Venezuela’s election, the day after: A handover of the nation’s oil riches to Russia and China?

This work originally appeared in the Global Americans. It argues that the deepening political and economic crisis of the Venezuelan regime, and its associated need for resources from Russia and the PRC to maintain itself in power, make it likely that after its almost inevitable victory in this month’s “elections,” it will use its “honeymoon period” to modify laws (and possibly the constitution) to give Chinese and Russian companies the expanded presence, control and safeguards they require before providing a significant new inflow of capital.  Such a move (which could even include expropriation of assets such as those of Chevron, and their handover to Rosneft to operate) would change Russia and China’s position just across the Caribbean from the US in important ways, and present the US government with important questions regarding how to respond.

On April 25th, I had the opportunity to participate in a roundtable at the Woodrow Wilson Center that brought together experts from multiple continents to discuss Russia’s relationship with Venezuela.  The event was one of the best scholarly interactions on this strategically important topic that I have had the privilege to be part of. It stimulated a number of insights regarding the trajectory of Venezuela, including risks that some of my colleagues may be overlooking.

While many scenarios are possible, Venezuela currently appears on track for a significant shift in policy following the (nominal) May 20, 2018 presidential election.  These changes may deepen Russia and China’s economic presence in Venezuela, as well as their political leverage over the country.  While events in the coming months could even produce a change in Venezuela’s political leadership, it’s unlikely such a change would occur in the manner that is commonly assumed. That change may not favor the U.S. and Venezuela’s neighbors.

“Venezuela is desperate for a new infusion of Russian and Chinese resources—particularly hard currency—to weather the present crisis.”

The potential for Venezuela to embark on a significantly different course after the elections reflects a convergence of factors, in which the election plays a pivotal role even if, ironically, change does not come directly from the ballot box.

The stakes

As the election approaches, the collapse of Venezuela’s economy is accelerating beyond the lack of food and medical supplies and other horrors that have already forced an estimated 1.7 million Venezuelans to flee their country.  Venezuelan oil production, at 3.5 million barrels per day when Hugo Chavez began his “Bolivarian” revolution, is now at 1.6 million barrels per day (20% less than just last year).  Moreover, most of that oil is committed to internal consumption and repaying loans, including to China, leaving very little opportunity to generate the currency Venezuela needs to feed its people and keep the economy running.  Collapsing production is accelerated by multiple feedback effects. In parts of the interior, oil operations are paralyzed by a lack of electricity as rampant crime and desperation have led to the scavenging of powerlines to sell as scrap.

Sanctions against long-term loans have also forced some companies to avoid doing business with PdVSA.  The company has become infamous for failing to meet payments, thus requiring de facto long-term loans, that would put service providers in violation of U.S. sanctions laws.  Moreover, service companies such as Schlumberger and Haliburton are reducing their activities in the country, due in part to non-payment for previous work.  Although some of that work can be replaced by Chinese companies, the withdrawal of Western service companies with unique skills further impedes production, both in the fields run by PdVSA and those still in the hands of other companies.

Further aggravating difficulties with oil production, the actions of PdVSA’s new head Manuel Quevedo, widely regarded as inept (reportedly even by Russia), have accelerated the flight of PdVSA senior managers (25,000 of its personnel have left during the past year), creating a ticking time-bomb of crises that will be difficult to resolve as they inevitably occur over the next year without the expertise of those experienced personnel.

The accelerating collapse in oil production will contribute to PdVSA’s financial crisis, even as that crisis contributes to declining production.  As noted by Venezuela petroleum industry expert Russ Dallen, the regime has made almost no payments on sovereign bonds since last November, is beginning to default on PdVSA bonds (which are more vulnerable in international courts), and is failing to pay past legal judgements.  The regime is also quickly running out of liquid assets to import basic goods, necessary both to satisfy the military and other core supporters and to keep the economy running.  Dallen calls attention to the fact that Venezuela’s gold reserves have fallen from $21.2 billion in 2011 to approximately $6.1 billion last month.  Last week, Venezuelan power producer Electricidad de Caracas became the first state entity to be officially declared in default in the United States.  Massive legal judgements, such as the $2 billion award against the Venezuelan government to the Canadian mining firm Crystallex, can no longer be avoided through maneuvering by Venezuelan government lawyers.

Beyond the financial crisis itself, the bond defaults and legal judgements are producing a wave of asset seizures that are just now beginning, and which will further paralyze PdVSA’s production chain.  One of the reasons that the Curaçao refinery (critical for processing Venezuelan crude oil) is operating well below capacity is that tankers laden with Venezuelan petroleum reportedly wait outside the nation’s territorial waters until the owners can verify that everything is legally in order, so that their cargo will not be seized if they enter Curaçao waters and thus subject themselves to Dutch legal jurisdiction.

Enter Russia and China

In the context of Venezuela’s accelerating implosion, the regime’s two principal benefactors, Russia and China, have been reluctant to extend new credit to underwrite the regime.  China has loaned an estimated $65 billion since 2008 but has extended almost no new credit during the past two years apart from consolidating existing loans and allowing the Venezuelan government to delay payments of principal against some of its outstanding debt.  Russia, which has extended Venezuela an estimated $6 billion through advance payments by Rosneft for oil, has reportedly recovered half of that debt.  When it became clear that the U.S. Congress would probably block Russia’s Rosneft from taking control of CITGO holdings, which PdVSA had offered as collateral for a $1.5 billion loan, the company sought instead to trade CITGO holdings for Venezuelan oilfields as an alternative form of collateral, and has reportedly even considered selling its option on CITGO holdings to a U.S. venture capital firm.  Russia, unlike China, has also shown a willingness to expand its presence on the ground in the Venezuelan petroleum sector despite the crisis. Russia has built a presence in joint venture oil projects such as Petromiranda, Petromonogas, Petrovictoria, Boqueron, and Petropereja.

While Venezuela is desperate for a new infusion of Russian and Chinese resources—particularly hard currency—to weather the present crisis, Russian companies and banks are likely holding out for more lucrative deals, more guarantees, more control over the assets they operate, and greater probability that the deals they sign will be enforced as legally legitimate by whatever eventually replaces the Maduro regime.  In December 2017, during a visit to Caracas, Rosneft head Igor Sechin signed a deal for access to the Patao and Mejilones offshore gas fields (near Trinidad), giving Rosneft rights to the fields for 30 years, and allowing it to sell all of its production directly for export.  Yet similar deals in the strategic Orinoco tar belt, where much of the country’s estimated 300 billion barrels of recoverable heavy crude are located, would generally require changes in laws and the Venezuelan constitution.

What’s next

With the Venezuelan opposition divided, its key leaders excluded, and the government in possession of ample tools to steal or manipulate the election, Nicholas Maduro will almost inevitably beat rival Henry Falcon in the May “elections” (in one cynical scenario, former Chavista Falcon could agree to be Vice-President in a “unity government”).  Yet barring such possibilities, with the exception of ALBA countries and a few oil-dependent neighbors in the Caribbean, the governments of the region will not accept the result.

Maduro will, however, likely take advantage of the demoralization of the opposition and disagreements within the international community created by his near-certain landslide election victory to implement some of the more controversial actions required to secure Russian and Chinese money and survive the crisis.  Such actions could include changes to the constitution to give Russian and Chinese companies legal control over the oilfields they operate, and the right to directly sell the oilfield’s production to the market.

Maduro could also choose the post-election honeymoon period to announce nationalizations of Western oil companies, which the government no longer believes it can coerce more investment and services from.  The government’s bold move to arrest and threaten treason charges against two Chevron employees for refusing to sign a highly questionable contract, for example, breaks an unspoken commitment between PdVSA and the minority share partners on which it depends to operate its oilfields.  That bargain revolved around the government’s granting the investor autonomy and decision authority over extraction in exchange for leveraging their resources and expertise to be able to access the resources underground and refine them.  The move against Chevron—the largest remaining, and once the most loyally Chavista Western, firm in Venezuela—will precipitate the firm’s flight from the country, and suggests that Maduro is abandoning the government’s previous “cooperative strategy” and is preparing to nationalize the assets of the remaining Western companies he is forcing out.  Since PdVSA lacks the resources and expertise to assume the role played by experienced Western companies such as Chevron, it will be tempted be to bring in Russian or Chinese companies to replace them.  For some projects, such as Petropiar (where Rosneft already works with Chevron), doing so would be relatively easy. In other fields, however, the technical challenges will be greater.

“The successor regime emerging from a forced transition, even if more competent, would likely be worse for the strategic position of the U.S. in the hemisphere.”

It is also possible that a leadership transition will occur in Venezuela (after the election, not through it). Maduro, responding to significant behind-the-scenes pressures to step down, could use his nominal election victory to declare victory, appoint a vice-president acceptable to Russia and China, and turn over power to him or her.

Alternatively, Maduro’s victory in the election could encourage him to become more reckless in his actions (mistakenly believing his survival to date reflects his political skill rather than the lack of alternatives), leading to his removal from power. This would require key military leadership playing a leading role in Maduro’s removal, or at least refusing to defend him. Yet such a post-election “coup” would probably not lead to the restoration of democracy, as some in the U.S. have hoped, but rather, would likely be managed by an awkward mix of the many Cuban agents and advisors already in the country, the Russians, and the Chinese.

Contrary to often little-questioned assumptions in the United States that an intervention by the Venezuelan military against the Maduro government could bring a democratic transition, the successor regime emerging from such a forced transition, even if more competent, would likely be worse for the strategic position of the U.S. in the hemisphere.  The resulting military government would be more directly dependent on Chinese and Russian capital, and possibly more willing to cooperate with both countries in military, as well as economic matters.

If such a regime were better managed, it would be good news for the millions of Venezuelans displaced from their country, and better for Venezuela’s neighbors such as Colombia, Brazil, Panama, and the Dominican Republic, who have had to host millions of refugees. Yet a better managed anti-U.S. regime dependent on Russia and China would also have more resources and capabilities to undermine the U.S. across the region.  Moreover, to date, the Maduro government’s corruption and mismanagement has arguably served as a cautionary tale against leftist populism, helping to elect center or right governments across the region, willing to work with the United States. More competent management in Caracas would remove that strategic benefit, one of the few positive impacts of Venezuela’s tragedy on the political landscape of the region.

Decision makers and analysts in the United States and the region must prepare for possible significant shifts in Venezuela following the May 20 elections. This includes not only crafting how the U.S. will respond to Maduro’s likely victory in the election itself, but also to a range of follow-on events, such as possible nationalizations and increased presence and leverage for Russia and China.  In preparing for potential action by the Venezuelan military, U.S. planners should not presume that such an outcome will restore democracy and a pro-U.S. regime, but rather, that in the ensuing chaotic situation, Cuba, Russia and China could reasonably guide the process toward an outcome that is even more prejudicial to U.S. strategic and security interests than the current regime.