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Caracas looks past US dollar to bypass sanctions

13 Sep 2017 22:44 (+01:00 GMT)
Caracas looks past US dollar to bypass sanctions

Caracas, 13 September (Argus) — Venezuela's government is hoping to bypass new US financial sanctions by invoicing its oil trade in currencies other than the US dollar, according to government officials and private-sector executives.

The sanctions effectively prohibit new debt and equity deals issued by the Venezuelan government and state-owned oil company PdV, reviving the threat of a debt default in coming weeks.

Caracas has repeatedly fended off default on sovereign and PdV debt through new oil-backed loans, selling or swapping assets and restructuring existing bonds.

Details on Venezuela's new payments system are sparse because the plan still "under development," a central bank official said.

But in broad terms the strategy to exclude the US dollar would establish a basket of alternative currencies including the Chinese yuan and renminbi, the Indian rupee, the Russian ruble and the euro. It could also feature the bolivarian sucre, a currency invented by former Venezuelan president Hugo Chavez to trade with regional allies. The sucre is not in circulation in any country.

The government says the new system will de-link Venezuela from the US dollar and therefore insulate the Venezuelan economy against US sanctions, echoing a failed effort by Iran before oil sanctions were lifted last year.

Under the new system, PdV would start invoicing and collecting revenues for up to half its oil exports in currencies other than the US dollar.

Maduro said on 31 August that the new payments system would launch officially this week in the private sector, which is scrambling for cash in the face of triple-digit inflation.

But the government's foreign currency auction committee (Dicom), through which private-sector companies and individuals are allowed to bid for a combined maximum of about $20mn per week, yesterday suspended its weekly currency auctions until the new payments system is "completely structured and funded," a central bank official said. It is unclear when the new system will be implemented, the official added.

Energy minister Eulogio Del Pino, currently touring Opec and non-Opec countries seeking support for an extension of coordinated production cuts in effect since the start of this year, said earlier this week that PdV soon will start selling oil to India invoiced in rupees and to China in yuan.

Del Pino did not mention Russia. But PdV also hopes to start invoicing oil sales to Russian companies in rubles or euros, an energy ministry official in Caracas said.

"Maduro is seeking a way to live without the US dollar because Venezuela has run out of dollars, PdV's dollar revenues are falling as its crude production continues to shrink, and PdV and the government have about $4bn in bond principal and interest payments due starting next month," a financial sector executive tells Argus. But Maduro's attempt to decouple Venezuela's oil-based economy from the dollar is "destined to fail."

Indian and Chinese clients that buy oil from PdV could benefit from currency exchange arbitrage if their oil imports from Venezuela are invoiced in their respective national currencies instead of the dollar. But it is also "very possible" that PdV could register losses measured in dollars when it books revenues received in these currencies, the central bank official said.

Local Russian, Chinese and Indian diplomatic and oil company officials declined to comment on how the Maduro government's goal of decoupling from the dollar could impact their commercial relations with Venezuela. PdV also declined to comment.

The Venezuelan central bank's hard currency reserves currently stand at about $9.8bn, or roughly 40pc of the almost $4bn in bond principal and interest due in the last four months of this year. But the bank's actual cash reserves total under $500mn, a central bank official said.

"If Russia and China don't ramp up their financial support for Maduro a default this year is possible," the financial sector executive said.

China and Russia have combined Venezuelan exposure in loans and investments totaling roughly $100bn.

Former PdV upstream manager Diego Gonzalez said PdV's real problem is not the US financial sanctions but its inability to halt falling production. "PdV's crude output is falling faster than oil prices are rising," Gonzalez said.

PdV's crude output in August averaged 1.918mn b/d, down 32,000 b/d compared with the previous month's output of 1.95mn b/d, according to secondary sources cited in Opec's latest monthly market report.

The secondary sources, which include Argus, show that during the first eight months of 2017 PdV's crude output dropped by 241,000 b/d or over 11pc from 2.159mn b/d produced at end-2016 to 1.918mn b/d last month.