Share A LinkedIn icon Share by linkedin An email icon Share by email

KEY POINTS China and Russia have kept Venezuela afloat by lending billions to the economically crippled petrostate, sometimes with cheap oil thrown in as a sweetener for the two creditors.

Those deals were struck with strongman Nicolas Maduro, whose leadership is facing a serious challenge from Juan Guaido, and it's not clear what happens to that debt if Maduro is kicked out of office.

Venezuela is indebted to external creditors by a total of something close to $100 billion.

Venezuela's President Nicolas Maduro, right, walks with Chinese President Xi Jinping as they arrive to a welcoming ceremony at the Great Hall of the People on January 7, 2015 in Beijing, China. Andy Wong, Pool | Getty Images

Venezuela is in the middle of a power struggle at the highest level, and that could mean trouble for its two biggest foreign allies: China and Russia. The socialist petrostate is home to the largest oil reserves on the planet, but endemic corruption has devastated its economy. Beijing and Moscow have helped the country stave off collapse by repeatedly extending financial lifelines — to the tune of tens of billions of dollars over the last decade. For the most part, those oil-for-debt swaps were good for all parties involved. But that may be changing.

They’re worried the opposition will come in and not necessarily want to honor their contracts — or find loopholes. Russ Dallen managing partner, Caracas Capital Markets

With the United States and others backing opposition leader Juan Guaido as the country's legitimate president over dictator Nicolas Maduro, it could take longer for Russia and China to get their money back. And in the case of some loans, they may not get anything back at all. "I don't think they like regime change. I don't think they like the idea that the U.S. is seemingly declaring somebody president," says Helima Croft, global head of commodity strategy at RBC Capital Markets. "Both Xi and Putin would be horrified if the U.S. got any ideas about trying to do this in any of their countries, or countries that they view as satellite states."

Venezuela's debt emergency

'The situation keeps deteriorating'

Guaido has said all lawful agreements approved by Venezuela's National Assembly will be honored, a statement widely seen as an olive branch to China. Thus far, Beijing is still publicly backing Maduro. "They're worried the opposition will come in and not necessarily want to honor their contracts — or find loopholes," said Russ Dallen, managing partner of investment bank Caracas Capital Markets. But Dallen acknowledged that Beijing's loyalty may not last. "The Chinese don't know what to do. They're not getting paid by Maduro's guys ... and the situation keeps deteriorating."

Juan Guaido, President of Venezuela's National Assembly, reacts during a rally against Venezuelan President Nicolas Maduro's government and to commemorate the 61st anniversary of the end of the dictatorship of Marcos Perez Jimenez in Caracas, Venezuela January 23, 2019. Carlos Garcia Rawlins | Reuters

Guaido has incentive to make good on Venezuela's debts to Beijing. China is Venezuela's biggest market. RBC's Croft pointed out that Guaido doesn't want to get on the bad side of the country that drives global oil demand. Failing to repay China would also erode Guaido's credibility. "If the opposition comes in and defaults, it would hurt them," said Kathryn Rooney Vera, chief investment strategist at Bulltick Capital Markets. "It would also hurt their future capacity to issue debt in terms of their credit. So I don't think that's going to happen." A desire to avoid antagonizing the United States during an already complex, high-stakes trade war may encourage China to consider a change of allegiance from Maduro to Guaido, according to Dallen.

Maduro needs Russia

Though Guaido is signaling he intends to honor Venezuela's obligations to China, he has made no such overtures to Russia. Moscow's latest deals with Venezuela are something they don't want to risk losing, either. "Not only are they getting oil, but they've also gained access to pretty good acreage in Venezuela," said Croft. Moscow is considered the linchpin to Maduro's survival. Russia has come in with cash at the eleventh hour a few times to help Venezuela avoid default. If the country gave another financial lifeline or even continued to buy gold at a discounted rate, the situation could become a protracted crisis.

"The question is, do they believe a couple billion more dollars can tide the country over? If not to preserve Maduro, to preserve some type of regime that remains loosely or closely aligned with Moscow," said Croft. Ironically, if Moscow lets Venezuela default on its debts, then Russia would actually be able to exercise its lien on Venezuela's most valuable asset: U.S.-based oil giant Citgo. In 2016, Maduro secured a fresh loan by giving Rosneft a 49.9 percent stake in Citgo as collateral. "It would not be unusual for the Russians ... to try and exercise the lien they have on the Citgo collateral, just because it would be very disruptive and chaotic to the U.S.," said Dallen of Caracas Capital.

Where Venezuela goes from here