Streetwise Professor

February 27, 2018

Well Played Igor, Well Played–But Not Well Paid, Collateral Notwithstanding

Filed under: Economics,Energy,Politics,Russia — The Profesor 2 @ 7:33 pm

I recall being quite amused at those who panicked over Rosneft investing large amounts of money in Venezuela’s cratering national oil company PDVSA, thinking that it gave the Russians a vital foothold in America’s back yard. They’ve outsmarted us again! said this lot.

My thought was the exact opposite: they were utter fools for plunging billions into a country and a company run by socialist lunatics (excuse me, “Bolivarian” lunatics), and figured that it would not go well:

Rosneft lent large money to a deadbeat. It’s not going to get paid back so it is seizing assets, and will end up losing money. Playing repo man is hardly the road to riches. It just mitigates the losses from making a bad loan, and it is the bad loan that is the real story here.

But it gets better!  Repo Man Igor outsmarted himself by getting Rosneft’s collateral in the US in the form of a lien on Citgo’s US refineries.  But given sanctions, the probability that he will be able to repossess them can be rounded up to zero.

Now oil trading firm Mercuria senses weakness, and is involved in an effort to take the collateral off Igors hands:

Commodity trader Mercuria has asked the US Treasury for permission to buy out a $1.5bn loan between Russia’s Rosneft and Venezuela’s state oil company, which had raised the prospect of Moscow taking control of refineries on US soil.

. . . .

“Rosneft would have faced an uphill struggle to get approval to exercise a stake in Citgo so this avoids a potential diplomatic strain between the US and Russia if this deal goes ahead,” said Mr Mallinson.

“If this signals that Russia is looking to reduce its loans to Venezuela rather than offering more support that leaves Caracas with nowhere obvious to turn.”

Rosneft has said it is unwilling to extend further loans to PDVSA, many of which have been secured against crude supplies, as the country’s economic crisis starts to hit oil output from the country. The Russian company is seen as keen to reduce its exposure to Venezuela as oil output falls, with the country seen as precariously close to defaulting on its debts.

Well played, Igor. Bravo! The move was so brilliant, that now he’s desperate–sorry, “keen” doesn’t quite cover it–to get out.

Rosneft’s bargaining leverage is pretty much nonexistent.  PDVSA is circling the drain, with a collapse in oil output and revenues.  It can’t pay back the Russians. The collateral is off limits to them.  So Rosneft faces a choice between a big fat zero, and whatever Mercuria et al deign offer it. Perhaps Rosneft can scare up other bidders, but the company holds a very weak hand, and will be lucky to walk away with kopecs on the ruble.

Keep this in mind whenever anyone tries to convince you of Putin’s or Sechin’s strategic brilliance. In this case, they have brilliantly succeeded in flushing several billion into the Venezuelan cesspool, with no real recourse or exit strategy.

They can take some comfort, though, having lent Venezuela a mere $5 billion. The even more brilliant Chinese lent 11 times as much. So there’s that, Igor!

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  1. Not sure I’d like to be in Maduro’s shoes right now. I don’t think he’d be keen to shake the hand of two Russians and/or Chinese in quick succession, especially at an airport…

    Comment by Mark — February 27, 2018 @ 9:00 pm

  2. Actually, lending taxpayer money to basket cases with subsequent write-off and handsome kickbacks is a boring SOP for Putin’s kleptocracy, so not sure this case is remarkable in any way. You can be certain Igor has gained rather than lost through this transaction. And the suckers back home got another reason to be proud of their superpower status as seen on TV. Win-win-win-win all around.

    Comment by Ivan — February 28, 2018 @ 4:30 am

  3. Well, SWP, you have written, and Ivan reminds us, that Putler, Sechin and company simply raid other oligarchs to come out whole personally.

    Putler and company can’t really raid other assets in Venezuela – so who’s going to be sent to the dustbin in Roosha to keep Putler and Sechin whole as a result of this Venezuelan adventure?

    Or is that not in the picture?

    Comment by elmer — February 28, 2018 @ 8:31 am

  4. Hmmmm, I wonder if their losses will eclipse the debacle of our previous fearless leader investing half billion of state funds in a shell solar panel company? As for the assets in the US subject to collateral seizure, I can’t say I see how the US could possibly prevent transfer of ownership rights from Maduro to Rosneft? I would think any signed collateral agreement, proven by transfer of funds, and durable by the proof of ownership by the debtor would be valid in any state/fed court. I’m sure if I were on a jury, deciding if the lender was due the collateral it would take me a few minutes to review the moving of money, and insure the title to the land and improvements was security, and give them the deeds.

    Comment by doc — February 28, 2018 @ 1:44 pm

  5. @Elmer–Your remark re “raid other assets in Venezuela” reminds me of a joke that used to be told about Iceland in 2008. “What’s the capital of Venezuela?” “About 20 bucks.”

    Comment by The Professor — February 28, 2018 @ 2:11 pm

  6. Good joke, SWP!

    And yet another reminder and example of the fantastic wonders of socialism!

    Comment by elmer — February 28, 2018 @ 5:52 pm

  7. Igor gets a big write-up in today’s FT.

    Didn’t see anything in there about the mullet.

    Comment by Global Super-Regulator on Lunch Break — March 1, 2018 @ 7:05 am

  8. @GSRLB–Just posted about that! I mentioned the mullet before reading your comment 😉

    Comment by The Professor — March 1, 2018 @ 10:48 am

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