Rosneft could take control of 49.9 % of Citgo – the troubled U.S. business of Venezuela’s state-owned oil company, media are warning.
PDVSA used the stake as collateral for a $1.5 bln loan provided by Rosneft last year, and the Russian company immediately filed a lien with the Delaware Department of State asserting its right to ownership in case PDVSA defaults on debt payments. Now, the possibility of a default has become more pronounced, spurring speculation about what might happen should this possibility turn into a certainty.
The loan deal itself sparked protests in the U.S. energy industry, with ConocoPhillips and a Canadian miner, Crystallex, asking the federal court in Delaware to cancel the lien, even though the use of stock as collateral in loan agreements is standard practice. This time, however, there are geopolitical implications weighing in, and it’s these implications that will, in all likelihood, make the idea of Russian ownership of a U.S. business purely theoretical.
A default on the part of PDVSA is seen as likely by rating agencies and observers. With the OPEC production cut deal failing to lift international oil prices in any substantial way, Caracas is quickly running out of options. At the start of the year, the country placed a $5 bln bond issue with state-run Banco de Venezuela, in its latest desperate attempt to raise some cash for essentials such as food and medicine.
Venezuela’s foreign currency reserves have dwindled to just $10.7 billion, from about $30 billion in 2011, and it is facing more than a dozen lawsuits from companies whose assets in the South American country were nationalized by Hugo Chavez, and who are asking for billions of dollars in compensation.
Against this background, a default looks more like a certainty than a remote possibility, although Caracas managed to renegotiate part of its debt late last year, moving substantial payments due this year to 2020.
At the time the loan with Rosneft was agreed, Johns Hopkins Economics professor Steve Hanke commented that in case PDVSA defaults, «the Russians will call the tune and pick up the pieces,» adding that «The Russians are very smart and know how to structure air-tight deals in cases like this.»
The deal may very well be air-tight, and Rosneft’s Igor Sechin is smart, but that doesn’t mean Citgo will fall into Russian hands the moment PDVSA announces that it is unable to service its debt.
For starters, there are still U.S. sanctions in force against Russian entities and individuals, one of these Igor Sechin himself, along with Rosneft as a whole. Now, President Trump has sent signals that he is willing to discuss a removal of the sanctions, but these signals have yet to turn into specific actions and this is unlikely to happen soon given the strong anti-Russian attitudes within Trump’s own party, which dominates both chambers of Congress.
Even if the sanctions are lifted, allowing Rosneft to seize Citgo, with its 3 refineries and oil transport infrastructure, there is the Committee on Foreign Investments in the United States, as CBS notes in its analysis of the Rosneft-Citgo situation. The committee’s task is to review the national security implications of foreign investments in the country. Given this focus and the current temperature of U.S.-Russian relations, it’s difficult to believe the committee would greenlight such a deal.
The final straw would be the likely public reaction to a major U.S.-based asset acquisition by Rosneft – a company so close to the Kremlin that it is widely seen as a government agency rather than a business entity. It is unlikely that the new administration would consider granting a deal as large as Citgo’s ownership to Rosneft, whether or not the deal itself is air-tight.