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Venezuela courting disaster

A Supreme Court ruling has given the president broad authority to strike oil deals. Will there be any takers?

Venezuela's economic and political crisis only seems to know one direction: descent. The latest lurch towards the abyss came after a 30 March decision from the Supreme Court, stacked with loyalists to social president Nicolás Maduro, that effectively dissolved the opposition-led National Assembly and assumed the body's powers for itself.

The decision triggered an intense backlash that clearly caught the government off guard. Weeks of protests in the streets of Caracas followed. The head of the Organisation of American States, Luis Almagro, decried the decision as a "self-inflicted coup d'état" and called Maduro's government a "dictatorship". It was even a step too far for at least one person inside Maduro's government. His Attorney General, Luisa Ortega, decried "a rupture in the constitutional order", a rare rebuke from inside the regime.

The blowback was intensive enough to force the government into at least a partial retreat. At the behest of Maduro, the Supreme Court quickly rewrote its decision to remove the most controversial aspects of the ruling stripping the National Assembly of its broad legislative powers.

Yet, crucially, it left in place a provision that gives Maduro new powers over the oil industry, including the ability to unilaterally sign off on oil deals—and therefore the formation of joint ventures—a responsibility that had rested with the National Assembly.

Desperate for cash, state oil company PdV and the Venezuelan government have been shopping around stakes in Orinoco heavy oil projects, its most attractive assets. Russia's Rosneft has reportedly been offered a 10% share of the Petropiar joint venture, a 130,000-barrels-a-day heavy oilfield (and upgrader) project—either to buy outright or to be used as collateral for a new oil-for-loan deal. It would be akin to an agreement the two companies struck recently, in which PdV put up a 49% stake in its US refining business Citgo to back a $1.5bn loan.

$2.5bn - PdV loan payments due in April

In February, Rosneft agreed to terms on a deal in which it would pay $0.5bn to up its stake in another heavy oil-to-upgrader project, called Petromonagas, from 16.7% to 40%, the most a foreign firm may hold in a Venezuelan oil project.

Such deals have come under intensified scrutiny from the opposition-held National Assembly, which has accused the Maduro government of holding a fire sale of the country's most valuable assets and threatened not to approve the new oil joint-venture deals. In a press conference on the steps of the Supreme Court, Julio Borges, a high-profile opposition leader, warned that "all oil agreements that do not pass through the National Assembly are null and void". It was clear he was talking to Russia and Rosneft, though the message will resonate with any company investing in Venezuela.

The episode has raised the stakes for Rosneft's business in Venezuela, which has expanded rapidly over the past couple of years. The company may still decide to move forward with deals signed off by Maduro alone, and bet that any post-Maduro government will simply have to accept the facts on the ground. It is rare for new governments to tear up deals done by their predecessors, no matter how much they dislike the circumstances under which they were signed. But it would be risky for Rosneft, especially given that Maduro is deeply unpopular and his hold on power is shaky.

Venezuela's immediate need for cash eased somewhat after it met $2.2bn in bond payments on 12 April. But the company's finances remain in dire shape. Oil prices remain depressed, PdV's output is falling and it is dealing with fuel shortages after several refinery problems. The company will get a breather from major debt payments until $3.5bn comes due in October and November.

Russia has gradually replaced China as Venezuela's most important source of foreign cash. After extending tens of billions of dollars in loans to Caracas over the past decade, Beijing has quietly distanced itself from the Maduro government recently, refusing to lend more money or sign new oil deals. It has even made a public show of maintaining positive relations with the opposition. The potential Petropiar deal is a good example. PdV had agreed to sell China's Citic Bank the 10% stake in 2012, before the Chinese firm gently backed out of the deal.

Russia, by contrast, has been much more full-throated in its support for Maduro's government. While much of the rest of the world was denouncing Venezuela's slide towards dictatorship, Vladimir Putin's government took a different tack, cautioning that "outside forces should not add fuel to the fire in the internal situation in Venezuela".

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