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Venezuelan crunch time

Venezuela faces steep bond payments before the end of the year. It is looking to Russia to help keep it from default

27 October will be a tense day for Venezuela's cash-strapped state oil company PdV and its bondholders. The company owes $0.84bn in principal payments on its PDVSA 2020 bond on the day. Unlike some other PdV debt, the 2020 bond does not have a provision for a grace period, so if PdV can't come up with the cash on the day, or there is a hiccup making the transfer to its payment agent Delaware Trust Company, PdV would be in default and one of the world's top oil producers would be plunged into a highly complex legal battle with its bondholders that would likely seize up its international business. The 27 October transaction is one of a string of payments PdV will have to make to bondholders totaling around $2.9bn.

PdV will, officials insist, make good on the payments. In all likelihood, the officials are correct. PdV management and president Nicolás Maduro know that defaulting would bring an existential crisis to Venezuela and likely see them turfed from power.

It is why Maduro went cap in hand to Moscow this month looking for yet another financial lifeline from Russia, which has replaced China as Caracas' key financier and has played a vital role helping Venezuela keep up with its debt payments. In May 2016, Rosneft signed a $0.5bn oil-for-loan deal with PdV just weeks before PdV was due to make a $0.72bn debt payment. Rosneft stepped up again in November last year, as yet another hefty bond payment was due, with another $0.5bn advance backed by an "option to buy shares in certain joint ventures", according to PdV's annual report. At the same time, the companies sealed a separate $485m oil-for-loan deal secured by a 49.9% stake in PdV's US downstream business Citgo. In total, Rosneft has lent PdV around $6bn, the Russian company has said.

News of the Citgo deal did not go down well in Washington DC. A number of senators raised concerns over the prospect of Rosneft taking over such crucial US energy infrastructure and vowed to block the transfer of ownership. During the October trip to Moscow, oil minister Eulogio del Pino said the companies were discussing a deal to swap the Citgo stake as collateral for the loan for equity in an oil project.

$6bn - Russian loans to Venezuela in recent years

The series of deals with PdV has quickly deepened Russia's involvement in Venezuelan oil. Rosneft is receiving more than 100,000 barrels a day in Venezuelan crude to pay off the loans and now has stakes in a series of prospective heavy oil and offshore gas projects, giving it access to billions of barrels of new reserves. PdV's ongoing cash crisis will continue to present more opportunities. But the strategy carries risks. Maduro's Russian oil deals have brought scorn from the opposition, which have vowed to rip up the deals if they go around the opposition-controlled National Assembly, which had authority over approving new oil contracts until its powers were usurped by the new Constituent Assembly.

While Moscow has opened its wallet to Venezuela, Washington has clamped down on Maduro as he slides further towards authoritarianism. The sanctions have not yet matched the Trump administration's bellicose rhetoric, but there are signs that recent financial sanctions are making life difficult for PdV and the Venezuelan government.

Many major US financial institutions have stopped doing business with Venezuela. That has had a number of knock-on effects. It has made it more difficult to trade in Venezuelan bonds, for one. But it also appears to be hurting PdV's operations. Reuters reported in October that PBF, a major US buyer of Venezuelan crude, had stopped purchasing oil directly from PdV because it couldn't get crucial letters of credit needed to facilitate the deals. PBF could still buy Venezuelan oil via third-party traders, but they and other refiners are looking to diversify into other sources of Latin American heavy crudes.

In September, Venezuelan oil exports to the US crashed to just 490,000 b/d, down nearly 40% from the same month a year earlier. Much of this was due to ports being shut down by Hurricane Harvey, but the sanctions also appear to be disrupting Venezuela's oil trade into the US. The oil ministry has responded by starting to publish the Venezuelan oil basket price in Chinese yuan rather than dollars.

At the same time, Venezuela's crude output continues to slide. Production was 2.1m b/d in August, according to figures the country reports to Opec, down 0.6m b/d-nearly a quarter-since the start of 2015.

For now, a Venezuelan default still looks unlikely, but the crisis has no end in sight.

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