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US control over Venezuelan oil could lead to a showdown with China on debt restructuring

The U.S.'s control over Venezuela's oil exports ensnared the barrels that were servicing debts to China. This could lead to another showdown between two superpowers, which would further complicate the South American nation's path towards avoiding default. Venezuela's $150billion foreign debt is believed to be a tenth loan from China, which the OPEC country was paying with oil cargoes – until the U.S. seized Venezuelan president Nicolas Maduro this month.

Experts in debt said that the impact of China's claim to the cargoes?and?any conflict with the United States?could make it harder for Venezuelans to restructure their debts after a default in 2017 and could put Beijing's collaboration on restructuring deals at risk for other developing countries.

Even under the best circumstances this was going be messy. Trying to figure out where these creditors stood in the credit hierarchy, said Christopher Hodge. He is the chief economist at Natixis, and a former U.S. Treasury Official.

Hodge stated that "the fact that America controls all finances in and out of the nation...seems to be unprecedented for me. We're going have such entanglements. Such opacity regarding the finances of a Government."

Hodge pointed out that Venezuela's primary source of income is oil sales proceeds.

Documents and sources of the state-run oil company PDVSA reveal that three supertankers were shuttling back and forth between Venezuela and China in the past five years, carrying oil to pay interest under the terms and conditions of a temporary deal struck in 2019. These shipments represent only a small fraction of Venezuela’s total crude oil exports to China.

AidData, a lab of the U.S. University William & Mary which tracks lending, reported that some cash proceeds were sent from Venezuela to China and went to a Beijing-controlled account to pay off the debt, even though sanctions and defaults prevented payments to other Venezuelan creditors. Trump's administration now says that the proceeds of the sale Venezuelan oil will be sent to a Qatari account controlled by Washington. This could give the U.S. president himself considerable?leverage in deciding which creditors are paid and when.

China's Foreign Ministry responded to a question about the cargoes, debts and payments by saying that Beijing had "repeatedly stated its position". Beijing has condemned the redirection Venezuelan oil exports at a?January 7th news conference. It added that "legitimate interests and rights of?China, and other countries of Venezuela in Venezuela should be protected".

Taylor Rogers, White House spokesperson, said that Trump had negotiated an oil deal with Venezuela which "will benefit both the American and Venezuelan public". A U.S. official confirmed on Thursday that the Trump administration has allowed China to buy Venezuelan crude oil, but not at "unfair and undercutting" prices, as Caracas had previously sold it. The traders who manage Venezuelan oil sales offered some to Chinese refiners. However, these were private market transactions and not meant as debt repayments.

The official from the United States said, "The people in Venezuela will receive a fair price from China and other countries for their oil."

The Venezuelan Communications Ministry, which is responsible for all government press inquiries, did not respond immediately to a comment request.

Other Options

Trump may still strike a deal with China. Restructuring advisors warn that the planned U.S. control over Venezuela's oil sector and its revenues could upset the hierarchy of creditors.

Lee Buchheit, a global sovereign debt expert, said that "all of these things" would have the effect of subordinating claims by legacy debt holders. He added that it was unclear whether Trump had the legal authority to decide who got paid first. Venezuelan bonds worth $60 billion went into default in 2017. A restructuring agreement will be needed to allow Venezuela to borrow money again and attract investment.

In a typical restructuration, bilateral lenders get together to decide what losses they are willing to accept. This is usually done via the Paris Club, a group of creditor nations. The "comparable" loss threshold is set by the Paris Club of creditor?nations.

Mark Walker, an experienced sovereign debt advisor, who worked previously on possible Venezuelan restructurings, said that "Comparability will be a challenge", particularly if the U.S. controls how oil revenues are used.

Pushing China

If the U.S. forces China to accept significant debt writedowns, and China refuses, it could slow down a restructuring process and even hinder Venezuela's recovery.

This could keep Venezuela in "very dire straits for the foreseeable future", according to Jean-Charles Sambor of TT International. The company holds Venezuelan bonds. This would then limit the amount of money that Venezuela can afford to pay back to its bondholders and creditors.

China has limited immediate leverage. Countries ?typically do not take other nations to court or arbitration over lending claims, Walker said, and would need to settle the situation "on a government-to-government basis".

China has had a major impact on the world's developing countries. It is the biggest bilateral lender in the region and its cooperation with Paris Club was crucial for the last decade. Beijing reached a restructuring agreement via a platform known as the Common Framework, during Ghana's, Zambia's and Ethiopia’s debt restructuring discussions.

Buchheit stated that "China's obvious lever is to refuse to participate in future Common Framework sovereign bond workouts until it feels it has been treated fairly by Venezuela." This threat would be very powerful.

(source: Reuters)