The sanctions announced today by the US Government against Venezuela’s oil company PDVSA and lesser known arms manufacturers CAVIM, represent a clear message of warning to the Venezuelan Government to watch the line they step over with Iran and other terrorist Nations.
The US had already sent a warning over PDVSA’s shipments on two tankers of a catalytic product used in the production of gasoline earlier this year. However, the President of PDVSA said in February that it had not made such shipment. It is less clear in what way CAVIM violated the US sanctions against Iran, we just note that the President off CAVIM happens to be a Director of PDVSAand in my interpretation, including CAVIM might have an implied message of warning in itself.
That this is a warning can be seen by the weak sanctions, as PDVSA will not be able to:
“compete for U.S. government procurement contracts, secure financing from the Export-Import Bank of the United States, and obtain U.S. export licenses”
Moreover, PDVSA’s affiliates (read CITGO, based in the US) will not be subject to the sanctions. Of the sanctions in itself only the last one may be of consequence as it will likely get tougher to obtain export licenses to Venezuela of sophisticated technology unless the exporter/importer can show that PDVSA will not have access to it.
The sanctions imposed are really mild. Under US law, the Secretary of State had to impose at least three sanctions from the nine possible ones (see Setty’s post). People who took part in the conference call and others I talked to today, indicate the three were chosen such that would not block oil trading between the two countries. The ban on import licenses applies to future ones, not past ones, it may be bad for PDVSA long term, but basically irrelevant at this time. PDVSA does not have any contracts with the US Government and Citgo is exempt from the sanctions. Venezuela has had no access to Ex-Im bank financing for a few years.
What is clear from the sanctions and various conversations with people in DC, is that this mild application of the sanctions is a warning and that were PDVSA to once again collaborate with Iran in violation of the sanctions, the US Government would take a much tougher stance.
So far Venezuela’s response has been mixed. There was the usual rhetoric, “imperialistc”, “Illegal”, “no fear from more”, but no threat to stop shipping oil to the US (so much for the revolution that needs capitalism to function). PDVSA “officials” told Reuters that this was done by the Obama administration to appease Senate critics.
Surprisingly, Chavez did not speak, either by premeditation or because that morphine for the pain in his knee is really taking a toll.
Perhaps the main impact of the sanctions will be on the Government’s finances. Both PDVSA and the Government have been issuing bonds mostly to create the supply for the Central Bank’s SITME system, the only legal mechanism (other than the Central Bank) to move money in and out of the country. In January, for example, PDVSA reopened the 2017, 8.5% coupon bond to pay the Central Bank US$ 1.9 billion (Or was it US$ 2 billion? Or was it US$ 2.4 billion?) which the bank has been selling via SITME. Similarly, in February it sold US$ 3 billion of a PDVSA issue, of which US$ 1 billion was kept by the Government.
The problem is that these bonds were sold at Bs. 4.3 per US$, which means that if they are sold through the SITME, the price of the bond needs to be above 81% for these institutions to break even. With the news today, PDVSA’s and Venezuela’s bond fell and the PDVSA 2022 closed below 80%, increasing possible losses if they began selling it in the SITME system. We suspect these bonds will be under pressure for a while with the news.
The next few days are important, after the initial rhetoric settles down, Chavez is likely to forget the topic. All he wants and needs is to be reelected, Iran may be an ally, but is not worth the sacrifice.