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Special Report: Vladimir's Venezuela - Leveraging loans to Caracas, Moscow snaps up oil assets

From Reuters - August 11, 2017

Caracas/Houston (Reuters) - Venezuelas unraveling socialist government is increasingly turning to ally Russia for the cash and credit it needs to surviveand offering prized state-owned oil assets in return, sources familiar with the negotiations told Reuters.

As Caracas struggles to contain an economic meltdown and violent street protests, Moscow is using its position as Venezuelas lender of last resort to gain more control over the OPEC nations crude reserves, the largest in the world.

Venezuela's state-owned oil firm, Petroleos de Venezuela (PDVSA), has been secretly negotiating since at least early this year with Russia's biggest state-owned oil company, Rosneft (ROSN.MM) - offering ownership interests in up to nine of Venezuela's most productive petroleum projects, according to a top Venezuelan government official and two industry sources familiar with the talks.

Moscow has substantial leverage in the negotiations: Cash from Russia and Rosneft has been crucial in helping the financially strapped government of Venezuelan President Nicolas Maduro avoid a sovereign debt default or a political coup.

Rosneft delivered Venezuelas state-owned firm more than $1 billion in April alone in exchange for a promise of oil shipments later. On at least two occasions, the Venezuelan government has used Russian cash to avoid imminent defaults on payments to bondholders, a high-level PDVSA official told Reuters.

Rosneft has also positioned itself as a middleman in sales of Venezuelan oil to customers worldwide. Much of it ends up at refineries in the United Statesdespite U.S. sanctions against Russiabecause it is sold through intermediaries such as oil trading firms, according to internal PDVSA trade reports seen by Reuters and a source at the firm.

PDVSA and the government of Venezuela did not respond to requests for comment.

The Russian government declined to comment and referred questions to the foreign ministry and the ministries of finance and defense, which did not respond to questions from Reuters. Rosneft declined to comment.

Russias growing control over Venezuelan crude gives it a stronger foothold in energy markets across the Americas. Rosneft now resells about 225,000 barrels per day (bpd) of Venezuelan oil - about 13 percent of the nations total exports, according to the PDVSA trade reports. Thats about enough to satisfy the daily demand of a country the size of Peru.

Venezuela gives Rosneft most of that oil as payment for billions of dollars in cash loans that Maduros government has already spent. His administration needs Russias money to finance everything from bond payments to imports of food and medicine amid severe national shortages.

For a graphic detailing the decline of Venezuela's oil industry, see: tmsnrt.rs/2fwsuCV

Venezuela's opposition lawmakers say Russia is behaving more like a predator than an ally.

"Rosneft is definitely taking advantage of the situation, said Elias Matta, vice president of the energy commission at Venezuela's elected National Assembly. They know this is a weak government; that it's desperate for cash - and they are sharks.

Matta echoed many others in the opposition-majority congress who have blasted corporate deals they say are underpinning Maduros efforts to establish a dictatorship.

The Venezuelan government has said previously that Russias investment in its oil industry shows confidence in PDVSAs financial stability and the nations business opportunities.

Maduros administration has grown increasingly dependent on Moscow in the past two years as China has curtailed credit to Venezuela because of payment delays and the corruption and crime faced by Chinese firms operating there, according to Venezuelan debt analysts and two oil industry sources.

Many multinational firms worldwide, meanwhile, have all but written off their Venezuelan operations amid the nations tanking economy and chronic shortages of raw materials.

Rosneft is making the opposite play - using Venezuelas hard times as a buying opportunity for oil assets with potentially high long-term value.

"The Russians are catching Venezuela at rock bottom, said one Western diplomat who has worked on issues involving Venezuelas oil industry in recent years.

As other companies shutter operations here, Rosneft has expanded to an additional floor of its office tower and added staff. The Russian firm has poached PDVSA professionals and brought in more Russian executives, two sources close to Rosneft told Reuters.

The corporate expansion provides a striking contrast to the scene on the streets below these days, in the once-thriving business district of Caracas.

As Rosneft staffers work in swanky offices alongside posters of Russian President Vladimir Putin and a bust of Hugo Chavez - the late Venezuelan leader and socialist icon - crowds of young men outside often throw rocks and Molotov cocktails in escalating protests of Chavez successor.

Rosneft currently owns substantial portions of five major Venezuelan oil projects. The additional projects PDVSA is now offering the Russian firm include five in the Orinoco - Venezuela's largest oil producing regionalong with three in Maracaibo Lake, its second-largest and oldest producing area, and a shallow-water oil project in the Paria Gulf, the two industry sources told Reuters.

In a separate proposal first reported by Reuters last month, Rosneft would swap its collateral on 49.9 percent of Citgo [PDVSAC.UL]the Venezuelan owned, U.S.-based refinerfor stakes in three additional PDVSA oil fields, two natural gas fields and a lucrative fuel supply contract, according to two sources with knowledge of the negotiations.

Under the proposal, Rosneft would also take increased management control over all the joint oil projects between the two firms.

Rosneft secured the collateral late last year on a loan of $1.5 billion to PDVSA.

The negotiations over a collateral swap are driven in part by a recent threat from U.S. President Donald Trump to sanction Venezuelas oil sector as punishment for Maduros efforts to undermine the nations elected congress.

Rosneft has already been sanctioned by the United States over Russias annexation of Crimea from Ukraine in 2014. Such actions require U.S. firms to end business relations with sanctioned entities.

Russian Oil Deals Undermine Democracy

Maduros need for Russian cash played a key role in a move by his political allies earlier this year that destabilized Venezuelas already teetering democracy, the top Venezuelan government official told Reuters.

In March, the nations Supreme Court - whose members are loyal to Maduro - took over the powers of the opposition-controlled National Assembly. A majority of elected Assembly members opposed any new oil deals with Russia and insisted on retaining power to veto them.

Days later - after fierce national protests against the action - the court returned most powers to the national legislature at Maduros public urging. But the court allowed the president to keep the legal authority to cut fresh oil deals with Russia without legislative approval.

The episode was pivotal in escalating daily street protests and clashes with authorities that have since caused more than 120 deaths.

Maduro needed sole authority to cut new oil deals to clear the way for Rosneft's expansion, the top Venezuelan government official told Reuters.

"Pressure from Russia has played an important role in Nicolas Maduro's decisions," the official said, speaking on condition of anonymity because he was not authorized to make public comments.

Rosneft said this month that it has lent a total of $6 billion to PDVSA. In total, Russia and Rosneft have delivered Venezuela at least $17 billion in loans and credit lines since 2006, according to Reuters calculations based on loans and credit lines announced by the government.

Venezuela does not publish the full details of the debts it owes Russia.

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