Political crisis in Venezuela: economic consequences for Russia / News / News agency Inforos
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Political crisis in Venezuela: economic consequences for Russia

Debt loss can become an urgent issue

Political crisis in Venezuela: economic consequences for Russia

The situation in the world oil market has become less predictable – certain problems with the dynamics of the OPEC+ transaction settlement are offset by increased instability in Venezuela. In this country the opposition leader Juan Guaido proclaimed himself the country's interim President.

Despite the unexpected cancellation of Russian Energy Minister Alexander Novak's visit to Davos, where he planned to meet with his Saudi counterpart on the OPEC+ deal, it is too early to speak of its failure. And the prolongation of critical events in Venezuela can have a positive impact on oil prices, as the recovery of the country's exploration and production sector will be postponed. And apparently, Venezuela's oil sector has not yet hit the bottom – a circumstance in favor of knocking out additional volumes of raw materials from the market. A US military intervention should not be ruled out either. The country may follow scenarios similar to those in Syria, Iraq or Libya. Maduro has the army on his side, but the situation is still critical. Little wonder that Brent crude climbed back above $60 a barrel.

There are no sweeping outlook revisions on the oil market developments by OPEC or heads of major oil companies. For example, LUKOIL President Vagit Alekperov believes that in the first half of 2019 Brent will cost $55-65 per barrel. Which is quite a comfortable price level.

Meanwhile, the US is increasing pressure on the regime of Venezuela's current leader Nicolas Maduro by means of new economic restrictions: the American authorities imposed sanctions against the Venezuelan state oil company PDVSA. On January 28, a relevant message was published on the website of US Treasury's Office of Foreign Assets Control (OFAC).

The sharp deterioration of the political situation in Venezuela and the sanction pressure by Washington challenges Russia's financial backing of its Latin American partner – the risks of defaults on multibillion-dollar loans have increased markedly.

One of the targets is Rosneft – in case of an adverse development of the political and economic situation in Venezuela, the company's partially returned prepayment is going to be jeopardized. Some $3 billion is yet to be paid off, which affected the company's capitalization, with shares beginning to fall in price against growing instability in the country. Apart from the upfront money, Rosneft has a number of oil projects in Venezuela, the prospects of which are under threat. For instance, substantial volumes of oil should be uninterruptedly supplied to the large Indian oil refinery Vadinar, which is almost half-owned by Rosneft.

According to the data on trade and economic cooperation between Moscow and Caracas provided by the Ministry of Economic Development and Trade of the Russian Federation, Russia's accumulated investments in the country exceed $4.1 billion, with major volumes concentrated in Rosneft investments.

Developments in Caracas cause concern among the Russian leadership. On January 24, Vladimir Putin had a telephone conversation with Venezuelan President Nicolas Maduro, during which he touched upon reasons for the country's ongoing crisis. In his opinion, the situation in Venezuela fell under external influences. The Russian leader emphasized that "destructive external interference that grossly violates the most basic norms of the international law."

In his turn, Press Secretary for the President of Russia Dmitry Peskov said that Washington's sanctions against PDVSA and its American Citgo division are a "manifestation of unfriendly, unfair and illegal competition", specifying that "Russia will defend its interests in Venezuela within the international law using all mechanisms available to us."

Nevertheless, the probability of financial losses by Russia and Rosneft remains rather high. Thus, the Ministry of Finance does not rule out issues as regards Venezuela's public debt management to Russia. A relevant statement came from Deputy Finance Minister Sergei Storchak on January 29. "There will probably be problems. Everything now depends on the army, on the soldiers and how faithful they will be to their duty and oath. It is difficult, impossible to give a different assessment," the official said. The next payment to Russia worth $100 million is scheduled for March, and Venezuela had so far never missed any of them, Storchak said.

On the other hand, the necessity of Russian financial interventions in Venezuela, whose oil reserves are rated as the world's most abundant, was evidently beyond question. Not least important is the geopolitical aspect for developing cooperation with Caracas. The only question is commensurability of Moscow's "aspirations" with political risks that have always been on the rise during Maduro's reign. Another aspect is the plausible cover thesis – replacing Russia in Venezuela's oil industry will be majors from the United States (Exxon, Chevron and others).

However, Russia is not the only one to skate on thin ice, with China having invested a lot more in this Latin American country, especially as far as its oil sector is concerned. In general, if Caracas faces a total default, a queue of creditors will not be long in coming. The only insecure thing is loan coverage.

But it is still premature to "reset" calculations that the Maduro regime will successfully overcome the latest surge in bifurcations relating to domestic policy. After a rally in Caracas Speaker of the National Assembly of Venezuela Juan Guaido, who called himself the new President, told reporters that the election may be held within a period of six months to one year. Horizons of this kind  play into Maduro's hands, but the only way for him to thwart the urgency of an early election is an effective anti-crisis plan. But it is highly questionable whether the legitimate Venezuelan President has enough strategic thought and resources to implement it.

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