Venezuelan Debt Conundrum: Continued deterioration of the oil industry will make restructuring even more difficult.

AuthorKargman, Steven T.

In the Fall 2018 issue of TIE, we discussed the myriad obstacles to a Venezuelan debt restructuring existing at that time, and also reviewed various scenarios in which such obstacles might be overcome. In this issue, we will review how a delay in restructuring Venezuela's debt--especially in light of the deteriorating state of Venezuela's economy in general and its oil industry in particular--will only make any eventual restructuring even more difficult to accomplish, and the longer the delay, the greater the difficulty.

Since last fall, there have obviously been major political developments in Venezuela, most notably the declaration by Juan Guaido, president of the Venezuelan National Assembly, on January 23, 2019, of his intention to begin serving as the interim president of Venezuela. That declaration was followed shortly thereafter by the recognition of Guaido by dozens of foreign governments, including the United States, as the legitimate leader of Venezuela. However, recognition was not granted by Russia, Cuba, China, and Turkey, which reaffirmed their support for the Maduro regime.

In addition, since recognizing Guaido as the interim president, the U.S. government has imposed additional sanctions affecting the Republic of Venezuela, its state-owned oil company PDVSA, and additional individuals in the Venezuelan government. The purpose of the U.S. sanctions imposed by the Trump administration is to sharply increase the economic and financial pressure on the Maduro regime with the fairly express aim of ultimately forcing the regime from power. Among other things, the sanctions have effectively cut off Venezuela's exports of oil to the United States--the key source of Venezuela's foreign exchange--and U.S. sales of light oil to Venezuela (which in the past was used for blending with Venezuela's heavy oil, thereby making it suitable for export). Most recently, in mid-April, new U.S. sanctions targeted Venezuela's central bank with the apparent aim of making it more difficult for Venezuela to conduct international financial transactions and access international financing, thereby attempting to put additional financial pressure on the Maduro regime.

The grave humanitarian crisis in Venezuela persists and appears to have grown increasingly dire by the day, and matters were not helped at all in late February when the Maduro regime used military force to block caravans of urgently needed humanitarian aid from entering into Venezuela. The nationwide blackouts which beset Venezuela in March only made the situation even more fraught and. indeed, even more desperate for many citizens, and such blackouts apparently represent a continuing threat in light of the vulnerabilities and fragility of Venezuela's electricity grid infrastructure.

Some observers have argued that U.S. sanctions have exacerbated an already precarious situation for Venezuela's citizens since Venezuela has a reduced ability to import necessities such as food and medicine, given the diminished oil revenues available to the Venezuelan government resulting from the sanctions. As stated in a New York Times headline in February, "U.S. Sanctions Are Aimed at Venezuela's Oil. Its Citizens May Suffer First."

Yet, as of late May, the Maduro regime remains in power. Most recently, in late April/early May, the Maduro regime thwarted an attempted uprising that had been announced by the Guaido-led opposition forces. Only time will tell whether the Maduro regime will continue to hold on, or whether Guaido and/or any other opposition-led group will eventually be able to ascend to power. Another possibility, in light of recent reports regarding the resumption of talks in Oslo between representatives of the Maduro regime and the opposition forces, would be some political settlement between the opposition and the Maduro regime.

As explained previously, it is difficult to...

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