too fine a point on this, but Chavista functionaries directly knowledgeable of meetings in Caracas between leading Chavistas and Chinese officials also told me, in mid-2011, how Beijing had sent inspectors into Bolivarian ministries and national facilities to see what had been done with their previous grants and loans.  And, they were very negatively impressed.  This became widely known in Venezuela.

An unrealistic post-Chavez bailout strategy fails

Why did getting this cash become Maduro’s (unrealistic) plan? Consider his other alternatives: quickly raise oil production, go to the junk bond market (as Chavez had habitually done), institute austerity measures in public spending,  devalue the Bolivar,  increase taxes and raise subsidised prices, and so on.

Going to the bond market would be very costly. Raising oil production can, in principle, slowly begin within about six months to a year if PDVSA rapidly implemented some pragmatic steps (see my two recent articles here and here).  But, relief was needed more rapidly in order to win the upcoming  8 December municipal elections.

As for the other possibilities, in consideration of how close the presidential elections had been in April, Maduro obviously felt he simply could not risk shifting the burden of the crises onto the popular classes via austerity, devaluation, price raises, new taxes, and etc.

So, it must have seemed to him that Beijing was the only palatable place to turn.  But, the sharpness of Beijing’s rejection of the Venezuelan delegation’s proposal (i.e., the Chinese leadership reportedly didn’t even allow the Venezuelan delegation to present their well-rehearsed PowerPoint pitch) seems to have shaken Maduro.  When Maduro left Beijing he skipped his scheduled speech at the UN General Assembly in NYC making the disingenuous excuse that his life would be in danger in the USA, and continued straight on to Caracas.

In a sign of the seriousness of the situation, Maduro and Ramirez immediately asked Colombia to sell Venezuela $600 million of food in return for bonds issued by Venezuela’s national oil company, PDVSA, Colombian exporters could then resell the bonds for dollars at junk-bond rates via Wall Street.  (See a striking article: “Bonds-for-Chickens Barter Feeds Debt Selloff in Venezuela, By Nathan Crooks & Andrea Jaramill of  Bloomberg’s Caracas office, 23 Sept 13).

On the surface, the trip might appear a great success for Chavismo in that a plethora of new multibillion dollar deals were signed by China’s oil giants Sinopec and CNPC for virgin Faja heavy-oil fields.  And, after lengthy pre-negotiations–Beijing also approved upping the next tranche of a renewable loan-for-oil that Venezuela has already taken four times at $4 billion, now allowing $5 billion.

All this will contribute, longer-term, for PDVSA to increase its oil production. However, from the viewpoint of  short-term, crisis management, from the point of view of getting dollars to import food to feed the population before municipal elections on 8 December, the Beijing trip was a failure.

Finance minister Merentes had previously announced, on 17 September, that a new less restrictive dollar-exchange system was being put in place soon.  After the Beijing cash rebuff, he was relieved of his inner-sanctum position as vice-president for economy on 8 October–probably because the Chinese refused to loan the cash to fund his scheme,  And, he was replaced in that position by oil minister Ramirez.

The chavista leadership is now constrained to consider less palatable, but more realistic options to address the dollar shortage.  But, Chavista leaders are split on what to do.  And, throwing out three more US diplomats (2 October) for talking to opposition activists and striking labour leaders won’t resolve this crisis.

Source: Global Barrel – Beijing ups Venezuelan oil investments, but refuses Chavista leaders’ plea for a cash bailout
 
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About Tom ODonnell

[This bio with hotlinks is at: http://www.umich.edu/~twod/bio/ ] Dr. Thomas Wilfred O’Donnell is an international academic, expert analyst and writer working on energy and international affairs, particularly the global oil and gas systems. Regions of interest include the USA, EU (especially Germany), Russia, China and the OPEC states of the Middle-East and Latin-American (especially Venezuela, Iran and Saudi Arabia). He teaches graduate seminars in Berlin at Hertie School of Governance and undergrads at Freie Universitӓt’s FU-BEST (European Studies Program). He previously taught at The University of Michigan (Ann Arbor) and The New School University (NYC). O’Donnell blogs at GlobalBarrel.com and has recently written for Berlin Policy Journal (Berlin), King’s College European Centre for Energy and Resource Security (London), Americas Quarterly (NYC/DC),Petroguía (Caracas & Latin America), AICGS (DC); reprinted in Natural Gas World, and is often interviewed by the international press. In Spring of 2015, Dr. O’Donnell was a fellow of The American Institute of Contemporary German Studies (AICGS) & The German Academic Exchange Service (DAAD) in Washington, DC interviewing US energy experts on German and EU energy vulnerabilities. He spent two full years, 2008-09, as a US Fulbright Scholar and Visiting Professor in Caracas at the Center for the Study of Development of the Central University of Venezuela (CENDES/UCV), returning several times since. He consults on energy, geopolitical and market/tech matters and is Senior Energy Desk Analyst at Wikistrat, O'Donnell's award-winning PhD thesis is in experimental nuclear physics (U. Michigan, Ann Arbor, 2000), which included research in several national and university laboratories. He is author or co-author of about 40 peer-reviewed physics papers. While doing post-doctoral physics and complex-systems research at U. Michigan, he taught social-science-focused courses in Science Technology & Society (STS) on historical technological change drawing on his industrial/scientific experience and also taught on issues of oil and geopolitics in Middle East and North African (MENA) Studies, as well as courses on the “Information Era” and “Energy and Environment,” and spent several semesters teaching in the Physics Department’s “Advanced Physics Laboratories” encompassing several subtopics. After his university studies, he spent 10+ years during the mid-1970’s to mid-1980’s working in U.S. automobile manufacturing, railways, and energy engineering, while writing and gaining a reputation in the US Midwest as an analyst and organizer of labor and social-political movements, developing extensive ties with activists and others in minority and immigrant working-class communities. This followed his initial (undergraduate) university years focused on political science and China Studies, where he had been an activist and organizer within political protest movements of the day. O’Donnell speaks English (native), Spanish (fluent) and functional German; he is fluent in various programming languages and computing environments. He resides in Berlin, accompanied by family; and maintains close professional and other ties to the USA.

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