CSIS Roundtable on ‘Venezuela’s Debt Situation’ with Ricardo Penfold and Russ Dallen

CSIS Venz Dallen

Zombie PDVSA Bonds and the Venezuela Reserves Crash

Zombie PDVSA Bonds and the Venezuela Reserves Crash
venz-reserves-graph

 

This past week a newspaper in Arkansas published an obituary for a popular (fictional) character on “The Walking Dead” – Glenn Rhee — who was killed in the premiere episode of the 7th season of the popular zombie apocalypse drama.

 

I must confess that I have watched the development of Zombie “lore” with fascination: From the original slow moving zombies of “Night of the Living Dead,” to mixing the medium with an attack on the foibles of modern consumer society in “Dawn of the Dead”, to taking the mythology further down the wormhole so that, in addition to “The Walking Dead,” we now have a series about a zombie detective who eats the brains (and gets the memories) of the dead victims to solve the crime that led to the victim’s death (“iZombie”) and another series (“In the Flesh”) about the partial cure, re-animation and re-entrance of zombies as productive members of society as mere sufferers of “Partially Deceased Syndrome” (PDS) — which also brought equality to zombies by including the first televised kiss between gay zombies. Donald Trump would definitely build a wall.

 

Aside from being the Halloween issue of this Report, we wanted to alert you to the billion dollar fall in Venezuela’s reserves that coincided with the billion dollar payment of the PDVSA 5.125% on Friday — and how zombie bonds meant that PDVSA owned the majority of that debt.

 

Friday afternoon the Venezuela Central Bank reported that its international reserves fell $1 billion from $11.8 billion to $10.895 – the lowest since 2002 when there was a national strike against Chavez. That is down $31 billion from the 2009 high of over $42 billion.
venz-reserves-27-oct-2016

 

On Friday, Venezuela paid the maturity and interest on the $1 billion PDVSA 5.125% of October 28, 2016, an amount that roughly totaled $1.026 billion.

 

While Minister of Oil and Mining and PDVSA head Eulogio Del Pino warned earlier this month about not paying the PDVSA 2017s, he had always promised to pay the PDVSA 16s. The reason for not including the PDVSA 16s in the threat or the swap was because PDVSA’s Pension Fund owned the majority of the PDVSA 16 and has since 2013, so he could easily pay the bonds and take the money out again.

 

In November 2013, rather than pay the full $1.2 billion of PDVSA 8% of 2013, PDVSA paid $705 million to the market but swapped the $440 million owned by the PDVSA Pension Fund into a newly created re-tap of $565 million of the PDVSA 5.125% of October 28, 2016, expanding the PDVSA 5.125% 2016 “Petrobono” from its original $435 million to $1 billion — making, not for the first time, the unpaid PDVSA 8% of 2013 a zombie bond that keeps living on.

 

In fact, the PDVSA 8.5% Citgo collateralized 2020 Swap Offering Circular sloppily refers to those bonds as the PDVSA 8% of November 2016 – not once, but two times at separate points in the document. Here is one:
pdvsa-8-extension
(p.71, PDVSA 2020 Exchange Offering Circular, http://laht.com/article.asp?ArticleId=2421844&CategoryId=10717 )

 

And then they carelessly drafted a different variation of the PDVSA 8% of November 2016 on another page:
pdvsa-8-2016-note
(p.72, PDVSA 2020 Exchange Offering Circular,

 

I can’t tell you how much time we wasted searching for this mythical zombie half-a-billion PDVSA 8% of November 2016 before we realized that PDVSA and its lawyers had repeatedly made an error and meant the PDVSA 5.125% of October 18, 2016 instead. Here is the original notice in Venezuela’s Official Gazette in November 2013 (and the Gaceta Oficial has a mistake in the ISIN to be consistent and compound the errors):

 

venz-gaz-pdvsa

 

 

Our zombie hunting adventure aside, what the $1 billion fall in reserves and that paragraph excerpted above tells you is that PDVSA is running out of funds and is raiding the Central Bank as well as its Pension Fund for cash. As we pointed out earlier this year and as that paragraph also reveals, PDVSA did the same thing with $900 million of the PDVSA 2015 bond last October, writing the PDVSA Pension Fund a promissory note rather than pay off the bonds, which are still unpaid to this day. (By the way, PDVSA also reported that it paid the $90 million coupon due on its $3 billion of PDVSA 6% of 2022 on Friday, another bond that we helped discover when PDVSA secretly handed it to the Venezuela Central Bank in exchange for a loan).

 

Gold Reserve to Be Paid $600 Million Today?

 

As if the $1.026 billion paid on Friday and the $1.2 billion due on November 2 was not enough (down from $2.2 billion because of the swap), PDVSA contracted August 8 to pay Gold Reserve Inc. $600 million by today, with the remaining $169 million due by December 31, for the $769 million expropriation judgment that the World Bank International Center for the Settlement of Investment Disputes (ICSID) awarded in 2014. Those of you who like us believe that PDVSA will not be able to make those payments can short the stock: GDZRF in the U.S. or GRZ on the Toronto Stock Exchange. But beware, the stock has a very low daily volume and no puts and calls are generically available. In addition, Del Pino was in China last week and an investment in this venture was a topic of discussion.

 

Venezuela in the U.S. Supreme Court on Wednesday

 

In addition to the $1.2 billion payment for the amortization of the PDVSA 8.5% of 2017 due on November 2nd, Venezuela will also be arguing a case before the U.S. Supreme Court on Wednesday. The case concerns Venezuela’s expropriation of Oklahoma-based Helmerich & Payne’s drilling rigs and local company in 2010, but the Supreme Court discussion is really about a hair-splitting threshold procedural issue about sovereign immunity. And the U.S. filed a brief in support of Venezuela’s interpretation, which calls for a return to the law of sovereign immunity as it was back in the early 19th century, which was also defined by an earlier U.S case involving Venezuela and its caudillo El Mocho — Jose Manuel Hernandez – which helped define the Act of State Doctrine back around the turn of the century.

 

Venezuela at the Council of the Americas on Thursday

 

Obviously it’s a big week for Venezuela, so on Thursday the always far-sighted Council of the Americas in New York has convened a panel to try to make sense of it all. I will be moderating a brilliant group made up of some of the leading intellectual lights on Venezuela, including Torino Capital’s Francisco Rodriguez, Fitch’s Lucas Aristizabal, and Greylock Capital’s Diego Ferro, and I invite you to join us. You can find out more here: http://www.as-coa.org/events/venezuela-and-pdvsas-bonds-what-expect

 

Top Ten Things to Know about Venezuela’s $7 Billion PDVSA Exchange Deal

pdvsa-offering-circular-portada-webWe have gone through the 442 page PDVSA exchange document and, if you do not have a copy, you can access it in LAHT’s online library here:

 

1. The Exchange is only for the $3 billion of PDVSA 5.25% of 2017 and the remaining $4.1 billion of the $6.2 billion PDVSA 8.5% of 2017. Although PDVSA’s head has said conflicting things over the past month, the $1 billion PDVSA 16 maturing next month is not included.

 

The PDVSA 16 is said to have a large government ownership already, so at different times they have said that they were not worried about it. Those who follow our Reports may remember in June that one of the gems that we discovered in the 2015 debt financials is that PDVSA wrote an IOU to its Pension Fund for $900 million of the $1.4 billion PDVSA 2015 bond maturity, meaning they only paid $500 million to other holders.

 

We had this from the footnotes in one of our June reports:

 

“In October 2015, for the maturity of the Petrobonos 2015 with a par value of $1,413,000,000 PDVSA paid $515 million in cash and the remainder of these instruments held by PDVSA-related entities were exchanged for promissory notes in the amount of $898 million.”

 

Well, we find out a little more in this latest sacking of the Pension Fund (including more worryingly that it hasn’t been paid) in the latest Prospectus:

 

“In October 2015, following the maturity of the Petrobonos due 2015, PDVSA paid U.S.$515 million in cash and exchanged the remaining bonds held by PDVSA’s related entities were for one-year promissory notes for an aggregate amount of U.S.$898 million with a 10% rate per annum payable semiannually, subject to automatic renewal.” (page 71).

 

2. The Exchange Bond being offered is a 4 year amortizer, paying 25% of principal each year beginning next year, and maturing in 2020, with an 8.5% coupon and being collateralized “by a first-priority lien on 50.1% of the capital stock of CITGO Holding, Inc. ” That language is peculiar and legally specific and I will explain why in a later point.

 

3. Paying Agent. After all the sturm and drang with Citibank quitting as paying agent and the resulting mystery, the paying agent here is Law Debenture Trust Company of New York. They are also the Transfer Agent and Registrar. The notes will be listed on the Luxembourg Exchange and Banque Internationale À Luxembourg, Société Anonyme is also listed as the Luxembourg listing Paying Agent.

 

4. The Trustee is MUFG Union Bank, N.A.

 

5. The Collateral Agent is GLAS Americas LLC

 

6. No Attorney, Law Firm or Counsel listed. Although the 442 pages of the document were clearly drafted by lawyers, on the back page of this document where they normally list them, there are no attorneys or investment banks listed. This is a worrying sign, in that no counsel for PDVSA, no counsel for Citgo, no counsel for the bondholders, no counsel for Venezuela and no counsel for the any of the Collateral Agents, Paying Agents, or Trustees is putting their name on this document, except these 2 sentences on page 176:

 

“Certain legal aspects of U.S. law and New York law and the issuance of the New Notes offered hereby will be passed upon for us by Hogan Lovells US LLP as our U.S. legal counsel. Certain legal matters with respect to Venezuelan law will be passed upon for us by Despacho de Abogados Hogan Lovells, S.C. as our Venezuelan legal counsel.”

 

7. No Investment Bank Listed. Likewise, there is no mention of the investment bank on the front or back pages of this deal. However, on page 43, Credit Suisse Securities (USA) LLC is named as the “financial advisor for the Exchange Offers.” (No counsel for them is listed there either, by the way). Among other caveats, the Credit Suisse portion also warns that

“The financial advisor is not being engaged to and will not solicit any holders of Existing Notes in connection with the Exchange Offers. The financial advisor does not make any recommendation to holders of Existing Notes as to whether to exchange or refrain from exchanging their Existing Notes.”

 

The first “tell” in the above is that the cast of agency players in numbers 3-5 are not your normal A-list for a company of PDVSA’s size. For example, Glas – Global Loan Agency Services – is a relatively new entrant, having just been founded 5 years ago. On the other hand, Law Debenture, though it has been around since 1889, has lately been largely involved in large bankruptcy situations, including GM (Chapter 11), Lyondell (Millenium America) (Chapter 11), American Home Mortgage (Chapter 11) and General Growth Products (Reorganization), which is not a good sign. Further, just last month Law Debenture announced it was selling “substantially all of its corporate trust business to Delaware Trust Company” — so Law Debenture may not even be the Paying Agent in the end.

 

The second “tell” comes in numbers 6-7. When the lawyers and investment banks on your payroll wont put their name on the legal document, that is a huge flag. When not even the investment bank you are paying will recommend or sell the resulting financial product they created, well, either the standards on Wall Street are improving or the deal smells so bad even they can’t stand it.

 

8. The Exchange Valuation. Although most of us eggheads on the street were analyzing net-present values (NPVs) of the bonds and future exchange 2020 bonds and trying to configure somewhat complicated models based on what each Exchange Ratio and coupon could be and what it would mean for ultimate yields, we gave PDVSA too much credit. THE OFFER? 1 to 1. Yep, you can exchange your $1000 of PDVSA 5.125% April 2017 bond in which you will get all your money back in just 7 more months for the exact same amount of a bond ($1000) in which they will pay your money back in 2020 instead. Oh, and if you don’t jump at this offer by September 29, PDVSA is willing to let you in before October 14, but you will only get $950 of that new bond (ie not even the full amount of $1000 you previously had).

 

9. The Citgo Collateral. If you thought the 1-for-1 exchange was a pathetic offer, the execution of what could have been some interesting financial engineering has turned it into a weapon of financial mass destruction. First of all, let me say that I began warning about Citgo when Venezuela was sucking $2.8 billion out of the company in January of last year (“Citgo and the Revolution’s Praying Mantis School of Business” in the Financial Times here: http://on.ft.com/1JOPbEX). Crystallex, which is owed $1.4 billion for the expropriation of its gold mining operation and has an award for that amount from the World Bank’s International Center for the Settlement of Investment Disputes (ICSID), is currently suing Citgo and PDVSA in Delaware federal court in an innovative suit using the Delaware Uniform Fraudulent Transfer Act to try and force PDVSA to return the $2.8 billion Venezuela sucked out of Citgo (We are quoted in the suit and follow it carefully. It is mentioned on pages 120-121 of this Offering Circular).

 

Second, as noted above, the use of the terms “collateralized by a first-priority lien on 50.1% of the capital stock of CITGO Holding, Inc” is not an accident. Should PDVSA default on this bond, PDVSA 8.5% of 2020 bondholders get to take the 50.1% of the shares of Citgo Holding (the other 49% are collateralizing the Citgo Holdings 10.75% 2/15/20. Bloomberg does not have that Citgo Holdings Prospectus, but you can find it in our library here: https://www.scribd.com/doc/254819229/CITGO-Holding-2020-Offering-Memorandum).

 

But, and here is where the weaponization takes place, 50.1% of the shares means a change of control (CoC), which triggers bond and debt covenants on much of the $5 billion in Citgo debt, making all $5 billion immediately due and fully payable BEFORE PDVSA 2020 bondholders, who are now shareholders in Citgo. As a Citgo shareholder, PDVSA 2020 bondholders would stand at the back of that line behind the Citgo debt holders.

 

And, as mentioned above, it is a line which could also include Crystallex ($1.4 billion), ExxonMobil ($1.6 billion), Rusoro ($1.2 billion), Gold Reserve ($769 million), Owens Illinois ($485 million) not to mention those coming down the pike, including ConocoPhillips (potentially around $5 billion), Koch, etc, if they are able to pierce the corporate veil and get judgments against Citgo — which is why Venezuela was trying to sell Citgo in the first place but had to settle for mortgaging it up to the hilt.

 

Which is a another wrinkle — valuation. In this document, PDVSA gives this generous back-of-the-envelope calculation for their valuation of Citgo.

 

Recently, PDVSA conducted a valuation of the market value of the equity of CITGO and CITGO Holding. CITGO is the owner and operator of important midstream assets, refineries, inventories and receivables, among others, all of which were taken into consideration during such valuation. This valuation exercise was conducted on the basis of an analysis of CITGO and CITGO Holding’s projected future free cash flows, based on certain assumptions regarding growth and taxes. Such valuation also took into consideration the amount of debt at the CITGO level (approximately U.S.$2.0 billion as of December 31, 2015) and CITGO Holding consolidated level (approximately U.S.$4.2 billion as December 31, 2015), among other factors. Such valuation concluded that the market value of the equity (before taxes) as of December 31, 2015 of CITGO was approximately U.S.$9.3 billion and of CITGO Holding was approximately U.S.$8.3 billion, in each case net of debt. In addition, the enterprise valuation of CITGO was U.S.$11.3 billion with an implied EBITDA multiple of 4.7x (based on an EBITDA of U.S.$2.4 billion for the year ended December 31, 2015 (see “Selected Consolidated Financial and Operating Data” for a reconciliation of net income to EBITDA)), and of CITGO Holding was U.S.$12.5 billion with an implied EBITDA multiple of 5.1x (based on an EBITDA of U.S.$2.4 billion for the year ended December 31, 2015 (see “Selected Consolidated Financial and Operating Data” for a reconciliation of net income to EBITDA)). There can be no assurance that such values with respect to a sale of shares of CITGO Holding or CITGO would be achieved.

 

In the whole Offering Circular, there is no Professional Appraisal made by a Professional Appraiser – just the above “here is what we think Citgo is worth.”

 

While we don’t have an independent appraisal of Citgo, we do have an appraisal on Citgo done at their request from an earlier Citgo offering, the Citgo 6.25% of 2/15/22 (you can find the Prospectus in our library here: https://www.scribd.com/doc/235590994/Citgo-6-25-of-2022-Offering-Memorandum ):

 

Turner, Mason & Company (“Turner Mason”), an independent petroleum consulting firm, was engaged to complete an appraisal estimating the value of our three refineries, which will comprise a substantial portion of the collateral securing the notes. Turner Mason estimated the total asset value of our three refineries to be $7 billion (excluding related working capital assets) as of June 1, 2014, based on typical industry valuation methodologies. Although the appraisal is based upon a number of estimates and assumptions that are considered reasonable by Turner Mason, these estimates and assumptions are subject to significant business and economic uncertainties and contingencies, many of which are beyond our control or the ability of the appraiser to accurately assess and estimate. An appraisal that is subject to different assumptions and limitations or based on different methodologies may result in valuations that are materially different from those contained in Turner Mason’s appraisal.

 

Citgo, of course, chose and paid the firm that did the appraisal, but never provided a copy of the appraisal, just the blurb above.

 

Last year, PDVSA and ExxonMobil sold their jointly-owned Chalmette Refinery in Louisiana with 189,000 bpd capacity and a host of pipeline assets for $322 million. Citgo can refine 749,000 bpd from its 3 refineries (including one close to the Chalmette refinery in Lake Charles, Louisiana) — in other words, about four times the $322 million Chalmette refinery amount — which might be closer to a more market-realistic valuation than PDVSA’s back-of-the-envelope “enterprise” calculation.

 

10. PDVSA Debts. One of the reasons the Offering Circular is so interesting is because it is a goldmine of legally obligated information and revelations from Venezuela, PDVSA and Citgo — entities into which we generally have very little transparency.

 

There are many, but of the top ten answers I first sought from the prospectus, the amount of promissory notes was the last in my top ten list. I found this gem:

 

PDVSA has implemented different transactions that allow to partially convert the outstanding commercial debt maintained with certain commercial suppliers into financial debt. This conversion is achieved by the execution of several note agreements which provide for (i) the assumption by PDVSA of a portion of its affiliates’ debt (evidenced in outstanding commercial invoices and contracts) with certain strategic suppliers; (ii) the novation of said commercial debt into a financial debt that cancels the former one; and (iii) the issuance of a three-year note (or several notes) regulated by a Note Agreement, with quarterly amortizations and an annual interest rate of 6.5%, to each of the participating strategic suppliers.
From May 2016 to the date of this offering circular, the aforementioned transactions have been successfully executed with GE Capital Financing, Inc., Cementaciones Petroleras Venezolanas, S.A., Petroalianza, C.A., Maritime Contractors de Venezuela, S.A., Weatherford Latin America, S.C.A., Servicios Halliburton de Venezuela, S.A., Environmental Solutions de Venezuela, C.A., Proambiente, S.A., Elecnor, S.A. and Servicios Picardi, C.A. for a total amount of U.S.$1,151 million.

 

The promissory note debt was previously pegged at just over $800 million and is now $1.151 billion in just 4 months, so it is growing and we now have a list of some of the unpaid entities that are converting some of their invoices to promissory notes that are being traded on Wall Street.

 


CONCLUSION —
Given the 1-to-1 conversion offer along with the weakness of the underlying Citgo collateral and the resulting destruction of Citgo from its execution, it is difficult to see many takers of this deal. I should note that the terms require a 50% tender rate, although PDVSA reserved the right to waive that condition (and others).

 

What this means for PDVSA is that default is ever more likely. PDVSA needed to get this right and they didn’t. Venezuela has less than $12 billion in its Reserves, and not all of that is really readily convertible to cash. They owe $5 billion more this year and another $10 billion next year.

 

The real worry now is, given the lack of cashflow and shortage of dollars that we have pointed out previously, how will Venezuela and PDVSA be able to pay the October and November payments of $4.8 billion if they are not able to get a significant amount of holders to swap out of the shorter date into longer maturities? To be able to pay, they could sell from their remaining claimed gold holdings of $7.4 billion, leaving them with $2.5 billion, but then in April they will also owe $3.8 billion, which includes the maturity of the $3 billion PDVSA 5.25% of 4/12/17, and then another
$2.8 billion in November. In between those payments, they will also have the other regular debt service payments, including of the larger ones, $725 million in February, $310 million in March, inferno$800 million in May, $725 million in August, and $750 million in October. And speaking of writing checks that you can’t cash, after repeatedly losing in court, last month PDVSA even agreed to pay Gold Reserve $600 million by October 31 and the remaining $169 billion on Gold Reserve’s court award by December 31.

 

In our last Report, we alluded to Dante. We close where Dante began: “Abandon all hope, ye who enter here.

Rig Count Reveals Venezuela Oil Production to Fall Further

As the world watches the situation in Venezuela continue to ever more rapidly descend from one level of hell to the next – like some coked-up modern version of Dante’s Inferno – my role has almost become a Virgilian explanation to investors, officials and onlookers of what happens in the next lower, depressing ring.

 

There is no easy way to say it: The only thing Venezuela has keeping the lights on – aside from the obvious, seemingly indomitable spirit of its people — is its oil production and that oil production is falling rapidly. Worse, according to our rig count, investigation and research, that oil production will continue to fall in the year ahead.

 

opec-oil-production-submitted-july-2016

 

As the table above shows, Venezuela did not report its July production figures to OPEC — despite PDVSA President Eulogio del Pino’s mid-month promises that it was going to be up (or perhaps, because of those promises).

 

Instead, what the figures show is that by Venezuela’s own submitted count, its oil production has fallen from 2.587 million barrels per day (bpd) at the start of the year to 2.364 million bpd by the end of June (which it did submit) – an admitted decline of 223,000 bpd in 6 months.

 

But OPEC also keeps a separate count of oil production, and their figures reveal 2 amazing things about Venezuela’s July production:

 

opec-calculated-oil-production-july-2016-crop

 

First is that OPEC calculates Venezuela’s fall in production from January to July as 259,000 bpd lost. Second, that OPEC calculates that Venezuela barely produced over 2 million bpd in July.

 

While 2.095 million bpd is nothing to shake a stick at for most countries, that is down from 3.5 million bpd when Venezuela President Hugo Chavez was elected in 1998. More importantly, as the table above shows, Saudi Arabia, which has lower oil reserves than Venezuela, is producing 10.477 million bpd.

 

But most importantly, that 2.095 million is sadly not what is available for export. According to PDVSA’s 128 pages of financials for 2015, Venezuela burned 580,000 bpd domestically in 2015, which PDVSA’s audited financials also explain is down from 647,000 bpd in 2014.

 

pdvsa-internal-venz-burn

 

That would leave just 1.5 million bpd available for export.

<br.

But, as PDVSA’s financials also reveal, Venezuela sent an average of 579,000 bpd to China in 2015 to repay the $65 billion that China has loaned Venezuela (As the price of oil has fallen, that 2015 figure is up from 472,000 in 2014 because it takes more bpd to keep paying the debt, the Financial Statements also reveal). But remember, China has already paid for that oil with $65 billion in loans to Caracas and Venezuela has already spent that money, so mostly no real income to Venezuela from that 579,000 bpd (which also is counted at a discount).

 

pdvsa-financials-china-petrocaribe-2015

 

So, take away another 600,000 from that 1.5 million bpd and suddenly you have just 900,000 bpd to generate hard cash from export — the bulk of which (around 700,000 bpd) goes to the USA and Citgo in particular, making the USA Venezuela’s biggest customer). According to the Energy Information Agency, Venezuela’s exports to the USA netted Caracas just $4.3 billion for the first 6 months of the year (700k bpd multiplied by Venezuela basket average for first 6 months of $31.50 comes to around $4 billion). And that is before the actual lift costs to Venezuela, which are between $10 to $23 a barrel, which is why there is not enough money to pay for food or medicine or bond payments – much less your suppliers and service providers, which bring us to the next leg down.

 

(By the way, you can find PDVSA’s Financial Statements in our database here:https://www.scribd.com/document/319988349/PDVSA-Financials-Consolidated-31-December-2015 ).

 

Because PDVSA doesn’t have the cash, it has not been paying the companies pumping the oil, whether they be majors (Shell says they are owed over $500 million, for example), countries (India says their oil companies are owed $600 million) or oil service providers (Schlumberger and Halliburton together were owed $2.1 billion as of April).

 

As a result, Schlumberger and Halliburton announced 4 months ago that they were drawing down their resources and personnel in Venezuela. Our investigations confirm that is indeed happening. In July Lagunillas union officials revealed to Platts that 4 of the 6 platforms that Schlumberger operated on Lake Maracaibo were no longer operating.

 

To confirm the depth of the withdrawal, we started calling extended stay hotels in oil regions across the country where these companies house employees in the field. At a hotel in Maturin in the state of Monagas, for example, the San Miguel near PDVSA’s PetroOriente headquarters there, Schlumberger had vacated over 80 rooms (over half of the hotel).

 

venz-rig-count-1-year

 

As a result, according to Baker Hughes (above graph), Venezuela’s rig count has fallen 19 rigs from 68 in May to just 49 active rigs in July.

 

venz-rig-count-10-v-venz-oil-production

 

It is the same for other unpaid oil service providers in Venezuela. In May, Peru’s Petrex halted drilling at 28 of its projects and Argentina’s San Antonio Internacional suspended drilling at 8 of its 16 rigs in Venezuela.

 

What that means is that Venezuela’s future production will continue to fall – and likely below 2 million barrels per day. Based on the trend lines above, we would not be surprised to see production fall even further to 1.7 to 1.8 million bpd as PDVSA continues in a vicious circle with the rest of the country into a new lower ring of hell.

 

Venezuela Ships More Gold to Switzerland in June

It’s official: We are geeks.

We realize we must be some of the few nerds in the world to anticipate with strong coffee and glee the 2:00 am New York time (8:00 am Zurich time) release of the monthly import statistics from the Swiss Federal Customs Administration so that we can cross-reference them with Venezuela Central Bank stats.

Venz Gold to Switzerland Sept 2015 to June 2016

This morning’s Swiss results show that Venezuela shipped $200 million dollars in gold to Switzerland during June. As we have previously explained, Venezuela and PDVSA have a light interest payment schedule in June and July, with just $80 million due in June and $70 million due in July.

As a result, Central Bank of Venezuela (BCV) head Nelson Merentes made a Gandalfian effort to prevent Venezuela’s International Reserves from passing below $12 billion in June (and the close of the first half of 2016). As the chart above indicates – the BCV did not sell any gold in May, although Venezuela sold $2.9 billion in the first half of the year and has sold $3.7 billion of their gold reserves since September 2015.

No sooner had the books been closed on the first half of 2016 than Venezuela’s Reserves crashed through that $12 billion line, however.

Venz BCV Reserves 19 July 2016 crop

From the almost $30 billion that the country had when Maduro began running the country in 2013, the country has just $11.826 billion left {To put that in perspective, if Venezuela decided to liquidate and just pay out all the reserves in the BCV equally to its 30 million citizens, each would get less than $400 per person. In neighboring Colombia – which had to open a humanitarian corridor to feed, clothe and medicate 123,000 Venezuelans this past weekend – Bogota’s $47 billion in reserves would net out at $1,022 per head; Brazil, $1710 per capita; Mexico, $1413 per head.

But Venezuela – with the world’s largest oil reserves — should be more in the proximity of fellow OPEC nations like Algeria ($3,611 per head) or even Saudi Arabia ($18,187.50 per head)}.

At any rate, Venezuela’s reserves will continue down in August as it, PDVSA and Citgo must pay $725 million in interest (You can use our debt calendar here: https://www.scribd.com/doc/286044491/Latinvest-Venezuela-Report-Bond-Debts-20-October-2015 ).

Following that, September requires interest payments of a comparatively modest $310 million, but October comes in at $1.782 billion and November requires $2.946 billion, so more gold sales are coming – if Venezuela and PDVSA are going to pay.

 

Venezuela’s National Assembly Uses the Nuclear Option

Last week, Henry Ramos, the President of Venezuela’s opposition-dominated National Assembly, did something that has gone relatively unnoticed around the world – and it is something important that YOU NEED TO KNOW.
Ramos used the nuclear option – and no, I am not talking about the decision over which of the 3 main constitutional strategies the opposition would pursue to try to legally remove Venezuela President Nicolas Maduro from office.
Faced with a Supreme Court (TSJ) and Executive Branch that are over-ruling every move they make and basically making them irrelevant (including even limiting getting this message out through the government’s media hegemony that dominates TV, radio and newspapers), Ramos had to take to twitter to warn international investors and counterparties that that any international financial agreement that Maduro signed without National Assembly approval would be null and void.
Warning to foreign creditors: contracts in the national interest signed by the Chavista government without approval by the National Assembly will be null and void.”
That tweet was followed by one from National Assembly opposition Deputy Jose Guerra, a Central University of Venezuela Professor who chairs the Assembly’s Finance Committee, seconding the strategy:
“I second what was said by Henry Ramos Allup: credits planned by Merentes [Central Bank President] and Del Pino [PDVSA head and Minister of Oil and Mining] will be null if not approved by the National Assembly. You are warned.”
Those who follow our Reports will remember that after the opposition won the December 6th parliamentary elections, we correctly advised that Maduro’s government would pursue the three-pronged strategy to neutralize the National Assembly that they have indeed followed. Here is the relevant part of our report from December 9th:
9 December 2015
“It’s the ‘economic war,’ stupid.” In simple terms, that’s the Bizarro World version of Clinton strategist James Carville’s slogan that sums up Venezuela President Nicolas Maduro’s reasoning for his government’s loss in Venezuela’s December 6th congressional elections. Instead of owning the economic disaster of crashing GDP, massive shortages, unparalleled currency devaluation and hyperinflation caused by 15 years of unrealistic communist policies and promising to right the sinking ship in his Monday madrigal concession speech, Maduro blamed oligarchs and outside forces for the economy’s — and thus his — dismal performance.
Worse, in a telling statement, Maduro went on to argue that: “In Venezuela the opposition has not won. For now, a counter-revolution that is at our doorstep has won.” Then he insisted that what the country needed was more radicalization — not less — and promised to deliver it. “The struggle for the construction of socialism is just beginning,” he declared, and went on to say he would double down on his disastrous economic policy.
Sadly, despite the opposition’s overwhelming victory in Sunday’s congressional elections, things will remain bad in Venezuela and will likely worsen as political infighting and retrenchment increase. Here is why.
WHAT COMES NEXT?
What will the Venezuela government do now?
Maduro has called for a week of discussion in his party. He has called a special meeting for all the organizations that make up the GPP – the umbrella group of those who support the revolution. Tuesday night Maduro announced that he was firing his whole cabinet.
Next Wednesday, Maduro will gather with all 900 of the government political party PSUV delegates to evaluate the situation, make plans and create proposals.
  1. The Communal Powers
More importantly, for Saturday, Maduro called a meeting of the presidential councils of popular power. These “Communes” have been largely ignored by the opposition and the vast majority of the councils are heavily Chavista. Venezuela passed the Organic Law of the Communes in December 2010, and the Ministry of Communes claims that there are over 40,000 community councils, with over 1000 communes. Maduro increased the 2015 budget of the Ministry of Communes by 62% in preparation for their increasing importance in his strategy. In the Chavez-Maduro version of the communes, residents unite in a number of community councils with the object of self-governance through a communal parliament – a parallel structure to the existing municipal, state and national structures financed from the executive branch. This is part of what the government labels its grass-roots “participatory democracy” that Maduro could turn to in order to get around the opposition-dominated National Assembly.
The government has followed the cut, isolate and neuter strategy before. When Opposition leader Antonio Ledezma defeated the Chavistas for the important and symbolic Caracas mayor position in 2008, the Chavista dominated National Assembly created a new “Capital District,” took away all the mayor’s power, money and responsibilities, and gave it to a new Chavez-appointed Caracas governor. Ledezma was subsequently arrested on trumped up charges of participating in an “American plot to overthrow the government,” jailed and is currently still under house arrest after undergoing medical treatment.
  1. The Supreme Court
This is possibly the most important and primary tool in the Chavista arsenal to maintain power and, like the communes, the signs point to the work that the government has been doing to prepare for Maduro’s reliance on the Supreme Justice Tribunal (TSJ). In October, the government persuaded 13 judges of the TSJ to take early retirement. Some of the judges were of questionable loyalty and many were set to have their terms expire in 2016, which would have allowed the new opposition-controlled National Assembly to appoint them, so having them resign now allows Maduro to replace them with loyalists.
National Assembly President Diosdado Cabello – who participated with Chavez in the coup in 1992 – said Tuesday that the National Assembly would be appointing those 13 new TSJ judges before the end of the year (likely over the Christmas holidays, which is what they also did last year). The government will, thus, rely on its fully-packed Supreme Court with its powerful 7 member Constitutional chamber to overturn, neutralize or block any movements from the incoming opposition-dominated National Assembly. Since 2004 (after Chavez packed it with another 12 loyal justices after his original 20 appointed justices dared to rule against him), the Supreme Court has never ruled against the government. And it only takes 4 justices of the Constitutional chamber to rule an action or law unconstitutional — in other words, 4 Chavista justices can defeat the whole of the elected National Assembly.
  1. Rule-by-Decree Authority
The outgoing National Assembly will probably also pass a decree giving Maduro the power to make and pass laws without the National Assembly, a Rule-by-Decree authority called Ley Habilitante (Enabling Law). Not only has Maduro been given this authority for most of his term in office, Chavez even did it in advance of the 2010 National Assembly elections which saw the opposition gain a substantial number of seats, though not a majority. When, of course, the new opposition-dominated National Assembly tries to revoke this Rule-by-Decree authority with its supermajority, the matter will likely end up in the Supreme Court (see #2).
In short, we have a recipe for impasse and any needed economic reforms will likely take a backseat to the power struggles. It is possible, of course, that some government officials and judges may see the writing on the wall and begin to negotiate about joining with the opposition to save their skins, jobs or just stay out of jail, but cornered rats do not as a general rule behave rationally.”
And sadly, so far this is what has happened and will continue to happen, with the Supreme Court even giving standing to “Commune” heads and even using the Commune law to limit the National Assembly (here, for example: https://www.scribd.com/doc/299469581/Venezuela-TSJ-Enforcing-Economic-Emergency-Decree-11-February-2016 or here, for the latest affront to the separation of powers: https://www.scribd.com/doc/301818932/Venezuela-TSJ-Decision-Limiting-National-Assembly-Powers-2016 )
Going for the nuclear option of disavowing the repayment of any new international investment or bond is the one thing that Ramos and the National Assembly could do to halt Maduro – it cuts off badly needed funds that the government needs to survive. Indeed, there are several investments and bond issuance deals in the works, including for settling an expropriation debt with Gold Reserve, LLC, and continued financing of the development of that Brisas and Cristinas gold mines, and even a deal in the works to exchange unsecured PDVSA supplier debt for newly issued collateralized PDVSA bonds.
Ecuador’s President Rafael Correa used a similar rationale to disavow $3.2 billion in Ecuador bonds 10 years ago. Investors would be wise to pay attention.

Venezuela: It’s the Economic War, Stupid!

“It’s the ‘economic war,’ stupid.” In simple terms, that’s the Bizarro World version of Clinton strategist James Carville’s slogan that sums up Venezuela President Nicolas Maduro’s reasoning for his government’s loss in Venezuela’s December 6th congressional elections. Instead of owning the economic disaster of crashing GDP, massive shortages, unparalleled currency devaluation and hyperinflation caused by 15 years of unrealistic communist policies and promising to right the sinking ship in his Monday madrigal concession speech, Maduro blamed oligarchs and outside forces for the economy’s — and thus his — dismal performance.
Worse, in a telling statement, Maduro went on to argue that: “In Venezuela the opposition has not won. For now, a counter-revolution that is at our doorstep has won.” Then he insisted that what the country needed was more radicalization — not less — and promised to deliver it. “The struggle for the construction of socialism is just beginning,” he declared, and went on to say he would double down on his disastrous economic policy.
Sadly, despite the opposition’s overwhelming victory in Sunday’s congressional elections, things will remain bad in Venezuela and will likely worsen as political infighting and retrenchment increase. Here is why.
WHAT COMES NEXT?
What will the Venezuela government do now?
Maduro has called for a week of discussion in his party. He has called a special meeting for all the organizations that make up the GPP – the umbrella group of those who support the revolution. Tuesday night Maduro announced that he was firing his whole cabinet.
Next Wednesday, Maduro will gather with all 900 of the government political party PSUV delegates to evaluate the situation, make plans and create proposals.
  1. The Communal Powers
More importantly, for Saturday, Maduro called a meeting of the presidential councils of popular power. These “Communes” have been largely ignored by the opposition and the vast majority of the councils are heavily Chavista. Venezuela passed the Organic Law of the Communes in December 2010, and the Ministry of Communes claims that there are over 40,000 community councils, with over 1000 communes. Maduro increased the 2015 budget of the Ministry of Communes by 62% in preparation for their increasing importance in his strategy. In the Chavez-Maduro version of the communes, residents unite in a number of community councils with the object of self-governance through a communal parliament – a parallel structure to the existing municipal, state and national structures financed from the executive branch. This is part of what the government labels its grass-roots “participatory democracy” that Maduro could turn to in order to get around the opposition-dominated National Assembly.
The government has followed the cut, isolate and neuter strategy before. When Opposition leader Antonio Ledezma defeated the Chavistas for the important and symbolic Caracas mayor position in 2008, the Chavista dominated National Assembly created a new “Capital District,” took away all the mayor’s power, money and responsibilities, and gave it to a new Chavez-appointed Caracas governor. Ledezma was subsequently arrested on trumped up charges of participating in an “American plot to overthrow the government,” jailed and is currently still under house arrest after undergoing medical treatment.
  1. The Supreme Court
This is possibly the most important and primary tool in the Chavista arsenal to maintain power and, like the communes, the signs point to the work that the government has been doing to prepare for Maduro’s reliance on the Supreme Justice Tribunal (TSJ). In October, the government persuaded 13 judges of the TSJ to take early retirement. Some of the judges were of questionable loyalty and many were set to have their terms expire in 2016, which would have allowed the new opposition-controlled National Assembly to appoint them, so having them resign now allows Maduro to replace them with loyalists.
National Assembly President Diosdado Cabello – who participated with Chavez in the coup in 1992 – said Tuesday that the National Assembly would be appointing those 13 new TSJ judges before the end of the year (likely over the Christmas holidays, which is what they also did last year). The government will, thus, rely on its fully-packed Supreme Court with its powerful 7 member Constitutional chamber to overturn, neutralize or block any movements from the incoming opposition-dominated National Assembly. Since 2004 (after Chavez packed it with another 12 loyal justices after his original 20 appointed justices dared to rule against him), the Supreme Court has never ruled against the government. And it only takes 4 justices of the Constitutional chamber to rule an action or law unconstitutional — in other words, 4 Chavista justices can defeat the whole of the elected National Assembly.
  1. Rule-by-Decree Authority
The outgoing National Assembly will probably also pass a decree giving Maduro the power to make and pass laws without the National Assembly, a Rule-by-Decree authority called Ley Habilitante (Enabling Law). Not only has Maduro been given this authority for most of his term in office, Chavez even did it in advance of the 2010 National Assembly elections which saw the opposition gain a substantial number of seats, though not a majority. When, of course, the new opposition-dominated National Assembly tries to revoke this Rule-by-Decree authority with its supermajority, the matter will likely end up in the Supreme Court (see #2).
In short, we have a recipe for impasse and any needed economic reforms will likely take a backseat to the power struggles. It is possible, of course, that some government officials and judges may see the writing on the wall and begin to negotiate about joining with the opposition to save their skins, jobs or just stay out of jail, but cornered rats do not as a general rule behave rationally.
THE ECONOMY
While most news has been understandably focused on the election and its machinations, back in the economics department, things are bad.
Oil Hits a New Low
First of all, cash inflows are collapsing as the price of Venezuela’s oil basket fell to $34.05 a barrel last week — its lowest since February of 2009. Venezuela has been lobbying its OPEC partners for months to lower production quotas, but instead got the opposite result as OPEC decided to increase the quota last Friday. As a result, Venezuela’s oil basket will fall even closer to $30 this week.
Financial Reserves Fall to a New Low
Venezuela Central Bank (BCV) reserves fell to a new low of $14.592 billion last week, the lowest since 2003. The BCV has strangely not published any reserves figures this week so far.
Gold Reserves Fall to a New Low
The government quietly released October balances on Friday night under the penumbra of the run-up to the election which show that Venezuela’s gold holdings fell almost half-a-billion to $11 billion during October. That means that Venezuela’s gold reserves have fallen over $3.5 billion so far this year.
Venz BCV Balance 31 Oct 2015.jpg
Unpaid Ships are Piling Up Offshore
Some 60 ships are waiting offshore waiting to be paid before they unload their cargoes, mostly light oil and oil components to mix with Venezuela’s heavy Orinoco oil, according to Reuters. But some are cargo ships. As of October, Venezuelan state importer monopoly Corpovex had only paid for $6 billion of the $19 billion of goods it ordered this year, according to an internal Corpovex document seen by Reuters.
When the anatomy of the government’s failure in the December election is written, this will be an important footnote: To try to buy votes and create the last minute illusion of a land of plenty to gullible voters, the government had planned 5,000 megamarkets around the country. In a testimony to the consistent efficiency of the Bolivarian government, the food never arrived.
WHAT IS TO COME POLICYWISE FROM THE U.S.?
There has been enormous interest around the country and world about Venezuela and its elections. I spent the last several weeks travelling around the country and region and participating in various events speaking about Venezuela and nowhere was there more interest than in Washington, D.C., where the Senate Human Rights Caucus headed by Senator Chris Coons and Senator Mark Kirk convened a group of experts to speak about Venezuela and its elections.
Indeed, the U.S. government was following the Venezuela elections so closely that not only did Hillary Clinton speak about the results before they were released at an event on Sunday night (LAHT exclusive video here: https://www.facebook.com/LatinAmericanHeraldTribune/videos/10205607457413346/?pnref=story ), but the U.S. also had a whole aircraft carrier task force off of Venezuela’s coast monitoring all the signal intelligence and wire traffic (LAHT exclusive here: http://www.laht.com/article.asp?CategoryId=10717&ArticleId=2401334 ).
I also understand from contacts at both the State Department and the Executive Branch that, as part of its strategy to prove that it is getting tough on Venezuela and highlight the country’s corruption, the White House intends to release the names of the 56 Venezuelans who had their U.S. visas revoked this year.
And, finally, also in that focus on Venezuela corruption, it has gone unreported that there are actually 4 sealed indictments in the U.S. arrest of the nephews of Nicolas Maduro and Cilia Flores on narco-trafficking, not just the 2 who have been arrested so far.
So be aware that there are possibly 2 more indictments in that case still to come, should the relevant parties venture outside of the safety of Venezuela.
USA v Campo Flores et al - Docket showing more sealed def - November 2015.jpg
As you can see from the latest docket below, the docket has now been cleaned up to hide the existence of the other 2 sealed indictments in the vault (docket #3 and #4 from above are now missing), so just keep it between us!
USA v Flores Now Missing 2 Sealed Indictments - 4 December 2015.jpg
Thanks again for your continued readership and business. Please let me know if there is anything else we can assist with.

Russell Dallen, ‘An Overview of European Community Protection of Human Rights, with Some Special References to the U.K.’

Russell M. Dallen, ‘An Overview of European Community Protection of Human Rights, with Some Special References to the U.K.’ (1990) 27 Common Market Law Review, Issue 4, pp. 761–790

https://www.kluwerlawonline.com/abstract.php?id=COLA1990046