US control of Venezuela oil risks debt restructuring showdown with China

Highlights:

• China's cooperation in global debt deals at risk, restructuring experts say
• Trump's oil revenue leverage could impact debtholders' claims
• Venezuela, China agreed on oil as payment since 2019 sanctions

US control of Venezuela's oil exports has ensnared barrels that had been servicing debt to China, lining up another potential showdown between the two superpowers that could further complicate the South American country's path out of default.

Around a tenth of Venezuela's $150 billion foreign debt pile is estimated to be loans from China that the OPEC member was paying in oil cargoes – until the US seized Venezuelan President Nicolas Maduro earlier this month.

Debt experts said the ramifications of China's claim on the cargoes and any clash with the United States could make it tougher for Venezuela to restructure its debt after a 2017 default and put at risk Beijing's cooperation in restructuring deals for other developing nations.

"Even under the best circumstances, this was going to be very messy – trying to disentangle where all these creditors stand in the credit hierarchy," said Christopher Hodge, chief economist with Natixis and a former US Treasury official.

"The fact that now America is controlling all the finances into and out of the country... this seems to be unprecedented to me, that we're going to have such entanglements, such opacity about the finances of a government," Hodge said.

While Washington currently controls only oil sale proceeds, Hodge noted that these are Venezuela's main source of revenue.

Oil for debt

Documents and sources from state-run oil firm PDVSA show three supertankers have been shuttling between Venezuela and China over the last five years carrying oil for interest payments under the terms of a temporary deal struck in 2019. But these shipments are only a fraction of Venezuela's total crude exports to China.

AidData, a research lab at the US university William & Mary that tracks lending, said some cash proceeds from oil sent to China went into an account controlled by Beijing and on to service the debt – even as sanctions and default blocked payments to many of Venezuela's other creditors.

The Trump administration has now said that proceeds from the sale of Venezuela's oil will go into a Qatar-based account controlled by Washington, potentially giving the US President himself substantial leverage over which creditors get paid, and when.

In response to a request for comment on the cargoes and debt payments, China's foreign ministry said Beijing "has repeatedly stated its position".

Beijing condemned the redirection of Venezuelan oil exports during a 7 January news conference, adding "legitimate rights and interests of China and other countries in Venezuela must be protected".

White House spokeswoman Taylor Rogers told Reuters that Trump had brokered an oil deal with Venezuela that "will benefit the American and Venezuelan people".

The Trump administration is allowing China to purchase Venezuelan oil but not at the "unfair, undercut" prices at which Caracas sold the crude previously, a US official said on Thursday.

Traders managing Venezuelan oil sales have offered some to Chinese refiners, but these are private market transactions, not intended as debt payments.

"The people of Venezuela will collect a fair price for their oil from China and other nations," the US official said.

The Venezuelan communications ministry, which handles all press inquiries for the government, did not immediately reply to a request for comment.

Other options

Trump could yet make a deal with China. However, the planned US takeover of Venezuela's oil sector and control of its revenue could upend the hierarchy of creditors, restructuring advisors warn.

"All of these things will have the practical effect of subordinating the claims of legacy debtholders," said global sovereign debt expert Lee Buchheit, adding it was unclear if Trump had the legal right to determine who gets paid first.

Some $60 billion of Venezuela's bonds tipped into default in 2017, and a restructuring agreement is essential to enable it to borrow again and attract new investment.

In a typical restructuring, bilateral lenders come together and agree what losses they will accept, usually via the Paris Club of creditor nations. This sets the bar for the "comparable" losses private lenders – bond investors, banks and others – must take.

"Comparability of treatment will be a real challenge, particularly if the US controls the use of oil revenues," said Mark Walker, a longtime sovereign debt advisor who previously worked on potential Venezuelan restructurings.

Pushing China

If the US pushes China to swallow significant writedowns on its debt – and China digs its heels in – it could slow a restructuring and hinder Venezuela's economic recovery in the process.

That could keep Venezuela "in very dire straits during the foreseeable future", said Jean-Charles Sambor, head of emerging market debt with TT International, which holds Venezuelan bonds. In turn, this would limit how much the country can afford to repay to bondholders and other creditors.

China has little immediate leverage. Countries typically do not take other nations to court or arbitration over lending claims, Walker said, and would need to settle the situation "on a government-to-government basis".

But ramifications are possible: China is the largest bilateral lender to the developing world and its cooperation with the Paris Club has been crucial over the past decade. Beijing agreed restructuring terms via a platform called the Common Framework during Ghana, Zambia and Ethiopia's debt restructuring talks.

"China's obvious leverage is to refuse to cooperate in future Common Framework sovereign debt workouts until it feels that it has been treated fairly in Venezuela," Buchheit said. "And that threat would have some force."