Venezuela: Intervention “Shouldn’t Even Be Considered”

Recent comments from US president Donald Trump that refer to a “military option” being under consideration in response to recent and ongoing developments across Venezuela have been met with strong opposition from leaders in Latin America. His vice president, Mike Pence, has now stated that the United States is seeking a “peaceful path” forward for Venezuela. Chiming in on the situation, Colombian President Juan Manuel Santos, a known and vocal US ally, has said that US military intervention “shouldn’t even be considered”.

Defiant opposition to US military intervention in Latin America has historically deep roots, tracing back to bad memories of the Cold War era, when most countries in the region were under military dictatorships (which were, to a fair extent, sponsored by the US, though a few such as Nicaragua and Cuba received support from other superpowers).

Bolstering Maduro?

“Trump’s comments will, in our view, give credence to Venezuelan president Nicolas Maduro’s claims that Venezuela is the victim of a US-led conspiracy,” Jan Dehn, head of research at emerging market specialist investment management firm wrote in a note to clients last week. “Trump’s comments may therefore end up strengthening Maduro and not weaken him.” And as if on cue, Maduro announced in recent days that he is moving local elections forward to October of this year. “This is a clear sign that he feels strengthened,” Dehn added. And the recent approval of a pro-government Constituent Assembly has also significantly increased Maduro’s political standing at the expense of the leading opposition party.

Anti-government demonstrators take cover from Venezuelan Bolivarian National guards officers at a protest against Venezuela’s Nicolas Maduro in Caracas, Venezuela, Saturday, Aug. 12, 2017. Associated Press/Ariana Cubillos.

On the financial services front, investment bank Credit Suisse has now stopped transacting business in 2022 PDVSA bonds and 2036 Venezuelan bonds, as well as any securities issued after June 1st, 2017. Any business transactions with counterparties controlled by the Venezuelan government, private individuals and private companies involving Venezuela’s underlying assets now must also be cleared by its reputational risk office. Credit Suisse will continue to make markets in other PDVSA and Venezuelan bonds within the secondary market.

Credit Suisse, Dehn explains, is “trying to protect itself from the reputational risk associated with extending new financing to Venezuela after opposition leader Julio Borges placed counterparties in recent deals involving the above-mentioned bonds on notice”. This, according to Dehn, is a blow to the Maduro Administration, but by no means a fatal one. The primary source of financing for Venezuela has come from joint venture (JV) partners, which have provided the bulk of credit lines for PDVSA, Venezuela’s national oil company. To date these include Russia’s Rosneft, China, Chevron, ENI and Total, respectively.

“We do not think Credit Suisse’s  announcement has a material impact on Venezuela’s oil production and its capacity to service debt.”

As noted, the Venezuelan government has strong incentives to continue to make debt payments, as debt service is critical to the willingness of the country’s JV partners to continue to extend finance/credit. PDVSA recently stated that it guarantees the legal security of all foreign energy companies operating as JV partners in the country. The JV’s also benefit from their operations in Venezuela in three ways: they make money from providing financing, they get to book oil reserves and they run their core oil businesses.