Archive for December 1st, 2014

Will The Minister Come Back Empty Handed From China?

December 1, 2014


It seems as if President Maduro really believed that OPEC would cut production after he sent Ramirez to visit a few countries, including Russia, who happens not to be a member of OPEC. But as most analysts expected, OPEC did not cut production and scheduled the next meeting for next June, bringing a lot of people back to reality, including Maduro. It was only after Ramirez reportedly left the meeting “red faced”, that it sunk in that maybe Plan A was not going to work. Thus, Maduro switched to Plans B and C. Plan B is to “hope” that oil prices bounce back and plan C was to send Minister of Finance Marco Torres to Beijing to see if he can get some money there. Plan D was to name a commission to cut salaries and luxurious expenses. Yeah, sure!

I have been arguing with a bunch of friends about the probability that Torres will come back with a significant loan, which I peg to be around 0.00001, but they seem to think it is somewhat higher. You see, they actually believe that Venezuela has something to offer the Chinese, like oil or oil fields. But the reality is that Venezuela has little to offer at this time and the Chinese know it, so that Minister Torres is very likely to come back empty handed.

Let’s look at the reasons why I believe this is so:

-What the Chinese are most interested in is oil. Venezuela already sends a few hundred thousand of barrels a day of oil to China, but as we saw earlier, the terms of the Chinese fund had to be changed for the simple reason that Venezuela was not sending the required number of barrels a day to China. Thus, the specific number of barrels to be sent were changed to a number “to be determined by Diplomatic channels” a euphemism for “we will try to work it out so we can collect from the Venezuelans”

Thus, Venezuela can not ship more oil to China, because it needs the cash flow from selling it internationally, let laone pay the Chinese on time. Thus, the possibility of getting a loan for oil is extremely difficult and remote. The Chinese will renew current agreements, but that is it.

-The next option, which is where Venezuelans think there is some value, is that The Government will simply give the Chinese an oil field in exchange for money. This, in fact, has been tried before, except that Chávez, in his minimal wisdom, created new laws that restrict the control of the foreign partners over the joint ventures. Thus, PDVSA has to contribute part of the money to the JV’s, unless the partner lends the money to PDVSA. Except that the Chinese have not been very amenable to this. They want “joint” to mean joint, not I put up all the money and you control. Some companies have accepted this, but not the Chinese, who, in fact did not participate in one of the Carabobo oil fields, precisely because they were told they had to put up all the money.

-The next important problem is the size of the amount of money needed. A US$ 4 billion loam solves very little, when the shortfall, at about US$ 700 million per dollar of oil drop, has now become around US$ 20 billion. Thus, the Chinese would be willing to lend the country US$ 4 billion if it would stabilize the country’s finances, but it would be throwing good money after bad money.

-There is also the problem of who is going to China. Ramirez, with much more experience and, at least an ability to say the right things, could not get a new loan from the Chinese last December or in June, only an extension of currently paid up loans. Marco Torres, a much more limited representative is unlikely to strike the right cord with Chinese authorities. He will get nothing.

-But more importantly, is the history of the Chinese-Venezuela relationship. Most people don’t do their research and ask lots of questions about the Chinese loans, but the papers about them are out there to see, I discovered them and they seem to be rediscovered periodically, the last time by good friend Bodzin. But even I forget about their content, so one should redo the research, as a good friend noted to me today that in one of those documents, the Chinese placed, in 2010, a limit on how much they would lend Venezuela.

Indeed, among all the documents, there is one in particular, that tells the whole story. In it, Asdrubal Chávez, the former President’s cousin, reports on his trip between Februay 2nd and 4d. 2010 to Beijing. The document is remarkable alone, as Chávez’ proposal is that the Chinese lend Venezuela in 2010 all of US$ 40 billion, while asking for the insignificant sum of US$ 116 billion in ten years. How they had planned to pay for this with oil is beyond me, but it is there and very clearly specified.

The Chinese simply did not bite, they very diplomatically said like the Beatles, well, you know, we all want to change the worldd, but we can only lend you US$ 10 billion in dollars and about US$ 10 billion in Yuan (Or Reminbi). Any higher amount, according to the memo would require “very rigorous procedures on the part of the Chinese Council of State”

Which simply says: “I can approve up to this amount on my own, but if you want more, it would take months, lots of discussions, due diligence and involve people, all the way up to the Premier, who may not even know where Venezuela is”

This all happened in 2010, when checks and balances were lighter and before the corruption crusade of Premier Jinping, who wants to personally oversee and check all outflows, loans, etc..making it even more difficult for Venezuela to obtain a loan now that it was in 2010.

All of which leads me to believe that Minister Torres will indeed come back empty handed from China, at which point Maduro will have to implement Plan E: Change the Minister of Finance to someone that knows something about Economics, like he has been told ever since he became President.

Sorry Marco…