Venezuela Issues Bonds to Save Economy

Venezuela issued bonds for the first time in five years in an attempt to raise funds. The $5 billon bond deal will mature in 2036, and the hope is that it will provide much needed cash as the socialist nation faces food shortages and a collapsing economy. However, this decision and a concurrent one to accept a Russian loan in exchange for collateral based in the United States is worrying some economists.

Venezuela faces national crisis as currency crashes.

Venezuela Issues Private Bond Deal

The government created a private deal through the country’s state bank, Banco de Venezuela, with assistance from the French based Global Emerging Markets Group and China’s Haitong Securities. The bonds are likely going to be used to buy time to stave off creditors, in the hopes that oil prices will increase in 2017. Over the last few month, this has definitely been the case, as OPEC and other countries such as Russia, Mexico, and Sudan, have agreed to restrict oil production. It remains to be seen whether oil prices and the bond issuance can help the Venezuelans make good on the $9 billion in existing bond payments due this year.

Venezuela Bases Loan on U.S. Holdings

In a separate attempt to free up cash, last month Venezuela’s national oil company, Petróleos de Venezuela SA (PDVSA), financed a $1.5 billion loan from Russia’s Rosneft. Rosneft gave the loan in exchange for a 49.9 percent of the shares in PVDSA’s U.S. subsidiary Citgo. This came two months after PDVSA used the other 50.1 percent of Citgo as the basis of a $2.8 bond swap that pushed part of the country’s 2017 bond liabilities to 2020.

Citgo owns three refineries in the United States. Canada’s Crystallex and ConocoPhillips, an American oil company, argued that PDVSA is moving assets from the United States to Venezuela. Both companies filed cases with an international tribunal for assets taken forcefully by former Venezuelan President Hugo Chavez.

Bribery Scandals Hit Venezuela’s State Oil Company

Citgo is just the tip of the iceberg when it comes to Venezuela’s problems with the American government. A bribery scandal involving U.S. oil companies and PDVSA continues to grow. This week U.S. prosecutors charged a Venezuelan with providing hotel rooms and cash to PDVSA officials. The company then gave contracts to companies owned by his business associate, Roberto Enrique Rincon Fernandez. The federal government sentenced Rincon to 13 years in a deal where he pled guilty to charges of bribery.

Venezuelan Currency No Longer Accepted at American Embassy

This week, the American Embassy in Venezuela refused to accept the Venezuelan Bolivar as currency for providing services. Instead those looking to have visas processed needed to pay by cash or credit card in U.S. Dollars. The Venezuelan government stopped the embassy from exchanging the rapidly devaluating bolivar for U.S. dollars. According to a State Department spokesman, “It is prudent to begin collecting visa fees exclusively in U.S. dollars.”

Venezuela’s Economy Faces a Freefall

Venezuela is facing a dire situation, since its government faces riots in response to food lines and medical shortages. The country has been in a recession for at least three years. Financial experts expect the situation to last until at least 2019. In 2016, the economy contracted by 10 percent. This is in addition to inflation that has risen by 475 percent over the last year. Analysts blame the Venezuelan government for squandering the funds it raised during the oil boom that lasted until 2014. Additionally, the country has not invested in oil manufacturing capabilities. This led to a production drop of almost 30 percent.

How Will Venezuela’s Bond Deal Affect Trading

Venezuela’s government should be able to tread water through 2017 on the strength of this deal. If the government increases oil production, the country will return to solvency. Venezuela has had a long history of negative interactions with the United States. It is unlikely that the current socialist administration will have a better relationship with President Trump. However, given the current political climate, it is possible that the Venezuelan people could choose a new government in the elections expected for the summer of 2017. If Venezuela releases more oil, it will help cap the expected surge in price. Given Venezuela’s relationship with Russia, a more moderate government could help the dollar, by cementing an alliance with Trump and Putin.