Venezuela to pledge more oil reserves for credit

Venezuela launched a new currency backed by the government's "petro" instrument and granted oil reserves to the central bank in a bid to secure fresh credit from abroad.

The "sovereign bolivar" will start circulating on 20 August, Venezuelan president Nicolas Maduro said during a 25 July nationally televised meeting with his cabinet and senior officials of the ruling socialist party (PSUV) to discuss ways of stabilizing the oil-based economy.

The new "sovereign bolivar" will erase five zeros from the "strong bolivar" that was launched in 2007 by late president Hugo Chavez in what ultimately was a failed bid to check the depreciation of the national currency.

Maduro also granted Venezuela's central bank 29bn bl of "certified crude reserves" in the Orinoco oil belt. These reserves will be offered by the bank as guarantees to secure new loans from Russia, China, Turkey and India, a presidential palace official told Argus.

On paper, the government is valuing the 29bn bl of "certified" reserves at about $1.9 trillion calculated at a rounded current average export price of $66/bl.

Critics have long accused the government of effectively mortgaging Venezuela's oil assets to stay in power. State-owned PdV's US refining subsidiary Citgo is already pledged to PdV bondholders and Russia's state-controlled Rosneft.

Both the new currency and the reserves-for-credit plan sparked overwhelming rejection from economists, business groups and labor union officials.

The implications of the sovereign bolivar's launch next month for PdV's oil operations, including over 40 upstream joint ventures with foreign partners, are not immediately clear. But payments for salaries and local goods and services are already clouded by hyperinflation, exchange rate ambiguity and a shortage of banknotes.

Maduro's decision to give the bank administrative control of untapped oil reserves to leverage fresh international loans appears to be an effort to skirt US financial sanctions imposed in August 2017. The US sanctions have blocked PdV's access to international credit, aggravating its struggle to reverse sharply declining production.

The proceeds of any new loans secured by the central bank could be accessed by state-owned companies that need hard currency to finance investments. These companies include PdV, state-owned petrochemicals producer Pequiven, state-owned utility Corpoelec, an energy ministry official tells Argus.

But a disgruntled senior central bank official dubbed the government's plans to launch a new currency and turn the central bank into an international borrower a "desperate doomed attempt" to reverse the Opec country´s economic debacle.

"Undeveloped oil reserves owned and controlled by the Venezuelan state are not liquid, therefore they are not tradable and cannot be leveraged constitutionally for purposes of incurring new debt and cannot be monetized as hard currency like gold bullion for purposes of reporting the country's hard currency reserves," the bank official said. .

Former central bank chief economist José Guerra also maintains that the sovereign bolivar is unviable. "A bus ride now costs 20 centimos (cents) priced at the new sovereign bolivar's rate, and gasoline costs 0.0001/liter, but the lowest denomination coinage in Venezuela is 50 centimos," Guerra said. Pegging the sovereign bolivar to the petro is also impossible "because the petro doesn't exist, it isn't accepted as a currency."

The petro, unveiled earlier this year, is an ambiguous financial instrument pegged to Venezuela's oil export price basket and backed officially by over 5.2bn bl of undeveloped extra-heavy crude reserves in the Ayacucho 1 block of the Orinoco oil belt. Each petro equals the market value of one barrel of the untapped reserves based on the weekly average price of the oil energy's oil export basket, according to Maduro.

The Maduro government claims the petro has been well received abroad, with PdV, Corpoelec and other government entities now using the instrument for all financial transactions. Commercial airlines and shipping companies also have been ordered by the Maduro government to use it.

But over a dozen local executives with foreign airlines and shipping companies say Venezuela's government and PdV continue to conduct foreign financial and commercial transactions in US dollars and euro.

Currently the only global financial institution that appears to accept the petro is Evrofinance Mosnarbank, a shadowy Russian-Venezuelan quasi-public financial institution in which Venezuela's state-owned National Development Fund (Fonden) holds a 49.99pc stake. The remaining 50.01pc stake is divided equally between Russian banks Gazprombank Group and VTB.

In an additional development, Maduro suspended all taxes for one year on imports of capital goods associated with industrial production, and pledged to reform existing money-laundering legislation to lessen legal risks for legitimate importers. He offered no details on how these proposals would work in practice.

Independent Venezuelan economists forecast that Venezuela's GDP will shrink by up to 22pc in 2018, extending the cumulative economic contraction since Maduro came to power in April 2013 to over 50pc.