Will The Minister Come Back Empty Handed From China?

December 1, 2014

manitos

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…

Advertisements

42 Responses to “Will The Minister Come Back Empty Handed From China?”

  1. Tomate Says:

    Sounds like they are going to refer him to the IMF. As that is where Venezuela has to go; like it or not. Is time to take the medicine

  2. Roy Says:

    What Plan letter is “Throw in the towel, leave Venezuela, and retire to enjoy all the money stolen over the years.”?

  3. Paul Says:

    The Minister will return with something in his hand but it won’t be money.

  4. Yuzhou Lin Says:

    How about China request VZ sell a oil-rich field to china and allow china to send a unit of military. I think this is a good offer, china may say yes to loan if those things happen.


  5. […] Will The Minister Come Back Empty Handed From China? 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! […]

  6. Tom ODonnell Says:

    Give or take a margin of error of a few billion, I think you are correct.

    As for buying any fields, it seems the Chinese (and other IOC/NOCs) have been pushing for de facto operational control as a condition on any more investments, even on presently owned fields … but that was a few months ago, and now the price has collapsed.

    Beijing could of course make an ‘investment’ for the future and get bargain prices on new fields — to be exploited much later under a new Venezuelan regime — but this is also rather doubtful right now. They are indeed sensitive to what the opposition and business class thinks.

  7. jau Says:

    (BFW) Venezuela Sold $4b Oil Debt At Discount to Goldman: Nuevo Herald

    +——————————————————————————+

    Venezuela Sold $4b Oil Debt At Discount to Goldman: Nuevo Herald
    2014-12-02 13:26:26.780 GMT

    By Jose Orozco
    Dec. 2 (Bloomberg) — Venezuela sold more than $4b worth of oil debt owed by the Dominican Republic to Goldman Sachs for $1.75b, or 41% of its value, Miami-based El Nuevo Herald newspaper reported citing people familiar with the operation.
    * Goldman Sachs to make a 59% profit, or $2.36b, from Dominican Republic’s Petrocaribe debt, which as of Aug stood at $4.09b: El Nuevo Herald
    * NOTE: Under Venezuela’s Petrocaribe program, the country finances as much as 60 percent of the cost of oil shipments to regional allies
    * Goldman Sachs in talks w/Venezuela for similar deal on Jamaica oil debt: El Nuevo Herald
    * Dominican Republic has received $8.22b in oil since 2005 from Venezuela through Petrocaribe; $4.26b in oil received w/ 23 yrs financing at 1% annual interest and 2-year grace period apart from payment of $140m in black beans exports: El Nuevo Herald
    * NOTE: From Nov. 25, at least four countries were taking steps to reduce reliance on Venezuela’s oil subsidy program as crude prices plunge and Venezuela faces 63% inflation and world’s widest budget deficit

    • Edgar Says:

      Maburro looking for money under the rocks!!

    • pookeye Says:

      this is amazing, Goldman would rather have debt from the Dominicans and Jamaicans than the Venezuelan’s themselves. freaking amazing.

      • FrankPintor Says:

        What’s also amazing is the 60% discount on the debt. What would the discount on the other Petrocaribe countries’ debt be? 80-90%? I don’t this trick can be repeated too often.

        • moctavio Says:

          Actually, the three biggest debtors of Petrocaribe (forget Cuba) are Dominican Republic, Jamaica and Bahamas. The last two pay less than Dominican Republic. Let’s use as an example ten year bonds, all three have them. RD yields to maturity 11.2%, Jamiaca 6.5% and Bahamas 4.7%, thus the discount rate would be the highest for DR. Amazing that Venezuela, which has a CCC to B credit rating, lends money cheaply to Bahamas, which is investment grade, no?

  8. Ronaldo Says:

    The biggest fear of China is that Maduro will leave office and the next government will refuse to honor any deals. Why should they take any chance on losing it all? The negotiations and final terms are State secrets in Venezuela.

    Moreover, the Chinese know that Cuba will take a 20% cut on any loans to Venezuela. Corruption in Venezuela will take another 20%. These parts will never be paid back.

    • Ira Says:

      Any opposition government will surely honor past financial agreements. And they will certainly get liberal readjustment terms from their creditors by taking sensible economic measures to righten the listing ship.

      I have zero doubt about VZ being able to eventually fix the damage, if the right people are in charge.

      And its creditors know this, even at 40 bbl.

  9. captainccs Says:

    I don’t know if the Minister will bring back egg foo yung or egg on his face but I do know that December 2 is a memorable day, “2 de Diciembre, Nuevo Ideal Nacional” was mi general’s motto. Adecos hated him so they renamed the barrio “23 de Enero.”

    What did the adecos accomplish in the end? They overthrew a nationalistic, patriotic general and 40 years later they handed over to a traitor, a treasonous, vende patria, commander.

  10. Arco Says:

    When does Torres go to China?

  11. Shrillary Clinton Says:

    so boys….hows those Chinese lessons coming? …. the last two paragraphs of this article are the best …plus the comments …..eat those Russian tanks and airplanes !!!

    http://finance.yahoo.com/news/venezuelas-future-barbarity-people-looting-165018511.html

  12. Rick Flowers Says:

    Venezuela is fast getting into so big a financial mess that even Chinese loans won’t help. Will they turn to ISIS for a loan in desperation? No, they will just print more money like idiots and assume price controls will prevent the hyper inflation. Funny that when the US increases its oil production it is called a crime against humanity, but when Venezuela wants to produce more oil it is heroic.

  13. Anon Says:

    Yuzhou Lin. Thank you for commenting. It is nice to hear from the Chinese perspective.

  14. Yuzhou Lin Says:

    “very rigorous procedures on the part of the Chinese Council of State” this is just a excuse.

  15. m_astera Says:

    I wouldn’t loan the Venezuelan government any money, and I don’t see why anyone else would either.

  16. Yuzhou Lin Says:

    As maybe the only Chinese who read this article, i would say you know china a lot. in fact, Nowadays, even the Chinese people are angry about the “renew agreement” with VZ. they think VZ play china by defaulting their debts. they are more angry when they heard that VZ plans to pay Wal-street on time.

  17. danielduquenal Says:

    Compelling read but oh so predictable 🙂

    I think the key word is here: throw good money after bad. As I wrote in my blog last Friday, Chinese are not known to throw good money after bad, in particular in the mounts that the regime needs to win next elections, just to be even deeper in debt.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: