CARACAS — As allies go, Venezuela is a relatively cheap one for Russia. But the potential returns on Moscow’s investment there could be priceless.
Venezuela also has signed over 49.9 percent of Citgo, its wholly owned company in the United States — including three Gulf Coast refineries and a countrywide web of pipelines — as collateral to Russia’s state-owned Rosneft oil behemoth for a reported $1.5 billion in desperately needed cash.
Russian advisers are inside the Venezuelan government, helping direct the course of President Nicolás Maduro’s attempts to bring his failing government back from bankruptcy. They helped orchestrate this year’s introduction of a new digital currency, the “Petro,” to keep oil payments flowing while avoiding U.S. sanctions on the country’s dollar transactions.
Venezuela’s still-formidable defense force, once an exclusively U.S. client, is now equipped with Russian guns, tanks and planes, financed with prepaid oil deliveries to Russian clients. Maduro scoffed last year at President Trump’s public threat to use the U.S. military to bring him down, saying Venezuela, with Russian help, had turned itself into a defensive “fortress.”
Under President Vladimir Putin, Russia has reestablished itself as a major player in the Middle East, a power broker in Asia and a global supplier of increasingly sophisticated weaponry. By becoming Venezuela’s patron — while gobbling up its resources — Putin has not only poked a stick in the eye of the United States; he also has built on his self-proclaimed reputation at home as the man who is returning Russia to the superpower status it lost with the fall of the Soviet Union.
For Russia, the establishment of a political outpost in the Western Hemisphere is “a strategic win,” said Eric Farnsworth, vice president of the Council of the Americas and the Americas Society.
“I don’t think Russia cares two bits about the survival of the Maduro regime,” Farnsworth said. “He is a means to an end. The end is to project power, bust out of sanctions the West has imposed and cause difficulties for the United States. If at the end of the day, they’ve got an unreliable partner . . . if they lose a few billion dollars, maybe that’s okay.”
In early December, two nuclear-capable, long-range Russian Tu-160 bombers arrived under sunny skies at Maiquetia International Airport outside Caracas, met by senior Venezuelan military officers who saluted and shook hands with the pilots. The Russians later took part in joint exercises.
“The Russian missile-carrying planes flew alongside [Sukhoi] Su-30 and F-16 fighter jets” of the Venezuelan air force, a Russian Defense Ministry statement said. “The pilots of the two countries practiced interaction in mid-air while tackling flight tasks,” including a 10-hour exercise across the Caribbean.
“This we are going to do with our friends, because we have friends in the world who defend respectful, balanced relations,” said Venezuelan Defense Minister Vladimir Padrino.
Although at least one of two previous trips by the strategic Russian bombers to Venezuela, in 2008 and 2013, led to them being trailed by NATO fighter jets partway across the Atlantic in a show of force, the most recent visit sparked only a diplomatic spat. Secretary of State Mike Pompeo declared the flights little more than a “squandering of public funds” by “two corrupt governments.”
Putin spokesman Dmitry Peskov called Pompeo’s remarks “unacceptable” and said that “it’s probably not very appropriate for a country to make such statements when half its defense budget could feed the whole of Africa.”
Working the summit
Trump’s rhetoric on trade, immigration and counternarcotics, along with his administration’s general disinterest in other aspects of the region, have left a void in the hemisphere that Russia has sought to fill.
After the recent Group of 20 summit in Buenos Aires, attended by Trump and Putin, it was the Russian president, criticized over Ukraine by Western powers at the meeting, who stayed for a bilateral visit with Argentine President Mauricio Macri. The two governments, which had already signed a strategic cooperation agreement, penned a new nuclear power accord.
The summit, nearly two years into Trump’s presidency, was his first trip to Latin America. He canceled his planned trip to last year’s Summit of the Americas in Peru, the major hemispheric gathering held every three years, as well as two scheduled visits to Colombia, ostensibly the United States’ closest South American ally. Each time, the White House said Trump was too busy.
While Trump had a truncated schedule in Argentina — canceling a meeting with Putin and downgrading scheduled formal sessions with allies Recep Tayyip Erdogan of Turkey and Moon Jae-in of South Korea — the Russian president seemed to be everywhere.
In addition to a BRICS meeting (Brazil, Russia, India, China and South Africa) and the RIC Forum (Russia, India, China) on the summit sidelines, Putin scheduled breakfast with German Chancellor Angela Merkel; bilateral sessions with French President Emmanuel Macron, Chinese President Xi Jinping and Saudi Crown Prince Mohammed bin Salman; and an informal pull-aside with Erdogan, with whom he meets frequently over Syria issues.
China’s Xi also cut a wide swath at the G-20, and the Chinese have made massive investments and established deep trade ties in Latin America. But their efforts are largely economic. A major Venezuelan creditor, China has shown little interest in accumulating Venezuelan assets or strengthening political ties with Maduro’s failing regime. For the most part, it has concentrated on trying to get its loans repaid.
Russia, in contrast, has repeatedly restructured, refinanced or taken in-kind payments from Venezuela.
Just days after the Argentina summit, Maduro traveled to Moscow to meet with Putin. The Venezuelan leader said Russia agreed to invest an additional $5 billion to improve Venezuelan oil production — much of which goes to Russia’s export customers — and $1 billion in gold mining. Separate contracts were signed to supply Venezuela with 600,000 tons of Russian wheat and to modernize and maintain its Russian-made weaponry.
Maduro described Russia and Venezuela, both under heavy U.S. sanctions, as comrades in a fight against American hegemony and leading the charge toward a new, “multipolar world.”
“Naturally,” Putin said at Maduro’s side, in a clear warning to Washington after Trump’s military threats, “we condemn any actions that are clearly terrorist in nature, any attempts to change the situation by force.”
Peskov later told reporters that “there is no doubt Russia will continue supporting Venezuela to one degree or another.”
Venezuela may well turn out to be a money-loser for Russia. The International Monetary Fund has estimated that inflation could surpass 1 million percent by the end of 2018 and that its economy will suffer a third straight year of double-digit decline in gross domestic product.
Mismanagement, corruption and sanctions have crippled Venezuela’s economy, and the oil industry is a shambles, with production down to 1.4 million barrels per day in September, its lowest point since a 2003 strike at Petróleos de Venezuela SA, or PDVSA, the national oil giant.
With high unemployment and food and medicine scarcities, millions of Venezuelans have become refugees, fleeing over neighboring borders.
Should the Maduro government fall, debt owed to Moscow, and Russian claims of Venezuelan oil and gas ownership, could end up in years of litigation as other creditors line up for repayment. Many are already in court, including claims demanding the sale of Citgo.
But for now, Moscow clearly believes Venezuela is well worth the effort.
“Nobody wants to be friends with Russia, and that’s why Russia is looking for such countries and regimes who still agree to cooperate,” said Mikhail Krutikhin, an oil, gas and energy analyst at the independent RusEnergy consulting firm.
Russia’s “friends” in Latin America include Venezuela, Nicaragua and Cuba, countries that Trump national security adviser John Bolton referred to in a speech last month as the “troika of tyranny.” Bolton said that “this president, this entire administration, will stand with the freedom fighters” combating the “destructive forces of oppression, socialism and totalitarianism.”
In a Dec. 12 news conference, Maduro, never known for diplomatic understatement, said Bolton had been tasked by the White House with “organizing my assassination” and overthrowing the Venezuelan government, charges he had made previously. Venezuela, he said, would fight back with the aid of “friendly countries.”
In response, deputy State Department spokesman Robert Palladino said, “We will continue to consider all diplomatic and economic measures that impose costs on corrupt regime officials and support the efforts of the Venezuelan people to restore democracy and freedom in their country.”
Acquiring state assets
The Russia-Venezuela relationship has been growing for more than a decade. What began as a business transaction has become a geo-strategic move for Putin, who sees a long game in gaining a stronger foothold over global energy supplies even as he puts down a political stake in Latin America.
Ties first solidified under Hugo Chávez, the revolutionary army officer turned politician who became president in 1999. Part of a left-wing tide that was sweeping Latin America at the time, Chávez described himself as an anti-imperialist and Marxist and quickly set out to establish new social policies, control key industries and displace Venezuela’s traditional ruling elite.
With oil prices soaring and relations with the United States deteriorating, Chávez turned to Moscow, initially for arms purchases. Between 2006 and Chávez’s death from cancer in 2013, Venezuela bought nearly $4 billion in military equipment, making it for several of those years Moscow’s second- or third-biggest customer in the world, according to data compiled by the Stockholm International Peace Research Institute.
At least initially, Venezuela had the money to make payments on its purchases, which included Sukhoi jet fighters and an estimated 5,000 MANPADS surface-to-air missile systems. “The Yankee hegemony is finished,” Chávez said in 2008 as the two countries carried out joint air and sea exercises.
Chávez made frequent trips to Moscow, visiting Putin when the Russian leader served as prime minister until he resumed the presidency in 2012. But much of the relationship was managed by Igor Sechin, the chief executive of Rosneft who also served as Putin’s deputy prime minister.
Moisés Naím, a distinguished fellow at the Carnegie Endowment for International Peace who was dean of Venezuela’s leading business school and trade minister during the pre-Chávez era, described the ensuing relationship as passing through several stages.
After the first stage, he said, when Venezuela was among the “best clients of the Russian arms industry,” Russia found it was getting harder to collect on debts owed by Caracas, and the purchases turned into loans. “That changed the main actors in the relationship,” Naím said in an interview. “It was no longer the Russian arms salesmen and warlords but the financiers.”
As Venezuela struggled to manage its debt, IOUs were gradually converted to bonds and other instruments that could be used to acquire state assets. Investors took advantage of opportunities to make their mark on the ground, although the results were often disappointing. Russian aluminum magnate Oleg Deripaska tried and failed to establish a major smelting operation. A manufacturing plant to produce tens of thousands of Kalashnikov AK-103 rifles a year in Venezuela, announced by the Russian Defense Ministry in 2006, remains unfinished.
Corruption, labor troubles, the effort to continue social programs as revenue dropped along with oil prices and, finally, U.S. sanctions left Maduro with few choices soon after he took over in 2013. Without the charisma or political sophistication of his predecessor, Maduro took the economy from bad to worse.
Oil, even if still in the ground with little prospect of early production, remained Venezuela’s major asset, and the Maduro government began to use it, through joint production agreements and title transfers, to finance its debt and boost national income. Much of Russia’s credit has been in the form of prepayment for oil exports that supply, among other facilities, a major Russian refinery in India, built to handle Venezuelan-style heavy crude.
While China refused to extend more credit, the Russian government was happy to do so, restructuring its debt with Venezuela in November 2017 when it was clear the government could not pay the interest. Sechin, formally out of government but still Rosneft chief and part of Putin’s inner circle, now controls at least 13 percent of the energy business in Venezuela. He visits the country frequently, increasingly as landlord rather than collaborator.
“We will never leave, and no one will be able to kick us out,” Sechin said last year, according to Russia’s Tass news agency. “We will keep expanding our cooperation.”
But the United States remains the largest purchaser of Venezuela’s fast-falling oil exports, at 45 percent, and as such is the biggest supplier of cash to the Maduro government. Although the Trump administration has threatened to add oil to its growing list of sanctions against Venezuela, such a move would shut down Citgo’s Gulf Coast refineries and the supply of refined product to Citgo gas stations and other U.S. distributors.
In 2016, Caracas put up 50.1 percent of Citgo as collateral for a new crop of bonds, allowing it to pay off its most pressing debts. Shortly after that deal was reached, the country’s Central Bank registered a separate, mysterious financial windfall.
When Russ Dallen, a Florida-based managing partner at the brokerage Caracas Capital Markets, sifted through court filings in Delaware, where Citgo’s holding company is based, he found that Rosneft had reached a deal that had pumped $1.5 billion into Venezuela in exchange for a lien on the other 49.9 percent of Citgo.
With assumptions that Citgo, if sold, could be worth between $6 billion and $9 billion, the arrangement amounted to a sweetheart deal — and, in addition, the Russians had managed to lay claim to almost half of a major U.S. oil giant.
“I think Mr. Putin and Mr. Sechin are both globally oriented. They know that oil is a weapon and a tool,” Dallen said. “They wanted to secure their investment in Venezuela, and what better way to do that than with a strong, U.S.-based asset?”
DeYoung reported from Washington. Rachelle Krygier in Caracas and Natalia Abbakumova in Moscow contributed to this report.