Should We Be Buying Gas at Citgo?

Citgo is at the center of an imbroglio involving Russia, two aggrieved U.S. Senators, and a tense South American nation.

Venezuela’s growing economic crisis appears to have far reaching consequences, especially after the revelation that PDVSA, Venezuela’s national oil company, received a loan from Rosneft, a state owned Russian firm. In order to secure the loan, PDVSA offered 49.5% of Citgo, the U.S.-based and Venezuelan-owned energy firm, as collateral.

PDVSA offered Citgo, owned by its subsidiary PDV America, as collateral after struggling to survive amid Venezuela’s mounting economic pressures and political instability. The loan followed PDVSA’s decision to offer over $5 billion in sovereign bonds to help keep the organization afloat.

So, what are the possible outcomes if PDVSA defaults on its loan?

The most obvious consequence will be that Rosneft will gain just under 50% of Citgo. This has alerted the US government as Citgo controls three oil refineries, multiple oil depots and pipelines. In the case of non-repayment, Rosneft could gain a controlling stake in Citgo if it purchases additional PDVSA bonds. This would give Rosneft, and indirectly the Russian government, control over vital US energy infrastructure.

The U.S. Senate raised concerns over the possible repercussions of the deal. In a letter to U.S. Secretary of the Treasury Steven Mnuchin, Senators Marco Rubio (R-FL) and Bob Menendez (D-NJ) raised concerns over the possible security risks of the loan deal.

The Senators wrote: “We are extremely concerned that Rosneft’s control of a major U.S. energy supplier could pose a grave threat to American energy security, impact the flow and price of gasoline for American consumers, and expose critical US infrastructure to national security threats.”

In response to the letter from the two Senators, Secretary McNuchin said that the matter would be investigated by the Council of Foreign Investment in the United States (CFIUS), which is coincidentally headed by Mnuchin himself.

According to Mnuchin, “This like any other national security issue will be reviewed at CFIUS and at appropriate where national security issues also discussed in other confidential settings and at the appropriate time as issues progress on a classified basis we would be more than happy to have a confidential discussion.”

With renewed U.S. sanctions on Venezuela, it appears that Rosneft is pushing for an outcome where it gains control over PDVSA oilfields. Rosneft is allegedly hawkish about the upcoming U.S. sanctions on Venezuela, which would most likely bankrupt PDVSA. This would result in a loan default wherein Rosneft can gain control over Citgo.

Meanwhile, the Untited States government has not shown the same degree of alarm as the Senators Rubio and Menendez. At least on the surface. President Donald Trump threatened economic sanctions on Venezuela if its president, Nicolás Maduro, continues to enforce his authoritarian rule over the increasingly tense nation. Mr. Maduro allegedly wants to rewrite the constitution via a constituent assembly.

According to President Trump: “The United States will not stand by as Venezuela crumbles…if the Maduro regime imposes its Constituent Assembly on July 30, the United States will take strong and swift economic actions”.

Mr. Trump also denounced Mr. Maduro as a dictator: “The Venezuelan people again made clear that they stand for democracy, freedom, and rule of law. Yet their strong and courageous actions continue to be ignored by a bad leader who dreams of becoming a dictator.”

Whether the US government actually goes ahead with the sanctions is a mystery because of the complications of the possible takeover of Citgo. While Mr. Trump is talking tough about Venezuela and Mr. Maduro, he may need to be cautious; a shoddily-executed sanction plan against Venezuela may backfire if it results in handing control over U.S. energy resources to Russian parties via Rosneft.

While the Rosneft-Citgo collateral deal seemed like a fantastical improbability a few months ago, Venezuela’s rapid economic deterioration has made the possibility of a Russian takeover of Citgo much more likely.

Arin Gerald studies mechanical engineering at Boston University. He writes about entrepreneurship, technology, and business.

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