Embattled Venezuela Issues $5 Billion in Sovereign Bonds, Pledges 50 Percent Stake in Citgo to Russia

Tuesday January 10, 2017

Civil unrest, food shortages, and hyperinflation: nothing has changed in Venezuela going into 2017, with a notable exception being that it has issued $5 billion in sovereign bonds in a deal involving Citgo and Russia – which observers view as a desperate effort to pay the country's bills and avoid default.

This is the first time in five years Venezuela has issued bonds, and the deal coincides with a separate decision by the Nicolas Maduro socialist government to pledge a nearly 50 percent stake in Citgo as collateral for a loan from Rosneft, Russia's state-controlled energy company.

Given the widespread contention that Russia only enters into deals that weigh heavily in its favour, some analysts worry that if Venezuela fails to make good on its sizeable debts, it could exacerbate Russia's already contentious relationship with the U.S.: that's because Citgo, which is owned by Venezuela state oil company Petroleos de Venezuela SA, is also a major U.S. oil refiner.

Steve Hanke, director of the Troubled Currencies Project at the Cato Institute, explained to CNBC, "If anything goes off the rails, the Russians will call the tune and pick up the pieces.

"The Russians are very smart and know how to structure air-tight deals in cases like this."

Jan Dehn, head of research at Ashmore Group, says the main external risk "is oil prices; U.S. interest rates do not matter much at this point, because the Venezuelan bond [already] trades at extremely wide spreads."

Dehn and other observers are hoping for the best by pointing out that the Maduro government is deprived of political support and ripe for being overthrown; however, yet more pundits believe Venezuela will encounter even more difficulties this year, and Simon Quijano-Evans, emerging markets strategist at Legal & General Investment Management, says, "2017 is more of a decisive year for Venezuela than previous years, as reserves" are running low and barely cover external debt payments.

If International Monetary Fund forecasts are any indication, the year won't be so much "decisive" for the republic as it will be outright disastrous: IMF expects inflation to surge to 1,660 percent in 2017 and 2,880 percent the year after.

In response, Maduro over the weekend hiked the minimum wage another 50 percent (the fifth increase in the past year, to boost the average monthly wage to $31.17, including food stamps) – and claimed his country is the victim of an economic war waged by his "opponents".

No reports have been forthcoming about Maduro's tour of oil producing nations to rally support for the Organization of the Petroleum Exporting Countries cutback deal, in which he promised the press he would propose "a new system, a new formula, to fix markets and oil prices to enable stability, harmony, continuity; I aspire to at least 10 years of stability with realistic, fair prices of oil, and I am going to achieve it."