Twitter Threat May Endanger Venezuela's Oil-for-Cash China Deals

President Maduro Considers Raising Prices On Cheapest In The World Gasoline

Customers refuel their vehicles at a Petroleos de Venzuela SA (PDVSA) gas station in Caracas, Venezuela on Feb. 11, 2016.

Photographer: Wilfredo Riera/Bloomberg
  • Opposition leader says Congress may not honor Maduro deals
  • PDVSA is currently in talks with China for financing

Venezuela’s opposition Congress is threatening to undermine President Nicolas Maduro’s ability to obtain desperately needed cash.

On March 1, National Assembly President Henry Ramos Allup said in a Twitter post that Congress may declare invalid financing deals signed by Maduro -- the late Hugo Chavez’s handpicked successor -- when he’s no longer president.

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“Warning to foreign creditors: contracts in the national interest signed by the Chavista government without approval by the National Assembly will be null and void," said Allup, who has 783,000 Twitter followers. The post was re-tweeted 11,000 times and echoed by Jose Guerra, chairman of the Finance Committee.

The threat comes at a time when state-owned oil producer Petroleos de Venezuela SA is in talks with China for money that would help the company pay $1 billion of bonds due in October. Since 2007, the Asian nation has lent more than $57 billion to the increasingly cash-strapped OPEC member in return for oil. Allup’s tweet represents the latest escalation in the power struggle between Maduro and a resurgent opposition, which won a landslide victory in elections in December after pledging to unwind more than a decade of socialist controls on the economy.

“If China doesn’t send any more money, Venezuela is going to have a real problem,” said Russ Dallen, a managing partner at Latinvest in Miami. “This has an incredibly chilling effect on investment in the country. This is the nuclear option. The opposition can’t fight a conventional war because the government controls all levers of power including guns. Pulling the plug on Maduro’s access to cash is the one thing they can do and it’s the most effective.” 

On Thursday, Maduro said on state television that he reached a “major economic and financial accord with China for several years," yet Dallen said the lack of details left him skeptical that such a deal was indeed finalized. The Venezuela government did not comment on Allup’s threat, default speculation or terms of any Chinese investment.

Two weeks ago, Venezuela Oil Minister Eulogio del Pino visited Beijing for talks, but left without announcing a deal. At the same time, Venezuelan opposition leaders were in separate meetings with senior Chinese officials, according to Dallen. Venezuela is also in financing talks with India’s Oil & Natural Gas Corp.

“The Chinese are not happy with the Venezuelans,” said Miguel Octavio, the head of research at BBO Financial Services Inc., which focuses on Venezuela. “They’re more uncertain now and feel they might be last in line to collect.”

The political impasse between Maduro and Congress may crimp a rally in Venezuela’s bonds, said Luisa Palacios, managing director at New York-based Medley Global Advisors. 

The nation’s notes have returned 26.6 percent over the past month, seven times the emerging-market average. Still, swaps traders put the odds of a Venezuela default in the next five years at 91 percent, the highest in the world. The Bloomberg USD Emerging Market Venezuela Sovereign Bond Index dropped 1.1 percent at 11:40 a.m. in New York.

“If I were looking at a transaction with Venezuela, I would be very concerned that any contract put into place now could come into question down the road,” said Ray Zucaro, chief investment officer at RVX Asset Management. “This causes more uncertainty and volatility for investors.”