Why You Should Be Very Wary of the Venezuelan “Fire Sale”

“Venezuela has been a lesson in caution for the past few years…”

Chronic mismanagement of national funding has led to what is by all accounts a national financial collapse the likes of which we haven’t seen since Weimar Germany.

As a result of the ongoing slide, for the past several days I have been ensconced in analyzing a proposal floated by the Venezuelan government: a new privatization scheme designed to bring in badly-needed revenue to offset this economic crisis.

There is considerable international investment interest developing. After all, if genuine, the initiative could provide some choice energy assets at discount prices.

But there is also the concern over how to gauge and offset some hefty risk associated with any decision to go in.

That’s where I come in, advising a range of private investment groups. If risk cannot be accurately determined, nobody should enter such a chancy undertaking. There remains much that Caracas and PDVSA (the national oil company) have not provided.

In many respects, this amounts to an outline only of what needs to be a more detailed proposal.

Yet it also once again introduces some underlying concerns surrounding any move by outside money. Some of these require a bit more familiarity with the less-than-transparent dynamics of how matters operate these days in Venezuela.

This brings to mind an Oil and Energy Investor I released late last year.

It was entitled “How My Powerful Venezuela Oil Connection Ended Up in Jail,” and it provides as much a caution today as it did then.

On December 1, I told you about my time in Quito, Ecuador, when I was able to spend several days in private conversations with Venezuela’s Minister of Oil. He was considered one of the most knowledgeable and able of the region’s execs at the time.

At one point, over a late-night drink, he confided the following: “You are always in a no-win situation when it comes to insulating working capital from central budgets,” he declared. “You have to provide for the next round of drilling. For that, proceeds from sales must be segregated. But the politicians can only see buying the next election.”

We were to renew the conversation later when I was scheduled to provide a similar seminar at the invitation of PDVSA.

However, by the time that was to take place, the domestic civil strife in Venezuela had intensified.

And my “drinking colleague,” – or Eulogio Del Pino, as the world knows him – was arrested at his home in Caracas.

The Real Reasons Behind PDVSA’s Recent Arrest Spree

The first is a contentious financial deal for Citgo refineries in the U.S.

The second is Petrozamora S.A, a joint venture with Russian banking major, Gazprombank, itself an arm of state-run natural gas giant Gazprom and oil major Gazprom Neft.

Del Pino was closely involved in the Petrozamora affair, while another well-known oil exec – Nelson Martinez – headed up the Citgo network both while PDVSA owned it, and after sales began to other interests.

Speculation has already begun that the arrests were more to pressure Del Pino and Martinez to turn “states evidence” against their former patron.

These latest moves follow the arrests of more than 60 others within PDVSA – casting a chilling silence over the national oil company, to say the least.

None of my current contacts would answer any messages following this.

According to Maduro, the issue surrounds billions of dollars in corruption within PDVSA, its arrangements with foreign companies and finance, as well as its administration of assets held abroad (like the Citgo refineries in the U.S.).

Others, however, charge that the real problem results from an increasingly desperate political leadership with its own “private accounts” in which public revenues are being siphoned while the central budget implodes under the weight of its own red ink.

The situation has only been intensified by the technical default into which both PDVSA bonds and Venezuelan sovereign debt (much tied to that PDVSA paper) have fallen after Caracas failed to pay interest as scheduled.

Eulogio also didn’t help his standing with Maduro when he went public with an opinion that Venezuela needs to own up to its foreign debt obligations.

There was, of course, another reason for that position…

PDVSA’s Transparency Problem

PDVSA is in desperate need of securing finance to fund ongoing operations, as crude oil sales remain the dominant source of the country’s revenues.

And this brings us back to the advice he gave me years ago.

With normal international finance markets closing to PDVSA, designing foreign ventures to obtain the working capital necessary for drilling becomes the only genuine option.

Petrozamora may well have been in that category.

By directing the finance to projects, PDVSA kept the lights on and workers paid.

But it did so at the expense of inciting the ire of the president and his cronies.

This morning, PDVSA was taken over by a general loyal to Maduro.

That means we should not expect any transparency anytime soon.

It also means something else…

Given the recent experience with debt payment defaults, I would be concerned if I was representing a Russian bank or energy major who thought they had some paper control over assets inside Venezuela.

Under the rule of Maduro, such papers have an irritating habit of disappearing… along with the Venezuelan officials who signed them.

The underlying concerns I had eight months ago are hardly less pressing today. This may look like there is a fire sale developing in Venezuela but it also has a hefty down side to worry about.

I will keep you updated as this situation develops, and we may well have more “inside” perspective on this shortly.

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