Trump Admin Closes Venezuela Sanctions Loophole in Favour of US Bondholders

Merida, July 20, 2018 (venezuelanalysis.com) – The United States Treasury Department has modified the wording of its latest round of sanctions against Venezuela. The changes allow US bondholders to seize the South American country’s assets should the Caracas government default in the repayment of its state oil company bonds, which are due to expire in 2020.

Under the May 21 US executive order the seizure of government-owned collateral for any unpaid Venezuelan bond would have been illegal. This, however, reportedly raised concerns in Washington that the Maduro government may take advantage of the sanctions to “default on its bond obligations without consequence.”

General License 5, which was emitted by the Office of Foreign Assets Control (OFAC) Thursday, authorises US citizens and firms “to engage in all transactions related to, the provision of financing for, and other dealings in the Petroleos de Venezuela SA [PDVSA] 2020 8.5 percent bond that would be prohibited by Subsection 1(a)(iii) of Executive Order 13835 of May 21, 2018.”

The regulation makes no reference to bonds or commercial dealing other than the 2020 PDVSA bonds.

Executive order 13835 was issued by the Trump administration as a direct response to Venezuelan President Nicolas Maduro’s landslide victory in May 20 elections and builds on a series of prior financial sanctions issued in August 2017 and March 2018 as well as the March 2015 decree branding Venezuela an “unusual extraordinary threat” to US national security.

Subsection 1(a) prohibits US and foreign citizens or companies operating in the US from purchasing existing Venezuelan sovereign debt, debt held as collateral, or acquiring assets in which Caracas has a fifty percent or greater ownership stake.

Speaking back in May, Venezuela’s foreign minister described the sanctions as “crazy, a barbarity, an absolute contradiction of international law.”

Under the new modification, in the event of default, US bondholders are now free to seize a string of assets owned by the Venezuelan government, including “vessels, properties, or financial assets.”

The legal change also raises particular concerns over the future of PDVSA’s US-based subsidiary, CITGO, which is used as collateral for the bonds in question and mentioned specifically by OFAC.

CITGO, which owns three large US-based refineries, has come under heightened pressure in recent days with its president having his US visa revoked by local migratory authorities.

The firm has also been the focus of attention in a recent legal dispute between the Venezuelan state and US oil giant ConocoPhillips, which is attempting to collect the USD$2.04 billion recently awarded by the International Chamber of Commerce as compensation for the 2007 expropriation of the firm’s Venezuelan assets. Apart from targeting PDVSA’s Caribbean assets, there are concerns that ConocoPhillips will go after CITGO’s sizeable assets in the US.

PDVSA’s 2020 bonds are reportedly the only current Venezuelan bond which are not in a state of repayment delay or default. However, with international trading and borrowing difficulties increasing for Caracas, many have predicted a partial default on the repayment obligations despite rising oil prices.

The modification of the US sanctions has so far received no reaction from the Maduro government.

Amid mounting foreign financial pressure, including the inviability of using Swiss banking networks due to sanctions, the Venezuelan government has been forced to review its international trade agreements to avoid further seizures and difficulties.

This week it was announced that Caracas is due to start refining its gold in Turkey rather than Switzerland, with 20.15 tonnes of gold already heading that way this year. The gold is due to return to the Venezuelan central bank’s reserves once refined.

Venezuela’s mining minister, Victor Cano, explained, “Imagine what would happen if we sent gold to Switzerland and we are told that it has to stay there because of sanctions.”

International sanctions on Venezuela have been widely condemned by a host of world-renowned personalities and multilateral institutions, including the United Nations Human Rights Council, which credit the US-led measures with exacerbating the Caribbean country’s health and food supply problems brought on by a deep economic crisis. UN Rapporteur Alfred de Zayas has even claimed that the sanctions are responsible for excess deaths in Venezuela and has described them as a “crime against humanity.”