Venezuela has reached a critical point. To avoid default, state oil and gas company Petroleos de Venezuela (PDVSA) must make $3 billion in foreign debt payments over the next two months, and the government is scrambling to find the cash to do so. Although Venezuela has long lived with the risk of default on foreign debt, reports have surfaced that Caracas has yet to seal agreements for loans it will need to make the payments — both those due soon and for the remainder of the year.
PDVSA has for months been negotiating the terms of a loan from Russian oil company Rosneft — a deal collateralized by Venezuelan bonds that would give Rosneft a stake in a joint oil venture in the country. There is also a reported $500 million loan deal that the country is negotiating with U.S. investment fund Fintech Advisory Inc. Both are crucial to Venezuela's ability to continue making debt payments. Venezuela has been traveling the path toward its current dire straits for a long time. It has just over $10 billion in (mostly illiquid) foreign reserves remaining, and PDVSA's income this year will probably be close to 2016's figures — the company's oil production is expected to hover around 2.5 million barrels per day (barely 5,000 bpd more than last year). It is apparent that Venezuela has reached a point where the odds of a default are more than remote.
If it misses its debt payments, PDVSA could find its lines of credit even more restricted and make some service companies wary of doing business with it. The default would not only kick off a lengthy legal dispute as foreign creditors sue PDVSA, but it also almost certainly would hamper oil production as investors shy away. Additional loans from China to PDVSA would also be in doubt. If companies that provide key services to PDVSA pull out of Venezuela, the drop in production could be even sharper. How creditors would go after Venezuelan assets or which companies would reduce their presence in the country is unknown, but at any rate, Venezuela simply cannot afford a major drop in oil production. Given that 95 percent of the country's exports are oil-related and that it relies on export revenue to pay for imports, any significant decline in production would quickly and significantly reduce the nation's food supply. A default would likely translate over the coming year into lower oil production, even further restricting food imports. Venezuela's already high inflation would skyrocket, and widespread shortages would become more acute.
If Venezuela defaults and oil production declines, more of its citizens will likely flee the country. Brazil's neighboring Roraima state and Colombia's Cucuta border crossing are the most logical initial destinations for such a migration, as are, to a lesser extent, nearby Caribbean islands such as Aruba. Fleeing Venezuelans most likely would have to travel by land to Colombia and Brazil, given that airline tickets are scarce and Venezuelan authorities probably would move to shut down mass emigration by air. In case of heavier emigration, even the Cucuta crossing could draw scrutiny, forcing would-be refugees to take circuitous routes across the Colombian border.
The political elites running the show in Caracas have been planning for the possibility of default and its associated problems.
The political elites running the show in Caracas have been planning for the possibility of default and its associated problems. President Nicolas Maduro, former National Assembly speaker Diosdado Cabello and Vice President Tareck El Aissami, among others, have been at the center of crafting a survival strategy for the ruling United Socialist Party of Venezuela (PSUV). Realizing that the increasingly unpopular party might not win if fair elections were held, its leaders have laid the groundwork for de facto one-party rule without heavy popular support. Their goal at this point is to cling to power by deflecting all threats to government control. As part of its ongoing plan to ensure its continued rule, the government will cull the field of opposition parties and try to set up an auxiliary militia in case of wider unrest. Venezuela's Supreme Court on March 30 also granted the president the power to approve new joint ventures with foreign oil companies, allowing him to bypass the hostile opposition-controlled National Assembly.
Presidential elections are scheduled for 2018, and regional elections that were supposed to occur last year remain delayed. According to a source close to the country's security establishment, the government is considering the possibility of holding municipal, regional and presidential elections at the same time in 2018, although it first wants to exclude as many opposition political figures as possible from running.
Standing in the way of the government strategy to ride out a default is the United States. Any moves Caracas makes to further delay elections or crack down on the opposition — necessary actions to rule a one-party state — could invite further U.S. sanctions. Venezuela's rulers, alert to this threat, have tentatively reached out to Washington. In March, a Stratfor source said the Venezuelan government was planning to open a back channel of communication with the United States. As part of its outreach to Washington, Maduro instructed Foreign Minister Delcy Rodriguez and Venezuelan Oil Minister Nelson Martinez, the chairman and CEO of PDVSA's U.S. subsidiary Citgo, to explore the possibility of further opening Venezuela's energy market to U.S. corporations.
This tracks closely with media reports that emerged Monday claiming that business executives close to Donald Trump Jr., son of the U.S. president, had discussed with National Security Council officials the possibility of loosening sanctions on Venezuelan officials in exchange for business opportunities in Venezuela. The intent by Venezuelan officials appears to have been to buy them some time to decide how to proceed with regional and presidential elections. Still, the offer, made in early February, did not prevent Washington from sanctioning El Aissami that month. There also have been indications that the Trump administration may be willing to enact additional sanctions against Venezuela.
Venezuela faces the real possibility of a sharper decline in already tenuous economic and social conditions. A foreign debt default would create more long-term instability that could affect neighboring states. The ruling PSUV has already started down the path to creating a one-party state as it plots to survive the looming crisis. In its preferred outcome, the Venezuelan government would rule through a combination of threats and concessions to a mostly docile opposition. As Venezuelan citizens become hungrier, social unrest would likely increase, but the government apparently intends to cling to power (at least until the 2018 vote), no matter the cost. At this point, the United States and the uncertain risk of action by the Venezuelan armed forces are the only notable obstacles hindering the PSUV's moves to consolidate power.