Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Huh. Look at what landed overnight from the US Department of the Treasury (Alphaville’s emphasis below):
WASHINGTON — In response to the signing of an electoral roadmap agreement between Venezuela’s Unitary Platform and representatives of Maduro, and in support of the Venezuelan people, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today issued 4 General Licenses suspending select sanctions.
. . . Treasury today:
— Issued a six-month general license temporarily authorizing transactions involving the oil and gas sector in Venezuela. The license will be renewed only if Venezuela meets its commitments under the electoral roadmap as well as other commitments with respect to those who are wrongfully detained.
— Issued a second general license authorizing dealings with Minerven — the Venezuelan state-owned gold mining company — which Treasury assesses would have the effect of reducing black-market trading in gold.
— Amended two relevant licenses to remove the secondary trading ban on certain Venezuelan sovereign bonds and PdVSA debt and equity. The ban on trading in the primary Venezuelan bond market remains in place. Treasury assesses that this, too, would have the positive effect of displacing nefarious players in this market, and with negligible financial benefit to the Venezuelan regime.
A deal between Caracas and DC on easing some of the sanctions on Venezuela has been expected for some time. Caracas desperately needs to revive its energy industry, and the Biden admin has been keen to bring more of its oil online to offset the impact of sanctions on Russia.
But while there had been some speculation that a deal might include something on Venezuela’s frozen bonds — the US has prohibited even trading them since 2019 — this is still a weird move. Basically, it doesn’t help Venezuela, but it doesn’t really help the US either. The only ones who win from this are the remaining Venezuelan bondholders.
Most of its external bonds have been in default since 2017, and — with bondholders unable to sell to any mainstream financial company that does business with the US — the prices have generally traded at under 10 cents on the dollar since then (when they trade at all).
The cautious lifting of Venezuelan oil, gas and gold sanctions — you can find more details in the Treasury’s Office of Foreign Assets Control accompanying FAQ — will help, but not much. As Capital Economics notes:
. . . Sanctions only explain part of the demise of Venezuela’s oil sector. Oil production has been in terminal decline since its most recent peak at 3.5mn bpd in 2005. That reflects years of underinvestment and the loss of skilled labour (to emigration or repatriation) which have undermined production, and potential production. It will require enormous amounts of investment and take a lot of time to restore production back to anything like that level. Indeed, although US oil major Chevron was given permission to restart operations in late 2022, Venezuela’s oil production was only up by 70,000 bpd in September.
As a result, while the lifting of US sanctions would facilitate higher output from Venezuela in the medium term (if the US conditions are met), we are sceptical that it will make much difference to the global oil market in the near term. After a deep deficit this year, we continue to expect the oil market to be finely balanced in 2024. even assuming some increase in Venezuela’s oil output (Chevron plans an additional 65,000 bpd coming on stream next year).
Moreover, sanctions are only lifted to April 18, 2024, and Treasury stressed it would only renew it if the Maduro government adheres to the existing deal and takes “continued concrete steps toward a democratic election by the end of 2024”.
Those caveats are not exactly going to encourage a lot of other majors to dive back into Venezuela (which also enjoys nationalisations as much as it does arepas). Restoring output to the 1mn barrels of oil a day that Venezuela churned out before 2019 is going to be difficult.
For most bondholders, Venezuelan bonds will remain virtually untouchable. They’re in still default and excluded from JPMorgan’s EMBI bond indices, which is unlikely to change because of this. And from Alphaville’s reading of the situation a restructuring would still be precluded by existing sanctions.
Sanctions have only been lifted for trading of pre-2017 bonds, and OFAC maintains a blanket ban on anyone with business in the US being involved in new debt issuance. The problem is that sovereign debt restructuring are structured as an exchange of old defaulted bond with less valuable new ones — which would presumably still be prohibited. Yesterday’s OPAC FAQ is annoyingly silent on this issue.
Still, it’s a big win for any big US investor that has, in practice, been trapped in the bonds — and the horde of more opportunistic hedge funds that specialise in sovereign distress, who can now load up in the hopes of a broader settlement one day.
So far the reaction has been noticeable, but hardly electrifying. For example, the 2020 bond has now jumped from 7.5 cents on the dollar to back over 10c.
But at some point, someone is going to make an unholy amount of lucre out of this trade.