By Libby George and Trevor Hunnicutt
LONDON/WASHINGTON, Jan 23 (Reuters) – U.S. controls on Venezuela’s oil exports have seized barrels that had serviced debt to China, lining up another potential showdown between the two superpowers that could further complicate the South American country’s path out of default.
About a tenth of Venezuela’s $150 billion foreign debt is estimated to be loans from China that the OPEC member was paying in oil cargoes – until the US captured Venezuelan President Nicolas Maduro earlier this month.
Debt experts said the ramifications of China’s commodity demand and any clash with the United States could make it more difficult for Venezuela to restructure its debt after a 2017 default and jeopardize Beijing’s cooperation in restructuring deals for other developing countries.
“Even under the best of circumstances, this was going to be very messy — trying to untangle where all these creditors are in the credit hierarchy,” said Christopher Hodge, chief economist at Natixis and a former US Treasury official.
“The fact that America now controls all the finances that come in and out of the country … that seems unprecedented to me, that we’re going to have this kind of entanglement, this much opacity about the finances of a government,” Hodge said.
While Washington currently controls only revenue from oil sales, Hodge noted that they are Venezuela’s main source of income.
OIL FOR DEBT
Documents and sources from state oil company PDVSA show that three supertankers have shuttled between Venezuela and China over the past five years, carrying oil for interest payments under the terms of a temporary agreement reached in 2019. But these shipments represent only a fraction of Venezuela’s total crude exports to China.
AidData, a research lab at the US University of William & Mary that tracks the loans, said some cash proceeds from the oil sent to China went into an account controlled by Beijing and went on to service the debt – even as sanctions and default blocked payments to many of Venezuela’s other creditors.
The Trump administration has now said proceeds from the sale of oil to Venezuela will go into a Qatar-based account controlled by Washington, potentially giving the US president himself substantial leverage over which creditors are paid and when.
In response to a request for comment on the cargoes and debt payments, China’s Foreign Ministry said Beijing had “repeatedly stated its position”.
Beijing condemned the diversion of Venezuelan oil exports during a press conference on January 7, adding that “the legitimate rights and interests of China and other countries in Venezuela must be protected.”
White House spokeswoman Taylor Rogers told Reuters that Trump had brokered an oil deal with Venezuela that “will benefit the American and Venezuelan people.”
The Trump administration is allowing China to buy Venezuelan oil, but not at the “unfair, undercut” prices at which Caracas previously sold the crude, a US official said Thursday.
Traders handling Venezuela’s oil sales have offered some to Chinese refiners, but these are private market deals, not debt payments.
“The people of Venezuela will collect a fair price for their oil from China and other nations,” the US official said.
Venezuela’s Communications Ministry, which handles all press inquiries for the government, did not immediately respond to a request for comment.
OTHER OPTIONS
Trump could still make a deal with China. However, the planned US takeover of Venezuela’s oil sector and control of its revenues could change the creditor hierarchy, restructuring advisers warn.
“All of these things will have the practical effect of subordinating the claims of legacy debt holders,” said global sovereign debt expert Lee Buchheit, adding that it was unclear whether Trump had the legal right to determine who would be paid first.
About $60 billion of Venezuela’s bonds defaulted in 2017, and a restructuring deal is essential to allow it to borrow again and attract new investment.
In a typical restructuring, bilateral creditors meet and agree what losses they will accept, usually through the Paris Club of creditor nations. This sets the bar for “comparable” losses that private lenders – bond investors, banks and others – must bear.
“Comparability of treatment is going to be a real challenge, especially if the US controls the use of oil revenues,” said Mark Walker, a longtime sovereign debt adviser who previously worked on potential Venezuelan restructurings.
THE CHINA PUSH
If the U.S. pushes China to swallow significant cuts to its debt — and China backs off — it could slow down a restructuring and hamper Venezuela’s economic recovery in the process.
That could keep Venezuela “in a very difficult situation for the foreseeable future,” said Jean-Charles Sambor, head of emerging market debt at TT International, which holds Venezuelan bonds. In turn, that would limit how much the country can afford to repay bondholders and other creditors.
China has little immediate leverage. Countries don’t typically take other nations to court or arbitration over loan requests, Walker said, and should resolve the situation “on a government-to-government basis.”
But the ramifications are possible: China is the developing world’s largest bilateral creditor, and its cooperation with the Paris Club has been crucial over the past decade. Beijing agreed on the terms of the restructuring through a platform called the Common Framework during debt restructuring talks in Ghana, Zambia and Ethiopia.
“China’s obvious leverage is to refuse to cooperate in future sovereign debt fixes under the Common Framework until it believes it has been treated fairly in Venezuela,” Buchheit said. “And that threat would have some force.”
(Reporting by Libby George, additional reporting by Joe Cash in Beijing and Marianna Parraga in Houston, editing by Karin Strohecker and Kirsten Donovan)