Russ Dallen: Russia Rescues Venezuela … Again?

LANGUE ANGLAISE:

 3 October 2017
Russia Rescues Venezuela … Again? (Part 1.5)
 

I miss Zbigniew Brzezinski.

Zbig – who passed away in May — knew how to play geopolitical chess with the Russians.  He had mentored me back in the day and over the last few years we had discussed his old Soviet rival’s growing chess moves in Venezuela, amongst other things.  And one of his great lessons over the years was how to understand and prevail in this historical rivalry.

I mention this because Russia continues to become an even more powerful contender in the global contest for control of strategic energy resources as well as demonstrating a willingness to use control of those resources to reach the outcomes it desires.  And as part of that strategy, Russia continues to focus its efforts on Venezuela, but in so doing, also becoming the wild card in whether Venezuela and PDVSA will default or be able to pay the $3.6 billion maturity bubble owed to bondholders this month and next.

The Recent History of Russia’s Assistance in Paying Venezuela & PDVSA’s Debts

Russia has figured largely in financially supporting Venezuela over the last four years, and especially over the last two years as Caracas dealt with its last 3 maturity bubbles.  As a result, Russia has consistently been one leg in an at least two-pronged approach that PDVSA and Venezuela have used to pay bondholders since last year.

1. February 2016 Heavy Maturities

In February 2016, Venezuela and PDVSA had to pay $2.3 billion to bondholders.

Long time readers of our work will remember that we pointed out one prong of this strategy that Venezuela was pursuing in January and February of 2016 when we tracked Venezuela’s  shipments of gold to Switzerland.  Venezuela raised $1.7 billion through these gold sales.

Russia’s state-owned oil company Rosneft would reveal in their first quarter 2016 financials that also in February $500 million came from them:

In May 2016, Rosneft would swap that $500 million loan with PDVSA to increase Russia’s share of PetroMonagas from 16.7% to 40%.  (PetroMonagas was formerly called Cerro Negro and those shares had been expropriated without payment from ExxonMobil).

2. October/November 2016 Maturity Bubble 

Of the almost $10 billion that Venezuela and PDVSA would owe bondholders in 2016, the biggest portion of $4.7 billion would come due in October and November 2016.  Venezuela and PDVSA would approach resolution of their payment distress by three methods, but with Russia figuring as one of the main prongs.
The first was offering a bond swap to PDVSA bondholders of the upcoming maturities, managing to swap and extend $2.8 billion of maturing PDVSA debt into $3.4 billion of a new amortizing PDVSA 8.5% of October 27, 2020 that was collateralized with 50.1% of Citgo.
The second method was one that PDVSA has repeatedly used for years to resolve debts: loading the PDVSA Pension Fund up with the bonds and repaying the fund with IOUs to pay off the maturities.

 We saw a similar move with the maturing PDVSA 5.125% on October 28, 2016, though not as much as in past raids, which confirmed our analysis that the cash kitty in the PDVSA Pension Fund must be running dry.  The Pension Fund apparently got $163 million in paper IOUs for its PDVSA 2016 bonds.

But in common with PDVSA’s methods for handling their maturity bubbles of the last two years, it was the third prong of PDVSA’s debt strategy that again involved Russia (and sent us on a puzzling chase until we could find that proof three weeks later).  By November 30, PDVSA was 2 weeks late on paying its final November 2016 coupons but finally managed to pay them that day and have $890 million show up in the Central Bank reserves.  With the hypothesis that the money had come from either China or Russia, it took us three weeks until we found the UCC Lien on Citgo that Rosneft’s lawyers Norton Rose had filed.

At the time of helping break that news of the Rosneft lien on Citgo on December 21, we were under the impression that — given that $500 million was converted into PetroMonagas shares, the 49.9% of Citgo was security against loans of $1.5 billion and our conclusion was confirmed by PDVSA’s consolidated debt statement.

3. April/May 2017 Maturity Bubble

 

In April and May 2017, Venezuela and PDVSA owed $3.7 billion in bond debt, the largest slice of the $10 billion that must be paid to their bondholders in 2017.

Their approach would again be two-pronged.

First, Venezuela’s bankers went around Wall Street flogging the $3 billion PDVSA 6% of 10/28/2022 that had been sitting in the Central Bank’s coffers since 2014 as well as the newly created $5 billion Venezuela 6.5% of 12/29/2036.  They found a taker for $2.8 billion in Goldman Sachs, which apparently paid $865 million, with another $100 million face going to Nomura, for another $30 million.  (We still don’t know what happened to the remaining $100 million, although it looks like it may have gone to UBS, given over $31 million is showing up in their onshore U.S. quarterly filing).

(While Nomura has announced that they have traded out of their $100 million, Goldman also sold some of their $2.8 billion but spread the rest among the various funds they manage, including under funds in the names of Prudential and Voya — nothing like sharing your shame with your clients.  And just to throw a little more shade, those bonds continue to trade at a loss to where Goldman bought them #shade #schadenfreude).

As in the previous two examples, the second prong of Venezuela’s attack on their April/May 2017 debt bubble was to rely on Russia.  According to Rosneft’s 2nd Quarter financials, the Russians advanced PDVSA $1.015 billion in April.

Will Russia Bailout Venezuela For This Month’s Maturity Bubble?

 

This month ($1.66 billion) and November ($1.89 billion) present Venezuela and PDVSA with $3.6 billion in bond payments and — after eliciting this pattern — the question from bondholders becomes whether Russia will again bail out the Bolivarian Republic.

Toward answering that, we have been carefully keying on Russia’s financial, oil and diplomatic moves for the last year now.  In May, for example, we were able to identify the $1 billion hole in Russia’s budget and predicted to our clients that it was caused by Venezuela re-defaulting on its payments for Russian tanks, helicopters, jets and an air defense system.  Our hunch was publicly confirmed by the Russian Deputy Finance Minister in June (and even led to a hedge fund attempting to trigger CDS default insurance).

Following the Russian’s “displeasure” with their Bolivarian colleagues, we began noticing a big change in Venezuela’s oil deliveries.  As we pointed out on September 18 in Part 1 of this research piece, Venezuela started shipping cargoes to the U.S.A. with payment directed to Rosneft in what we came to call “hurry up huddles” to repay the Russians in the first weeks of August.

Russia Brings India into the Equation

 

But there was also a second and more important shift in the oil traffic.  Russia ramped up the amount of oil Venezuela was shipping to India — but not just to any India port.  In August, Venezuela shipped an average of 172,000 barrels per day (bpd) to Rosneft’s newly purchased Essar oil Vadinar refinery in India.  That is a jump of almost three times the July amount of 63,000 bpd that Venezuela had been supplying.  And, interestingly, the reduction in supplies to the refinery came directly out of Iran’s hide, with the geographically more desirable Iran’s supply to Vadinar (1200 miles straight down the coast) dropping from around 140,000 bpd to 60,000 bpd. #schadenfreude

Russia and its partners Trafigura and UCP had closed on the 400,000 bpd Vadinar refinery — for which they paid a whopping $12.9 billion — on August 21.  Vadinar — which was named India’s Refiner of the Year for the second time last year by the Petroleum Federation of India — is India’s second largest non-state refinery and was built to handle heavy crudes like Venezuela’s.  It produces 9% of India’s refining output.  At 172,000 bpd, Venezuela would be on track to pay Rosneft around $230 – 250 million per month, allowing Venezuela to pay off its $5 billion oil debt — and regain the Russian’s confidence about continued assistance.

Russia Directing Venezuela Oil Traffic

A second “tell” that we have been focusing on is also highlighted above by Russia’s growing control over Venezuela’s corrupt, bankrupt, inefficient and incompetent oil operations.   Increasingly, we are seeing Rosneft direct PDVSA operations, with Rosneft’s fingerprints all over the shipments from the August Bill of Ladings data we highlighted in Part 1 of this Report, for example, to Rosneft even conducting the tenders for PDVSA’s refineries.  Just last week Rosneft — not PDVSA — began asking oil traders for pricings for crude for PDVSA’s Isla Refinery in Curacao.

 

Maduro Goes to Moscow

 

This will be an important “tell.”

A month ago, in the wake of Washington imposing new bond sanctions that crushed chances for what would have been one of Venezuela’s prongs in its plan to resolve its October/November liabilities — a new PDVSA swap — Maduro took off for a hastily arranged trip to Kazakhstan, supposedly to attend an Organization for Islamic Cooperation summit.  One of the real purposes of the trip was Bolivarian “ambush diplomacy”, where the Presidential entourage stops in various capitals on the way there or back.  The plan in this case was to make a fueling or pit stop in Moscow to see Putin.  But the Russians rejected the Venezuelans plans to stop both on the way to Astana and on the way back.

So, now Maduro is trying the trip to Moscow again, this time under the guise of Russia Energy Week, an oil convention that starts today.  Oil Minister Eulogio Del Pino and PDVSA head Nelson Martinez will be attending, which is appropriate as this is mainly for oil companies.  But apparently, Putin will meet with Maduro.  So, watch this space.  (By the way, the Bolivarians have built some seeming fallbacks in the trip in case there are no results to report:  Maduro will also reportedly visit Turkey and Belarus).

We have spent a great deal of time generating probable outcomes and probabilities from all this data and much more that we don’t have the time or space to go into in these reports and we are happy to go through them with you.   In addition, there are a number of anomalies and changes in the Rosneft and PDVSA reported and restated data that betray some of their intentions but get confusing to explain in these more general reports but that we are delighted to share with you.

Please don’t hesitate to reach out to Jon Stephens or me if we can be of service.

Thanks again for your continued readership and business.

                                                               -Russ

Russ Dallen | Managing Partner
Caracas (58) (212) 335-1906
Miami (305) 735-8280
New York (917) 499-8346
London (44) (207) 993-4557
RMDallen@CaracasCapital.com

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