In a desperate bid to boost oil prices and rescue its economy, Venezuela has turned to both Russia and China for help. But how likely are they to lend Venezuela a helping hand?
The only country that could help Venezuela is not Russia, but China. Photo: AP
On the brink of economic collapse, Venezuela is trying to obtain higher prices for its oil. In this struggle, the country was hoping for some assistance from Russia, which has also been hit hard by falling energy prices. However, while being linked together by a common dependence on oil, the two countries are unlikely to ever develop a unified strategy.
Attending the 70th anniversary of the end of the Second World War in Beijing, the leaders of Russia and Venezuela met for talks, during which Vladimir Putin and Nicolas Maduro shared opinions on how to stabilize oil prices. During these talks, Maduro told Putin that he had “some more or less good ideas” in terms of oil policy.
What these ideas were has not been made public, but judging by the previous maneuvers attempted by the Venezuelan president on the world stage, we can easily assume what these are.
Venezuela’s economy on the verge of collapse
For more than a year, Maduro has been touring oil-exporting countries, trying to get them to agree on reducing their volumes of oil extraction. While one year ago, his goal was to achieve an increase in oil prices to the $100-per-barrel level, now, realizing the futility of this effort, Maduro has lowered his bar of expectations. Now he is only insisting on convening an Emergency Summit of OPEC in December in order to discuss the issue of oil prices.
The Venezuelan president seems to be on the verge of despair. According to the latest official figures, Venezuela’s budget deficit in 2014 reached 20 percent of national GDP, and since that time, these statistics are no longer being published in that country. According to Bloomberg, during the period March to July of this year, Venezuela had “eaten up” about $1.8 billion of its foreign exchange reserves. As of today, these stand at $16.4 billion.
And Scotiabank analyst Joe Kogan calculates that in the best-case scenario, these will be spent by August 2016 – and under less favorable circumstances, as early as April 2016. And if that happens, then Venezuela, a country with the largest proven oil reserves in the world, will be facing default.
The extremely chaotic state of the Venezuelan economy is also evidenced by the spread between the official exchange rate of the local currency to the dollar and the black market rate. Officially, the dollar is worth 6.3 bolivars, but in “hand-to-hand” transactions, it is possible to receive over 700 bolivars.
One can easily imagine how this creates a great environment for currency speculators and smugglers of all kinds, especially when we take into account the fully state subsidized symbolic price of gasoline in the country. In Venezuela, one can fill up a 40-liter car tank for less than one U.S. cent at the black market exchange rate. Who will be able, in such circumstances, to stop the flow of fuel smuggling to neighboring Colombia, where gasoline costs four thousand times more?
While the Venezuelan government is losing tens of billions of dollars annually in subsidizing gasoline prices, it is investing huge sums into the state-owned Petroleos de Venezuela. As Orlando Ochoa, professor of economics at the Universidad Catolica Andres Bello, pointed out, in the first quarter of this year, the financing provided to this company has increased by 36 percent, when compared to the same period last year.
However, oil production levels in the country continue to fall. When Chavez came to power in 1998, 3 million barrels were produced every day, while today this figure barely exceeds 2.4 million barrels, which, according to Professor Ochoa, is a direct result of the primary task set by Chavez, and then Maduro – the strict observance of the plan to build “socialism of the 21st century.”
Under these circumstances, only a miracle can save the Venezuelan economy. According to local economists, a deficit-free state budget is only possible if oil prices rise to $120 per barrel.
Also read: "Why it's too early to worry about $40 oil"
Playing with paper oil
Maduro understands that achieving a price of $120 for oil in the foreseeable future is unrealistic. So he is trying to trigger anxiety in oil-exporting countries that are members of OPEC, and those who are not members of this organization, to achieve an increase in oil prices.
Sergei Pravosudov, director of the National Energy Institute of Russia, said that, “It is important not so much that production be really reduced, but that the coming reduction be clearly stated. The problem is that the price of oil is determined primarily by traders, who invest huge amounts of money into the so-called ‘paper oil’ market.”
Pravosudov goes on to say that, “And here we must understand that – the ‘paper oil’ market is several times bigger than the real oil market, and prices in the ‘paper market’ are determined, in the first place, by the expectations of its participants.”
“Depending on their expectations, oil traders start to make their play either towards increasing or decreasing prices. In other words, for the price of oil to rise, traders must feel that the world economy will soon be experiencing a shortage of oil. Only when this happens, will they begin to increase their bids.”
Venezuelan President Nicolas Maduro, center, enters a hall for a meeting with Russia's President Vladimir Putin, not pictured, at the Kremlin in Moscow, Tuesday, July 2, 2013. Photo: AP
Prices have fallen, the bluffing remains
In August of this year, this game of traders’ expectations led to beneficial results for Venezuela. According to the Azerbaijani Internet portal haqqin.az – Venezuela and Russia “shook up” the oil market. After consultations were held between these two countries, accompanied by a Venezuela’s desperate appeal to OPEC, requesting an emergency summit, Brent futures on the Intercontinental Exchange (ICE) rose by more than 9 percent, Crude Oil WTI futures on the New York Mercantile Exchange jumped by 8.8 percent.
However, this increase did not last long. According to the analysts, it did not meet the current downward trends in the global market, caused by oversupply and slowing economic growth of large energy consumers such as China.
Most likely Maduro will have no other choice than to continue bluffing. But will Russia help him in this? Mr. Pravosudov considers that Russia is unlikely to agree to cutting of its own oil production, as this has never been done in the past, and is unlikely to do be done now.
“Today, low oil prices and the accompanying lost revenues to the Russian federal budget are in part compensated by the ruble’s inflation,” said the expert. Russian oil exporters are obliged to sell their foreign exchange earnings, as taxes and wages are paid in rubles. The result is that our state budget – in rubles – is not losing too much. In addition, we have the means to deal with such a contingency, in the National Welfare Fund and the Reserve Fund. In other words, we have what is needed to survive through periods of falling oil prices – unless, of course, such a situation lasts a long time.”
Intentions not to reduce but rather, to increase oil production have been confirmed by Igor Sechin, head of Rosneft. He said that Russia’s oil production could be increased to 700 million tons per year (compared with 526.7 million tons last year). The forecasts of the Ministry of Economic Development are more modest, but also indicate increased extraction – according to the Ministry, oil production in Russia will reach about 530.5 million tons in 2015.
Sergey Pikin, director of the Energy Development Fund, also said that Maduro is unlikely to achieve understanding among OPEC members.
“Selling OPEC on the idea to reduce production is very difficult,” he considers. “Being against such a decision are Saudi Arabia, Kuwait and Qatar. And as long as these countries do not feel the heat themselves, they will not change their position.”
The problem, according to the expert, lies in the fact that there is a need for large cuts in production levels – at least one million barrels per day. And if such a reduction is not fully approved by OPEC, the vacated market share will be immediately filled by other suppliers, which will increase their own production volumes.”
Venezuela’s plan to binge on an oil cocktail
For quite some time now, Venezuelan authorities have been trying to implement another plan. The problem lies in the fact that in the past, this country has quickly used up its reserves of light oil, and what remains today is heavy oil, resembling tar, which practically does not flow.
The idea of Maduro and his team is to obtain light oil from other countries, mix it with local heavy oil, and deliver this new “oil cocktail” to the market. Earlier, Venezuela had made such proposals to Algeria, Nigeria, and Angola, but recently it has turned with this idea to Russia.
However, Russian experts are also skeptical about prospects for this type of cooperation. According to Rustam Tankaeva, leading expert at the Union of Oil & Gas Producers of Russia, the way in which Venezuela wants to raise prices for the “black gold” is not a feasible idea.
“In wanting to increase the price of oil, Venezuela is increasingly seeking to solve its own national budget problems,” he said. “No country wants to mix its own oil with Venezuela’s. Essentially, the idea of creating a new oil variety will benefit only Venezuela, but this can never lead to higher prices for the “black gold.” “Moreover, once you start mixing,” continues the expert, “oil prices will drop, as the supply will increase.”
However, Venezuelan authorities have not lost hope. They are encouraged by long-term plans, which, year after year, they have been promised by Rosneft, which is led by a big fan of the Latin American left, Igor Sechin.
Earlier this year, Rosneft announced intentions to invest $14 billion into the development of oil fields in Venezuela. Moreover, on the eve of the meeting between Putin and Maduro in Beijing, Rosneft announced a further expansion of its activities in Venezuela, “involvement in offshore projects in the Venezuelan section of the Caribbean, in the Gulf of Venezuela, and the Atlantic coast of Venezuela.”
Apparently, the leadership of Russia’s largest company does not worry about the plight of this country, which is on the brink of collapse.
Also read: "Russia, Venezuela and Iran: Axis of oil"
Only China can help, but will it?
Meanwhile, the only country that could help Venezuela is not Russia, which itself is going through a deep economic crisis, but China. Therefore, it is no accident that Putin and Maduro decided to hold their meeting in Beijing. As the Venezuelan leader stated in the Chinese capital, “He had travelled 9,000 miles to ensure the receipt of resources that are needed by Venezuela, a country experiencing great difficulties, which the whole world knows about.”
Maduro was hoping to obtain a Chinese loan for at least $20 billion – this is what the country needs to increase the level of oil production, and to buy the necessary food supplies for the population. “If China will provide $20 billion to Venezuela, then the latter can escape a serious crisis in 2015 and 2016,” says Alejandro Grisanti, analyst at Barclays.
However, in recent years, China has been very wary when it comes to responding to requests for loans. Beijing gave Maduro a loan of $5 billion – which is enough just to keep the Venezuelan economy afloat until the end of this year, no more than that.
Venezuelan economists say that no one should expect any more “gifts” from Beijing.
“The inefficient Venezuelan government has already spent half of the $20 billion loan that it received from China in 2010,” said Orlando Ochoa.
“It has become obvious that the authorities have no ideas on how to solve the problem of food imports, or to meet the country’s external debt obligations for 2016. Under such circumstances, the guarantees that Maduro gives foreign countries are very risky. When a government finds itself in such a desperate situation, it can offer its natural resources for a pittance, just to survive.”