Venezuela skirts US sanctions by funneling oil sales via Russia

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Reuters

KEY POINTS
  • President Nicolas Maduro is funneling cash flow from Venezuelan oil sales through Russian state energy giant Rosneft as he seeks to evade U.S. sanctions designed to oust him from power.
  • The sales are the latest sign of the growing dependence of Venezuela’s cash-strapped government on Russia.
  • Under the scheme uncovered by Reuters, Venezuelan state oil company PDVSA has started passing invoices from its oil sales to Rosneft.
RT: Venezuela's President Nicolas Maduro 180302
Venezuela’s President Nicolas Maduro talks to the media after a meeting for signing an agreement on guarantees for the vote at the National Electoral Council (CNE) headquarters in Caracas, Venezuela March 2, 2018.
Marco Bello | Reuters

President Nicolas Maduro is funneling cash flow from Venezuelan oil sales through Russian state energy giant Rosneft as he seeks to evade U.S. sanctions designed to oust him from power, according to sources and documents reviewed by Reuters.

The sales are the latest sign of the growing dependence of Venezuela’s cash-strapped government on Russia as the United States tightens a financial noose around Maduro, who it describes as a dictator.

With its economy reeling from years of recession and a sharp decline in oil production, Venezuela was already struggling to finance imports and government spending before Washington imposed tough restrictions on state oil company PDVSA in January.

Oil accounts for more than 90 percent of exports from the OPEC nation and the lion’s share of government revenues. Maduro has accused U.S. President Donald Trump of waging economic war against Venezuela.

Since January, Maduro’s administration has been in talks with allies in Moscow about ways to circumvent a ban on clients paying PDVSA in dollars, the sources said. Russia has publicly said the U.S. sanctions are illegal and it would work with Venezuela to weather them.

Under the scheme uncovered by Reuters, Venezuelan state oil company PDVSA has started passing invoices from its oil sales to Rosneft.

The Russian energy giant pays PDVSA immediately at a discount to the sale price avoiding the usual 30-to-90 day timeframe for completing oil transactions and collects the full amount later from the buyer, according to the documents and sources.

“PDVSA is delivering its accounts receivable to Rosneft,” said a source at the Venezuelan state firm with knowledge of the deals, who spoke on condition of anonymity for fear of retaliation.

Major energy companies such as India’s Reliance Industries – PDVSA’s largest cash-paying client – have been asked to participate in the scheme by paying Rosneft for Venezuelan oil, the documents show.

Rosneft, which has heavily invested in Venezuela under President Vladimir Putin, did not immediately respond to a request for comment.

Venezuela’s oil ministry, its information ministry, which handles media for the government, and PDVSA did not respond to questions.

Asked about the transactions, a spokesperson for Reliance said it had made payments to Russia and Chinese companies for Venezuelan oil. The spokesperson said the payments were deducted from money owed by Venezuela to those countries, but did not provide further details.

“We are in active dialogue with the U.S. Department of State on our dealings on Venezuelan oil to remain compliant with U.S. sanctions,” the spokesperson said.

Oil prices fall as U.S. rig count rise, trade concerns

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  • Both U.S. and Brent crude futures slipped.
  • In the United States, energy firms last week increased the number of oil rigs operating for the second time in three weeks, a weekly report by Baker Hughes said on Friday.

Oil tanker

Jean-Paul Pelissier | Reuters

Oil prices fell by around 1 percent on Monday as drilling activity in the United States, the world’s largest oil producer, picked up and financial markets were pulled down by trade concerns.

A refinery fire in the U.S. state of Illinois, which resulted in the shutdown of a large crude distillation unit, that could cause crude demand to fall also weighed on prices, traders said.

U.S. West Texas Intermediate (WTI) crude futures were at $52.09 per barrel at 0347 GMT, down 63 cents, or 1.2 percent, from their last settlement.

International Brent crude oil futures were down 49 cents, or 0.8 percent, at $61.61 a barrel.

In the United States, energy firms last week increased the number of oil rigs operating for the second time in three weeks, a weekly report by Baker Hughes said on Friday.

Companies added seven oil rigs in the week to Feb. 8, bringing the total count to 854, pointing to a further rise in U.S. crude production, which already stands at a record 11.9 million bpd.

WTI prices were also weighed down by the closure of a 120,000-barrels-per-day (bpd) crude distillation unit (CDU) at Phillips 66’sWood River, Illinois, refinery following a fire on Sunday.

Elsewhere, the head of Russian oil giant Rosneft, Igor Sechin, has written to the Russian President Vladimir Putin saying Moscow’s deal with the Organization of the Petroleum Exporting Countries (OPEC) to withhold output is a strategic threat and plays into the hands of the United States.

The so-called OPEC+ deal has been in place since 2017, aimed at reining in a global supply overhang. It has been extended several times and, under the latest deal, participants are cutting output by 1.2 million bpd until the end of June.

OPEC and its allies will meet on April 17 and 18 in Vienna to review the pact.

Analysts said economic concerns were also weighing on crude oil futures.

Vandana Hari of Vanda Insights said in a note that crude prices were dragged down “as China returned from a week-long Lunar New Year holiday and regional stock markets plunged into the red amid resurgent concerns over the U.S.-China trade dispute.”

Trade talks between the Washington and Beijing resume this week with a delegation of U.S. officials travelling to China for the next round of negotiations. The United States has threatened to increase tariffs already imposed on goods from China on March 1 if the trade talks do not produce an agreement.

Preventing crude prices from falling further have been U.S. sanctions on Venezuela, targeting its state-owned oil firm Petroleos de Venezeula SA (PDVSA).

“The issues in Venezuela continue to support prices. Reports are emerging that PDVSA is scrambling to secure new markets for its crude, after the U.S. placed additional sanctions on the country,” ANZ bank said on Monday.

Venezuela is blowing debt payments ahead of a huge, make-or-break bill

  • Venezuela’s state oil giant has two massive bond payments coming due in the next two weeks.
  • The oil-dependent nation missed several debt payments totaling nearly $350 million last week.
  • Analysts don’t expect Venezuela to default in the coming weeks, but the missed payments have rattled the market.
Nicolas Maduro, president of Venezuela, speaks during a swearing in ceremony for the new board of directors of Petroleos de Venezuela SA (PDVSA), Venezuela's state oil company, in Caracas, Venezuela, on Tuesday, Jan. 31, 2017.

Carlos Becerra | Bloomberg | Getty Images
Nicolas Maduro, president of Venezuela, speaks during a swearing in ceremony for the new board of directors of Petroleos de Venezuela SA (PDVSA), Venezuela’s state oil company, in Caracas, Venezuela, on Tuesday, Jan. 31, 2017.

One week before Venezuela faces a critical debt payment, the distressed petrostate is already late on a series of smaller bills — and no one can say exactly why.

The nation’s state-owned oil giant, Petroleos de Venezuela, SA, has two major bond payments totaling about $2 billion coming due in the next two weeks. While the market expects the company, better known as PDVSA, to avoid default, the missed payments have rattled investors and raised fresh questions about how long embattled President Nicolas Maduro’s regime might last.

“You’re cutting close to the edge of not enough money in the checking account to pay the bills,” said Ray Zucaro, chief investment officer at RVX Asset Management, an asset manager specializing in emerging and frontier markets.

Last week, Venezuela missed five coupon payments totaling nearly $350 million tied to the debt of PDVSA, the government and the utility Electricidad de Caracas. That stoked a minor sell-off in a number of outstanding bonds.

Santelli Exchange: The

Santelli Exchange: The “bitcoinization” of Venezuela  

As for the upcoming payments, the first is due next Friday. The price of that bond dipped from a one-year high of $86.80 last week to $83.48 on Monday. It has rallied from a 12-month low of $62.50 on Aug. 1.

PDVSA needs to pay $841 million in principal, plus interest, on that bond. It’s a critical moment for Venezuela because a default is seen as hastening Maduro’s demise. Making matters worse, the collateral against the bond is Citgo, PDVSA’s Houston-based refining and retail subsidiary.

The following week, on Nov. 2, a nearly $1.2 billion PDVSA bond is maturing. Total outstanding obligations for 2017 are about $3.4 billion, and there’s no grace period for the two biggest payments.

As Venezuela’s economic and political crisis worsens, foreign reserves have dwindled to just $9.9 billion. But analysts and money managers say more than half of that could be in gold and illiquid assets.

The market currently puts the odds of a Venezuelan default at 15 percent, according to an analysis by RVX Asset Management, but Zucaro said he believes the chances are closer to 40 percent. The environment is deteriorating, he said, as Venezuela’s latest election results are being questioned and as sanctions on the country expand to include measures that prevent it from raising new funds.

Given the severe cash crunch, it’s possible that Venezuela skipped out on the five coupon payments, which have a 30-day grace period, in order to allocate those funds to the payment due on the Oct. 27 bond, Zucaro said.

Without help, Venezuela cannot pay liabilites alone: Daniel Osorio

Without help, Venezuela cannot pay liabilities: Daniel Osorio  

Edward Glossop, an emerging markets economist at Capital Economics, said that’s possible. Since Venezuela is essentially locked out of capital markets, the impact of missing the payments on its ability to borrow is negligible, he said.

But Glossop believes another explanation is more likely: that U.S. sanctions have created technical problems that have forced Venezuela to make alternative arrangements to pay its debt, delaying payments. Some U.S. institutions could be refusing to deal with the government for fear of sanctions, he said. However, he doesn’t doubt Maduro’s willingness or ability to pay, given that making debt payments has been a priority.

Capital Economics projects that Venezuela is unlikely to default until 2019, though Glossop says it faces another round of hefty payments in 2018.

“Next year is quite tough again. It will be sort of touch and go,” he said. “If oil prices remain where they are, we think they could get through.”

Helima Croft, global head of commodity strategy at RBC Capital Markets, believes Maduro will continue to rely on Russia to bail out the regime. Russia’s biggest oil company, Rosneft, has given PDVSA financial support.

“While it makes sense that they will preserve as much cash to avoid default, they will not be able to do it without Russia. So the question will be how much acreage will this cost them?” she said in an email. “Rosneft is acquiring Venezuelan assets at fire sale prices.”

Russia’s Rosneft to take control of major Kurdish oil pipeline

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  • The deal is part of President Vladimir Putin’s bid to boost Russian influence
  • Investment in the pipeline is seen at $1.8 billion

Andrey Rudakov | Bloomberg | Getty Images

Russian energy major Rosneft has agreed to take control of the main oil pipeline in Iraq’s Kurdistan, further boosting its role as the main international investor in the semi-autonomous region.

The move is an apparent part of a broader strategy by President Vladimir Putin to ratchet up Moscow’s political and economic influence in the Middle East. It came amid the crisis in Kurdistan’s relations with the central government in Baghdad, which erupted after the region held an independence referendum last month.

Rosneft said its share in the project may total as much as 60 percent, while the current pipeline operator KAR Group will retain 40 percent.

Sources familiar with the deal said Rosneft’s investment in the project was seen totaling about $1.8 billion.

The deal comes days after Baghdad threatened to re-route a big chunk of oil flows towards an old oil pipeline, which has been out of operation for several years since Kurdistan built its own infrastructure to the Turkish Mediterranean port of Ceyhan.

The main lifters of the oil there are trading houses Vitol, Petraco, Glencore and most recently Rosneft via pre-financing deals.

Rosneft’s influential Chief Executive Officer Igor Sechin said on Thursday that Kurshish authorities and Baghdad have to resolve their differences by themselves.

Iraq, along with neighboring Iran and Turkey, has pledged to isolate Kurdistan in the wake of last month’s referendum.

That includes cutting off air and banking ties and reviving an old pipeline to Turkey to deprive Erbil of a big chunk of oil revenues.

Rosneft will be investing in expanding Erbil’s independent pipeline, which Baghdad has targeted, hoping to boost its capacity by a third to 950,000 barrels per day. That is the equivalent of about 1 percent of total global supply.

With Rosneft acquiring 60 percent in the project, the Kremlin oil major effectively becomes a controlling stakeholder in Kurdish oil infrastructure. That should give Erbil some sense of security as it faces unprecedented pressure from its neighbours.

Rosneft has already agreed to invest $400 million in five oil blocks in Iraqi Kurdistan.

It also had previously loaned Kurdistan $1.2 billion, guaranteed by oil sales, and is seeking to help Erbil build two major oil and gas pipelines.