Author:Niall Walsh (2017)
Posted on: Global Risk Insights| October 17th, 2017
Russia’s cash and credit are helping to keep Venezuela politically and economically afloat. For Russia, access to Venezuela’s oil market is part of its objective to achieve influence in the Latin American region – and beyond.
Since oil prices crashed to a low of $24 per barrel in 2016, Venezuela’s oil-based economy has been in a state of meltdown. A sharp reduction in export revenue and a lack of petrodollars have severely compromised the Venezuelan government’s legitimacy. Unable to make adequate provision for basic needs such as food and medicine, economic turmoil has threatened the political survival of Nicolas Maduro’s government in Latin America’s once richest nation.
As a result of political repression and human rights abuses, international support has been a challenge for the Maduro regime. However, it has found a close ally in Russia which is providing the country with essential revenue. Indeed, Venezuela is increasingly dependent on Russian cash and credit in order to survive. In return, Moscow’s biggest oil firms are profiting from Venezuela’s prized state-owned oil assets.
According to Reuters, Venezuela has been secretly negotiating with Russia’s biggest state-owned oil company – Rosneft. As part of the negotiations, Rosneft has been offered ownership interests in up to nine of Venezuela’s most productive petroleum projects.
Russian leverage and Venezuelan dependence
Fifteen years ago the Moscow-Caracas relationship was one of parity. Venezuela was a leading regional economic power under the vision of Hugo Chavez. Russia, emerging from the depression of the 1990s, strongly benefited from stable commercial ties with oil-rich Venezuela.
However, today Russia is essential in keeping the Venezuelan economy afloat. This represents a major change in the dynamics of the relationship. Indeed, Russian cash for Venezuelan oil could help Maduro avoid a sovereign debt default or even a political coup. Rosneft’s payments to Venezuela’s state owned Petróleos de Venezuela (PDVSA) have already amounted to nearly 6 billion dollars. In April alone, the PDVSA received $1.02 billion from Rosneft as an advance payment for future crude supplies.
Caracas must be hoping that Rosneft’s operations in Venezuela’s oil industry will underscore confidence in the PDVSA’s financial stability and the country’s business opportunities to international investors. However, the country’s instability and dire economic situation are unlikely to attract more risk-averse investors.
Meanwhile, Russia has also positioned itself as an intermediary in Venezuela’s sale of oil to global customers. On October 3, EulogiodelPino, the minister of the PDVSA travelled to Moscow for a meeting with the director general of Gazprom International. The aim was to establish ‘‘strategic alliances’’.
Closer political ties
Russia’s support for Venezuela plays a significant role within the Venezuelan national context. At a time when Venezuela is experiencing further sanctions and isolation from Washington, support from the Kremlin provides Maduro with a degree of international legitimacy.
The significance of Russian investment in the Venezuelan economy was highlighted when the Venezuelan Supreme Court gave the government special authority to cut oil deals with Russia, despite the condemnation of the opposition. Maduro reportedly required the power to make oil deals with Russia to facilitate Rosneft’s expansion.
Economic relations between Russia and the OPEC nation have had a positive impact on the diplomatic front. On October 4, Maduro travelled to Moscow for a meeting with Russian President Vladimir Putin. During talks, Maduro thanked the Kremlin for its political and diplomatic support for the beleaguered nation. Subsequently, Maduro hailed the ‘‘extraordinary’’ working meeting with Putin which served to ‘‘strengthen ties of cooperation’’ between the two nations. Putin recognised that Venezuela ‘‘is going through uneasy times’’. He also applauded Maduro for ‘‘succeeding in establishing some contact’’ with his political opponents.
Russia appears to be taking advantage of Venezuela’s economic situation. Rosneft is benefiting from Caracas’s economic difficulties by availing of cheap oil. It is also expanding its base in Venezuela at a time of growing social unrest on the streets of Caracas.
Gaining regional leverage
Russia’s economic interests in Latin America are expanding. Russia’s traditional sphere of influence in Latin America was primarily ideological, aligning itself with socialist regimes that espoused anti-Americanism. However, Russia’s latest oil investments in Latin America underscore its more expansive influence in the region. On February 17, Rosneft announced plans to drill its first oil wells in Brazil. It was also given the green light, along with Russian company Lukoil, to bid on contracts to develop shallow-water oil fields in the Gulf of Mexico. Moreover, Argentine President Macri has welcomed Gazprom’s interest in investing in the country. Rosneft is also a provider of oil to Cuba, picking up one of Venezuela’s key customers.
Both Brazil and Mexico currently have centre-right governments, while President Macrifavours open markets. On October 4, the former Brazilian President Dilma Rousseff was in St Petersburg during Energy Week to address a forum on cooperation between Russia and Latin America. At the same event was the former Colombian President, Ernesto Samper, who spoke about the strategic significance of Russia in the Latin American region.
Russia’s wider strategy
Russian support for Venezuela may prove pivotal for the beleaguered country’s economic and political survival, but Venezuela’s difficulty is definitely proving to be Russia’s gain.
The Kremlin’s pragmatic approach to Latin America is strategically positioned on the backdrop of Donald Trump’s ‘‘America First’’ policy and China’s substantial curtailment of credit to Venezuela. This reflects Russia’s broader ambition to influence the nature of the global order, preferring a multipolar world to the dominance of superpowers such as the United States and China.