End of sanctions for Venezuela?
After the economic collapse, foreign investors begin to eye opportunities.
The US government could be in talks to end the ban on Venezuelan bonds. This was allegedly confirmed by unnamed sources to HispanoPost, a major digital outlet in the country. Since 2017, US sanctions have targeted debt issued by the government and by state oil company PDVSA. Though issued by the White House, these measures effectively bar Venezuelan bonds from Europe and other markets. Washington DC has sent Roger Carstens, special envoy for hostages, to negotiate with President Nicolas Maduro.
Venezuela already defaulted on its debt, currently worth $60bn. However, an array of foreign funds are attempting to pool bonds and reach an agreement with the government. Some distressed debt funds are even attempting to woo local bondholders, who hold an estimated $1.5bn. According to Horacio Velutini, a local investor, Venezuela’s external debt can offer unprecedented gains. Bonds can be bought at 5 cents on the dollar: “if restructuring leads to recognising 60% of its value, and this is done in 2026, the rate of return would be 1,100%, and if we were more pessimistic and this is done by 2030, the internal rate of return would be 43%”. Venezuela’s government could also offer a deal like Suriname, which is promising bondholders a cut of its future oil royalties after default negotiations.
Stocks: A time for opportunity?
Two recent pieces of information are demonstrating the potential profitability of investing in the domestic market. Data collected by economist Francisco Sanabria shows that, despite currency devaluations, the main equity index outperformed the local value of the US dollar. As we analysed in March, the stock market is indexed on the dollar already, and local investors use it as a hedge against currency devaluation.
Meanwhile, Banco Provincial, a subsidiary of Spain’s BBVA, recently released its results for the second half of 2022. The price to earnings ratio is just 1.02, though a considerable increase from 0.08 the previous semester. BBVA had plans to exit the country last year, until Chevron’s licence was renewed; Provincial is one of the banks carrying out its currency operations.
According to OPEC data, crude oil production has steadily risen since 2020, when it hit bottom. Still, it remains well below highs from a decade ago, when Maduro succeeded Hugo Chavez. This nonetheless presents further opportunities for sectors that relate to the energy industry, as is the case for Banco Provincial. Furthermore, though Venezuela has never exported natural gas, this could change soon. European energy firms Eni and Repsol are setting up operations in the country.
Will sanctions ever be lifted?
Large obstacles and risks remain. The size of the national economy is still about 60% down from its 2014 peak and close to the size it was 20 years ago. US sanctions remain, and the currency is too reliant on oil revenues, even though diversification has increased. So far, the US is hardly retreating from its “maximum pressure” policy.
Chevron has been allowed to ship Venezuelan oil, while the opposition itself put an end to the US-backed “interim government”. However, the first point indicates the oil giant’s success at lobbying, while the political institution had become an embarrassment to Washington DC’s foreign policy. The key fact remains that, after sanctions hit PDVSA in 2019, US refineries had replaced Venezuelan crude with similar Russian grades - prompting a new dilemma for the industry.
As the Biden administration renewed Chevron’s license to maintain operations, hopes went up that sanctions would be eased. However, 8 months later, negotiations between Washington DC and Caracas have stalled. Other forms of sanctions relief are currently off the table. Late last year, in negotiations in Mexico, there seemed to be an agreement to release $3bn worth of frozen assets to be invested in health, education and infrastructure, under UN infrastructure. The US has since deemed there was not enough progress with negotiations, so there is no sign of the funds being released.
Assets in Western banks remain frozen and sanctions remain on sovereign bonds and PDVSA, among other targets. The difference is that Washington has lost its regional allies and made an exception for Chevron. Furthermore, while the so-called interim government has ceased to exist, the US and some allies have still found justifications to withhold the Venezuelan government’s foreign assets.
Venezuela’s largest foreign asset, the US-based fuel firm CITGO, was seized by the Trump administration and could be auctioned off to creditors. Despite its high profitability, sanctions and seizure have forced it into a technical default, prompting a US court to order its liquidation. Unless there is a change in policy, this will be the hardest blow to Venezuela’s post-sanction prospects. A subsidiary of PDVSA, CITGO owns a multitude of refineries and petrol stations across the US.
The most significant turn in policy has come from the region. Many anti-Maduro presidents have lost against candidates from the left since 2019. In May, we saw that all South American heads of state agree sanctions should be lifted, left and right. Venezuela’s most important neighbours, Colombia and Brazil, have reopened trade and embassies. This, together with Chevron’s rents, has already prompted a small yet significant recovery in Venezuela.
This year is seeing an economic slowdown in the retail sector. This could be the result of a growth bubble bursting while many problems remain unresolved. These include sanctions and mass corruption; a large case in PDVSA and the government was unveiled in March, where $3 bn could be missing. Growth still has a long way to go to catch up to historic levels. Among other points, it will have to reverse its exodus, as around 6 million Venezuelans currently live abroad, mostly in other Latin American countries.
Election ahead
Within Venezuela, plans for a presidential election in 2024 are going ahead. The opposition alliance is preparing for its primaries using the national voting system, effectively trusting the state with the result. In 2018, the same organisation had refused to partake in a presidential run-off, claiming fraud and setting the stage to put forth a self-proclaimed “interim president”.
Fears remain that sanctions could be sustained for more years. On one hand, the US is unlikely to recognise a win by Maduro and its party. On the other, the incumbent is likely to come out victorious. The current government still enjoys support from a working-class base, as it has still kept providing subsidised food, housing, education, and healthcare through the worst of the crisis. This is hardly enough to win over middle-class professionals, but is significant for the poor majority.
An indication that sanctions are likely to remain is that Caracas has doubled down on alliances outside of the West. This June, Maduro and Ebrahim Raisi agreed on a new cooperation agreement focused on petrochemicals and mining, though no details were shared. Bilateral trade has increased from $200 mn to $3 bn in the last year between the two sanctioned countries. Maduro has also reinforced ties with Russia, Turkey, and Gulf countries - at a time when the latter group is slowly drifting away from decades-old alliances with the US.
You mention the article from HispanoPost which in turn mentions three unnamed sources.
In all honesty, I do not see as portrayed an exchange in which Maduro releases on or more US prisoners in exchange for the OFAC letting US investors buy Venezuela and PDVSA bonds... I see no incentives for Maduro.
Furthermore recent local events like the resignation of CNE authorities indicate Maduro is stepping away from democracy and planning on becoming another “Fidel Castro”...
There