US signals end to Citgo protection by June 2022

The US government may be turning a Venezuela policy corner by signaling a possible end to its protection of US refiner Citgo from creditors in first half 2022.

In a 10 September letter to the Washington attorneys representing leading arbitration claimant Crystallex, the US Treasury Department's Office of Foreign Assets Control (OFAC) acknowledges that the Venezuelan opposition-controlled National Assembly's mandate ends in January 2022. The lapse of this already tenuous mandate effectively ends the authority of opposition leader Juan Guaidó as Venezuela's interim president.

Citgo, the US downstream arm of Venezuela's national oil company PdV, is the target of myriad creditors and arbitration claimants. After the former US administration withdrew recognition of Venezuela's president Nicolas Maduro in favor of Guaidó in January 2019 and imposed oil sanctions to drive Maduro out, Citgo came under the administrative control of the interim administration.

Crystallex as well as ConocoPhillips, among others with outstanding arbitration awards stemming from nationalization of their Venezuelan assets, have been battling in US courts for years to lay claim to PdV Holding, the Delaware-based indirect parents of Houston-based Citgo. In the letter made public yesterday, OFAC denies Crystallex's request for a specific license for a judicial sale of PdV Holding shares at this "particularly sensitive" time based on State Department recommendations, but the US "will reassess whether the sale of the PDVH shares is consistent with United States foreign policy, as the situation in Venezuela evolves. The United States anticipates doing so during the first half of 2022 as warranted by changed circumstances."

The timing refers to Venezuelan political negotiations underway in Mexico, where the Maduro government and an opposition coalition have begun to hammer out initial social welfare cooperation ahead of November regional elections in which the opposition agreed to participate following years of electoral boycotts. Control over Venezuela's overseas assets and a roadmap for the post-sanctions recovery of the oil industry are key topics of near-term discussion. US president Joe Biden's administration has already signalled a willingness to gradually lift the byzantine financial and oil sanctions and executive orders on Venezuela if the negotiations progress.

Yellow light

Crystallex, a Canadian mining company now controlled by New York-based Tenor Capital Management, previously argued successfully that PdV is an alter ego of the Venezuelan government. The Delaware court where its case is unfolding already has a Citgo sale plan in hand from a court-appointed special master, pending the issuance of a license to proceed.

The Crystallex claim is nonetheless a step behind the specific pledge held by PdV 2020 bondholders. The PdV 2020 bonds feature collateral of a majority of shares in Citgo's direct parent, Citgo Holding. The US Treasury has repeatedly suspended existing authorization for the bondholders to pursue their claim to Citgo Holding shares.

Not surprisingly, the secondary market prices of PdV bonds have been climbing in recent days as Venezuela's protracted conflict looks closer to ending, and the possibility of a debt restructuring, debt-for-equity swaps and reconstruction plans anchored on oil whet investor appetite. US citizens are not allowed to transact Venezuelan bonds, a restriction that US traders are hoping will be lifted soon.

The potentially watershed OFAC letter is the first concrete sign of US willingness to throw in the towel on Citgo, Venezuela's most valuable overseas asset that Guaido's fading interim administration had vowed to protect. The spotlight will now turn brighter on other Venezuelan assets abroad, namely Colombian fertilizers giant Monomeros and Venezuelan central bank gold reserves in the Bank of England that Maduro is pushing to win back.

By Patricia Garip