To begin imagining a recovery from the economic and humanitarian crisis that Venezuela is going through, it is necessary to examine the battle that will be fought abroad to preserve its most precious asset: Citago, state-owned Petroleos de US subsidiary of Venezuela (PDVSA). In talks with the opposition that began last Friday, the Venezuelan government claimed control of Citgo, in gear created by opposition leader Juan Guaidó, who was recognized as interim president by more than 50 countries at the time. Was. The company faces threats from the creditors on various fronts and is expected to find some way to prevent the company from falling into the hands of third parties.
Within the limits under which it operates, Citgo on Monday reported a small profit in the second quarter of the year, the first since 2019, and remains the eighth-largest refinery in the United States, according to Reuters. The company’s recent history is a legal drama parallel to the political crisis the South American country has been experiencing since 2014, when it entered an economic downturn.
In December 2015, the opposition won two-thirds of the Legislative Assembly and, a few months later, in 2016, President Nicolas Maduro’s government raised $1.4 billion (7.4 billion reais) in bonds to refinance the PDVSA’s debt. Decided to issue without the approval of Parliament. The government offered Citgo shares as collateral and Wall Street reacted with hunger by buying the shares.
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The result of the 2015 election, which was recognized by the Maduro government, raised hopes that a regime change is coming in Venezuela, says Francisco Rodriguez, economist and director of the organization Petroleo Para Venezuela. “In September 2016, the markets did not see Venezuela as a dictatorship as they see it today. They saw it as an unpopular government that would likely emerge through an electoral process,” Rodriguez says. Was: ‘The days of this government are numbered,’ he says. Therefore, at the time, the purchase of bonds was not necessarily an endorsement for Maduro, but a condition on change.
But this did not happen. The Venezuelan government convened a National Constituent Assembly in which the opposition did not participate. A day later, on July 31, 2017, the US Treasury Department imposed sanctions on President Maduro, freezing all assets under US jurisdiction. In May 2018, presidential elections were held in which Maduro was the winner, but the opposition and part of the international community ignored the results amid allegations of fraud and lack of legitimacy. As a result, several countries adopted sanctions against 78 Venezuelans linked to Maduro, and in April of the following year, the United States expanded these punitive measures. It complicated bond payments, but the government continued to meet quarterly interest payments through the end of 2018.
It was here that Guaido, the then Speaker of the Assembly, relied on the constitution to declare himself the “president in charge” of the country, a move that left Maduro on edge. “The problem starts when the move from Maduro to Guaidó,” explains Rodriguez. Donald Trump’s government decided to recognize Guaidó as president, meaning he is considered a representative of Venezuela’s state companies in the North American country. Subsequently, Guaidó formed a board of directors at Citgo for this purpose, and it is he who is now facing the legal problems of the company.
The country’s economic woes and sanctions have limited Guaidó’s ability to refine Venezuelan oil in Citadel. It is also nearly impossible to make a profit on Citgo earnings, as the restrictions include freezing of accounts. In turn, the Maduro government found a way around the sanctions in 2019 and began moving oil, money, gold and other resources along Russian routes.
Guaidó appealed in a New York court and asked for the debt to be canceled, arguing that the issuance was illegal because Congressional approval had not been sought. The judge responsible ruled against Guaidó, arguing that, based on the law of the city where the bonds were issued, the issuance was legal. This brought Guaidó and Citgo’s board of directors to the court of appeal.
“We are asking this to go deeper,” said Horacio Medina, the chairman of the Guaidó-appointed board of directors for Citgo, by telephone from Florida, “because basically, both the bondholders and the Maduro government were well aware that this was unconstitutional. Because it required the approval of the National Assembly and it was not presented there. This is where our struggle in litigation is centered.” In 2019, bondholders, including investment banks and international funds, were already licensed to execute 49% of Citgo’s shares owed to them.
To prevent Guaidó from losing Citgo, the United States government approved a temporary suspension of said license to give the Court time to resolve the dispute. The suspension was temporarily renewed until 21 October. Medina, who referred to the US ally as Venezuela’s “jewel in the crown”, was named chairman of the board in December after years as a member.
“We started negotiating with the bondholders to see if we could reach some sort of agreement, and thus the months of August and September of 2020 have passed, which cannot be called negotiations,” says Medina. “As expected, we listened to each other and the conclusion we came to is that we are on completely opposite points. There was no possibility of convergence”, he added.
This means, Medina points out, that the future of Citgo and, therefore, this source of income and foreign exchange that Venezuela so desperately needs, is in the hands of the Court of Appeal. “It is not possible to predict when the decision will be made, but depending on experience, it could be at the end of the year or the beginning of the next one”, says Medina.
But the Venezuelan title play isn’t the only one facing Citego. Two international companies, oil company ConocoPhillips and mining company Crystallex, are claiming rights to Citgo in US courts in separate lawsuits. In 2017, Conoco Philips won an international arbitration proceeding against the State of Venezuela unfairly and without compensation. In return, Crystallex won a similar arbitration for a proprietorship it did in 2008. Both companies claim to be partial owners of Citgo, which considers the subsidiary to be the property of the Venezuelan government. Conoco Philips has sought to declare Citgo bankrupt.
So the first meeting between the government and the opposition suddenly becomes crucial for Citgo. “If there is a change in the political model in Venezuela and a democratic government, if there is a way to balance the issue, stabilize the country economically and politically, then there will be great potential for reaching some of these. Settlement with all creditors,” says Medina.
Rodriguez believes the Guaido government, which controls Citgo, has the ability to pay off “a refinanced version of that debt” if creditors are willing to negotiate. Despite the crisis and sanctions, with non-Venezuela oil refining, Rodriguez says, the subsidiary has turned a profit in recent years. “Citgo is a company that has a revenue stream whose value exceeds the value of debt, including assets and deposits. I believe it is possible to reach an agreement.”
Medina, however, is only partially optimistic: “It is very difficult for us to completely save Citgo.” “We are doing everything possible, analyzing all the options that we have, as it is necessary for us,” the director of the company said. Medina recalls a phrase uttered by the libertarian general San Martín in Argentina: “When he was told that the cause of independence was impossible, he replied that yes, it was impossible, but it was necessary. I believe it.” It seems impossible to save Citgo here, but it is necessary because Citgo is a key player in Venezuela’s recovery.
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