MIAMI - For months analyst had been asking, when would President Donald Trump make a move against Russian oil interests in Venezuela? Would he dare risk offending Vladimir Putin, accused by Democrats of interfering in the 2016 election to undermine U.S. democracy and help elect Trump.
So, it caused quite a stir when the U.S. Treasury Department announced on Tuesday it was blocking U.S. companies from doing business with a Geneva subsidiary of the Russian state-owned oil giant, Rosneft, which is accused of helping the Maduro regime bypass U.S. sanctions.
“It sends a very, very strong message that we are moving into a new stage of secondary sanctions,” said Fernando Cutz, former White House National Security Council director for South America. “All of a sudden, it’s a whole new ballgame,” he added.
However, analysts warn that the move is unlikely to stop the oil flowing from Venezuela due to the multitude of often murky ways that oil is traded, shipped and sometimes smuggled around the global marketplace. Nonetheless, it will cause significant problems for Rosneft as it seeks to avoid sanctions, as well as driving down the value of Venezuelan oil exports as Maduro seeks to entice allies with steeply discounted prices for its heavy crude, which is dense and has a high sulfur content making it harder to refine.
“This will cause headaches for Rosneft, but it’s not itself enough to change matters. It won’t cut the cord,” said Maximilian Hess, an analyst at AKE International, a political risk and security consulting firm in London. Hess, and other analysts point out that Rosneft is too big a target for U.S. sanctions and the Trump administration is unlikely to risk a head on confrontation with the Russian energy giant, which is the world’s second largest oil producer behind only the Saudi Arabian oil company, Aramco.
Tuesday’s sanction was specifically limited to Rosneft Trading in Geneva, one of more than half a dozen trading subsidiaries of Moscow-based Rosneft dotted around the world that buy and sell oil. The sanctions did not touch the rest of Rosneft’s international operations spread across 25 countries, including Venezuela, Iraq, India and Canada, including joint ventures with Exxon, the U.S. oil company and Shell, the British-Dutch company.
“If you take out Rosneft it would create huge disruption in the oil markets. You would be poisoning the well with a host of companies in different countries. You couldn’t do it unless you took two years to prepare people and let them unravel their investments,” said Hess. “I think Trump is very nervous about going too far,” he added.
While Rosneft is 50 percent owned by Russia, it is partly owned by the British oil company, BP, (20 percent) and a Qatar government fund (19 percent).
The sanctions against Rosneft Trading came only days after U.S. intelligence agencies briefed member of Congress that Russia is attempting to help Trump get re-elected in November. Trump refuted his own intelligence agencies, calling the reports “another misinformation campaign” and a “hoax” by his Democratic party opponents.
Revenues from oil and gas are a matter of life and death for Maduro and Putin. Oil and gas exports account for around 40 percent of Russia's federal budget revenues, or roughly 44.4 billion dollars, according to the Finance Ministry. By the same token, Venezuela's oil revenues account for about 99 per cent of export earnings, according to the Organization of the Petroleum Exporting Countries (OPEC). Venezuela also sits on the world’s largest proven reserves of oil and gas, though its production and revenue has fallen precipitously in recent months.
While it is hard to make an up to date calculation, revenue is estimated to have fallen from about 22 billion dollars in 2016 to as little as 9 billion in 2020, says Francisco Monaldi, a Venezuelan oil expert at Rice University in Houston.
U.S. officials stressed the seriousness of their intentions over Tuesday’s sanctions announcement, while recognizing it would not necessarily bring Venezuela to its knees immediately. “What happened [Tuesday] was one step,” Elliott Abrams, the U.S. Special Representative for Venezuela, told reporters. “There will be other steps. There will be other targets. There will be more sanctions. The pressure will not cease until Venezuela once again is able to recover its democracy,” he added.
When asked by Univision if he believed Rosneft’s oil interests in Venezuela would be impacted by the sanctions, Abrams said people in the oil industry were concerned about the legal issues it created. “I think that Rosneft Trading is actually quite vulnerable, and I think a number of the companies that it trades with, sells oil to, for example, will no longer wish to deal with it,” he said.
He added that the Trump administration planned to speak with the major consumers of Venezuelan oil in Asia about reducing their purchases. “We will be urging people who are consumers of Venezuelan oil to look elsewhere, and I think that any prudent company would start turning away from Venezuelan oil as it seeks to think about oil supplies for the rest of 2020,” he added.
That includes Spanish energy company Repsol, a significant refiner and importer of Venezuelan crude.
The sanctions are long overdue, some experts say. Until now, Russia has been making out like a bandit due to the steep discounts being offered by Venezuela in order to keep traders and shippers from turning down the ever riskier business or transporting its tainted petroleum products around the world. Industry experts say Venezuela has been forced to sell its own crude at $30 dollars a barrel, or less, well below the international market price of $53-58.
Even more ironic, Russia has also increased its own shipments of heavy ‘residuum’ crude oil to U.S. refineries in Texas and Louisiana after the Trump administration banned imports of Venezuelan crude last year.
“Russia has become the mainstay of the worst dictatorship in [Latin America’s] recent history,” Carlos Vecchio, the U.S. ambassador for Venezuela’s interim president, Juan Guaidó, said in an interview with the Spanish newspaper ABC this week.
“Today Russia takes advantage of our chaos to make money and to play geopolitics, to confront its main enemy, the United States ... Russia benefits because it has become the intermediary to trade our crude oil on the international market. It buys it at a discount, charges a commission and places it wherever it wants … earning money without investing anything,” he added.
Stopping the oil shipments is easier said than done. The Rosneft Trading office in Geneva was clearly designed to protect the company’s headquarters from becoming a target. “The Russians knew they were running a risk, so instead of exposing their crown jewels they created a shell company,” said Cutz. “What’s to stop them creating another shell company?” he added.
To avoid sanctions, Rosneft also uses oil tankers that after loading in Venezuela attempt to hide their cargo, either by turning off their ship tracking systems or transferring oil at sea from one tanker to another off the coast of west Africa, before off-loading in India where Rosneft has a large refinery, or Singapore, before heading to China.
“The achilles heel is the shipping companies. If they really want to close the noose it’s the tankers,” said Jorge Piñon, an oil industry expert at the University of Texas at Austin. He noted two recent examples of crude oil tankers that switched their flags last year to avoid the Venezuela sanctions. One ship, the Nedas, flew the Greek flag until May last year before changing its name to Esperanza, and adopting the Cuban flag.
“You might not see the name Rosneft on a cargo. They can pull names off the shelf anywhere,” he said, describing it like a shell game. “Even though China is showing zero imports from Venezuela, it’s getting oil from Singapore. You can see the increase there. Everyone knowns it’s Venezuelan crude.’
Part of the sanctions busting problem is that Venezuela owes large debts to Russia and China which it pays off with oil. These debt payments are exempted from the embargo as they are pre-existing financial arrangements. China does not release its financial data, but the debt is believed to still run in the billions of dollars, meaning it could continue to receive Venezuelan oil for years to come – though Venezuela gets no cash in return.
The debt with Russia is on the verge of being paid off, begging the question what Russia will do when it no longer has any debt, or interest payments, to hide behind.
Tanks and banks
Besides debt, Rosneft owns large stakes in half a dozen oil production projects in Venezuela, such as PetroMonagas and PetroMiranda, as well as 49 percent of the U.S. refiner, Citgo, notes Russ Dallen, managing director of Caracas Capital, a Venezuela-based boutique investment bank. It has also become the largest client for Russian weapons in Latin America, with the purchase of kalishnikov rifles, Sukhoi fighter jets, T72 tanks, helicopters and an S-300 anti-aircraft missile defense system.
Russia and Venezuela have a joint venture bank, Evrofinance Mosnarbank. “Combining an arms dealer with a dubious Venezuelan bank used for kickbacks ... what could possibly go wrong?” quips Dallen.
In a further sign of defiance, Russia’s foreign minister Sergei Lavrov, visited Venezuela two weeks ago and slammed the U.S. sanctions. “We have agreed to deepen our economic, commercial and investment cooperation in several areas despite the illegitimate sanctions,” Lavrov said, following a meeting with Maduro.
In the past, U.S. officials have downplayed Putin’s messing with Washington in its backyard as a clever ruse to magnify his geopolitical importance. But it’s arguably Rosneft’s CEO, Igor Sechin, who holds the most influence in Venezuela. “Sechin has single-handedly been driving the policy. He is one of the most powerful men in the Kremlin. Were he to give up on Venezuela that would really weaken Maduro’s position,” said Hess.
While Lavrov was making only his first trip to Caracas this month, Sechin, who speaks fluent Spanish, is a frequent visitor. Russia’s geopolitical games in the region haven’t turned out so well either, as left wing regimes have fallen in Bolivia and Ecuador and Moscow’s old ally in Nicaragua, Daniel Ortega, has been enveloped in crisis. “The geopolitical angle was the cherry on the cake, but the oil market itself is the cake,” Hess said. “Having a big say in an oil market so far from home, is far more important that playing political games.”
It remains unclear what it will take to prize Moscow away from Maduro and Venezuela’s rich oil and gas deposits. “The thing is, we can go one suffocating Venezuela’s economy more and more, but what we don’t know is whether it will lead to anything," said Cutz. "Is the thinking that people will go out on the streets and protest, or will they just flee to Colombia? We just don’t know,” he added.