A month ago, Venezuelan National Assembly President Juan Guaidó refused to recognize the legitimacy of President Nicolás Maduro’s fraudulent May 2018 reelection. Guaidó declared himself interim president, calling for new elections — and quickly garnered the support of the United States, Canada, most of the European Union and a dozen Latin American nations.

Absent from that list are two countries with major financial interests in Venezuela: China and Russia. It has been a tale of two creditors, each with a concentrated financial exposure to Venezuela yet distinct foreign policy aims. Our research, reflected in two recently published Wilson Center reports, examines these differences in Chinese-Venezuelan and Russian-Venezuelan economic relations. Here’s what you need to know:

1. For China, oil ties mean Beijing has to be pragmatic about nonintervention.

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On the eve of the global financial crisis, President Hugo Chávez and President Hu Jintao laid the foundations of the China-Venezuela state-to-state relationship when they crafted their first loans-for-oil deals in 2007. Chávez was able to court a creditor to help expand the Venezuelan state. For Beijing, Venezuela’s abundant natural resources and energy supplies could help China secure long-term access to these vital national assets.

By 2014, China’s main policy bank, the China Development Bank (CDB), had provided the Venezuelan government with more than $30 billion in new oil-backed loans. They had mainly supported investment in the energy and mining sectors, including power stations, oil refineries and pipelines. However, the initial discretionary nature of these policy bank loans also meant that Venezuela used the proceeds for infrastructure projects in a variety of other sectors, including agriculture, telecommunications, housing and forestry.

China’s policy banks hoped to avoid the failings of other creditors in Latin America by circumventing the need for policy conditionality with commercial conditions. Beijing used loans-for-oil deals, wagering that the production capacity of Venezuela’s state oil company (PDVSA) was a sufficient guarantee for debt repayment.

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This was a miscalculation. China overestimated Venezuela’s ability to sustain oil production and, hence, economic activity, but also its ability to successfully manage several commercial projects that were spread across broad sectors of the economy. China thus paid a high cost when Venezuela fell into arrears on its oil collateral and failed to finance transportation projects in 2014 amid the country’s worsening economic crisis and historic oil sector collapse.

As Venezuela’s economy worsened, China grew cautious

With China’s loans tied to oil production, China’s policy banks were compelled to lend defensively — rolling over about $9 billion of existing bilateral funds — in the hope of boosting Venezuela crude output and recovering their oil collateral. But Beijing also grew reluctant to extend any new financial arrangements, as China became more circumspect about Maduro’s ability to manage the economy. At its peak, between 2010 and 2013, Venezuela accounted for an average of 64 percent of China’s new approved lines of credit to Latin America. But from 2014 to 2017, Venezuela represented 18 percent of China’s total new lines of credit to the region.

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China’s strategy revolves around a pragmatic commitment to “nonintervention,” protecting its considerable financial commitments by hedging politically as well as commercially. Chinese leaders courted Venezuela’s opposition leaders during the 2012 presidential and the 2015 parliamentary elections. Guaidó representatives reportedly met with Chinese officials last week to discuss Venezuela’s $20 billion outstanding debt to China.

Guaidó has sought to build on this diplomatic momentum, saying that China’s “support will be very important in boosting our country’s economy and future development.” In Beijing, a statement from the Ministry of Foreign Affairs seemed to reciprocate, saying, “No matter how the situation evolves, China-Venezuela cooperation should not be undermined.”

2. Russia is looking to boost both its geopolitical and economic capital

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Beginning in 2015, as China grew more cautious and concerned about its exposure in Venezuela, Russia provided about $6.5 billion in new funds through its state-owned enterprise, Rosneft, to Venezuela’s state-owned oil company. Previously, the cornerstone of the Russia-Venezuelan relationship had been military ties, with Venezuela buying more than $4 billion in Russian arms and military equipment.

By financially backing the Maduro regime, Russia seized an opportunity to signal its return to the global and hemispheric stage with a symbolic move in Venezuela, a country in close U.S. proximity. Moscow also demonstrated to its hemispheric allies, such as Cuba and Nicaragua, that it could both exercise Latin American influence and challenge U.S. geopolitical interests.

In the wake of Guaidó’s political ascension, Russia drafted a U.N. resolution expressing “its concerns over threats to use force” against Venezuela. Russia fired a rhetorical shot across the U.S.’s foreign policy bow, warning that “the cynical, overt interference in the internal affairs of a sovereign state” must stop. Venezuela’s military, an ongoing supporter of the Maduro regime, has relied on Russia for military equipment — circumventing U.S. sanctions.

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Russia’s motivations were largely political

The guiding principles of Russia’s involvement in the oil and gas sectors are also mostly political rather than commercial. In a recent Wilson Center report, analyst Vladimir Rouvinski suggests that Russian political elites “sincerely believe there is an opportunity to improve the situation sometime in the future with Chavistas still in control of Venezuela.”

Russia’s state-owned enterprises emerged as key investors at a time when the Maduro government found it increasingly difficult to secure new credit from anywhere, including China. Rosneft and Gazprom, Russia’s energy giants, provided valued short-term financing to Venezuela’s crumbling oil-state company (PDVSA).

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In exchange, PDVSA provided 49.9 percent of its total shares from its U.S. subsidiary, Citgo, as collateral to Rosneft to guarantee future payments. Furthermore, Rosneft has increased in equity stake in the Orinoco’s heavy oil belt joint venture and has also received access to the largest gas reserves in Venezuela.

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But Moscow appears to be learning from China’s Venezuelan hedge by diversifying its strategic hand beyond the geopolitical card. Facing mounting financial arrears, vulnerable supply chains, U.S. court battles over Citgo shares used as loan collateral, and U.S. sanctions on the Rosneft CEO, there are limits to how far Rosneft can extend its financial exposure in Venezuela.

Rosneft is Russia’s largest oil producer and second-largest gas-producing firm — this means Russia has to protect the company’s commercial interests. Recently, Russia appears to be counterbalancing the tough geopolitical rhetoric with a softer push, saying, “The only way out of this crisis is for the government and opposition to sit down for negotiations.” Notwithstanding ongoing uncertainty regarding Venezuela’s political future, it is clear that both China and Russia plan to be a part of Venezuela’s economic future.

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Editor’s note: This article was updated to clarify the role of the China Development Bank.

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Stephen B. Kaplan is an associate professor of political science and international affairs at George Washington University and a Global Fellow at the Wilson Center in Washington, D.C. His book, “The Rise of Patient Capital: The Political Economy of Chinese Finance in the Western Hemisphere,” is forthcoming with Cambridge University Press.

Michael Penfold is full professor of political economy and governance at IESA Business and Public Policy School in Caracas and Global Fellow at the Wilson Center in Washington, D.C.

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