Oil-slicked debt trap

Nothing can be more counterproductive than military intervention in Venezuela to tackle the humanitarian crisis. Improbable as the idea sounds, the U.S.’s attempt should be to help Caracas overcome the disruption to its oil exports. Revenue losses at the state-owned oil firm, PDVSA, have also been spiralling downwards, after crude output dipped to its lowest in 30 years.

Last November, Venezuela’s beleaguered President, Nicolas Maduro, asked creditors to renegotiate the country’s sovereign debt, estimated at over $100 billion. The cash-strapped economy has been unable to sustain imports of basic necessities, even as the socialist government has unleashed a crackdown on an angry opposition and activists. The mass exodus of millions of Venezuelans into neighbouring states has led to occasional comparisons with the Syrian refugee crisis. The currency was devalued by 95%, and the minimum wage was raised in August, but these will have little impact unless the fundamentals are addressed. The wider significance of the situation in Venezuela was underscored recently by the International Energy Agency. It predicted that crude prices will touch $85 a barrel following a squeeze in global supplies, resulting from lower Iranian exports in the wake of U.S. sanctions. For his part, Mr. Maduro must restore confidence in democratic institutions and the rule of law.

But Venezuela has in recent months been consumed by efforts to forestall the seizure of PDVSA assets by investors. Legal disputes following the frenetic nationalisation drive under Hugo Chavez a decade earlier have reached culmination point. Recently, PDVSA agreed to compensate the U.S. exploration group, ConocoPhillips, to the tune of $2 billion — a sizeable chunk of Venezuelan foreign reserves — following an International Chamber of Commerce (ICC) ruling in April. ConocoPhillips is also pursuing a separate litigation against Caracas at the World Bank dispute redress body, which commentators say could cost around $6 billion.

The ICC decision was followed in May by a law suit in New York to recover a $25 million promissory note guaranteed by a PDVSA subsidiary, raising the prospects of more action to redeem other pledges. In August, a U.S. judge authorised the seizure of a PDVSA subsidiary’s assets to compensate $1.4 billion for the nationalisation of a gold mine owned by Canada’s Crystallex. Many of PDVSA’s oil tankers have since been anchored in Venezuelan waters for fear of seizure by its creditors.

Meanwhile, as Venezuela hurtles towards a complex process of debt restructuring, the scope for such a settlement appears limited. Current U.S. sanctions forbid bondholders from negotiating fresh debt instruments with Caracas as well as PDVSA, except those with a maturity of a few months. Sanctions also have targeted top government officials. Both time and options are running out for Caracas.

The writer is a Deputy Editor at The Hindu in Chennai

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