As Venezuela is gripped in an acute political crisis, the turmoil raises serious questions for Chinese creditors who may now wonder how a new Venezuelan government might treat the large oil-backed debts owed to Chinese lenders, according to an expert in the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Gabriel Collins, the Baker Botts Fellow in Energy and Environmental Regulatory Affairs at the Baker Institute, outlines his insights in a new article that was published in The National Interest, “China’s Oil-Backed Loans to Venezuela Appear Headed for a Haircut.”
“In theory, Venezuela’s massive oil resources offer ample support for at least $50 billion in loans that China has provided since 2007, perhaps $20 to $25 billion of which remain outstanding,” Collins wrote. “Yet for Chinese lenders exposed to Venezuela’s chaos, the country’s oil shows itself to be an increasingly illusory underpinning for the loans.
“The situation is becoming a classic example of ‘geoeconomics gone wrong’ and highlights the reality that even large money outlays often fail to purchase lasting strategic influence in chaotic places. To the contrary, such influence is, at best, temporarily ‘rented’ and can be rapidly degraded, if not outright destroyed, by events beyond the lender’s control. Venezuela’s current situation provides a dose of sober reality for Beijing’s Belt and Road Initiative, for which large-scale strategic financing from China’s parastatal lenders are a central element.”
Collins added, “The unfolding Venezuelan debt saga appears to be rapidly turning into an expensive lesson for China. Among the core takeaways: A veneer of commerciality cannot compensate for the fundamentally non-commercial objectives oil-backed loans actually aim to fulfill. Furthermore, political crises — particularly those that result in a change of government — credibly threaten to invalidate the hydrocarbon ‘soft collateral’ that likely helped soothe Chinese lenders’ risk fears.
“Much of the value of soft collateral depends on the ruling government’s willingness to mortgage current and future natural resource production in order to service loans. Because such resource flows financially underpin state functionality, they are often a vital national security interest in the producing country and are intensely politicized during periods of unplanned political transition.”
It is being concluded by many that China is concerned that if a new government officially takes over in Venezuela, it may not honor its debt because it was acquired under the dictatorship. That may play a role in China’s failure in recognizing the popularly elected President of the National Assembly.
According to Rice, “Collins conducts a range of globally focused commodity market, energy, water and environmental research. His current research focuses on oil field water issues, evolutions in the global gasoline market, shifts in China’s domestic oil consumption structure, water governance and groundwater valuation in Texas and the nexus between food, water and energy.”