Venezuela’s oil production fell by another 100,000 barrels per day (bpd) in March, a devastating blow that will only make the country’s economic crisis worse. Output is expected to continue its downward spiral; the only uncertainty is over the pace of decline.

As Venezuela comes apart at the seams, it will hand over more and more control of its natural resources, and even power over its institutions, to China, according to a new report from the Washington-based Center for Strategic & International Studies.

The report argues that enormous levels of foreign investment may seem beneficial, but that Venezuela’s economic predicament has actually been made much worse by China. Taking advantage of Venezuela’s desperation, China has managed to convince Caracas to sign “one-sided financial agreements” that perpetuate the economic malaise afflicting the country.

Over the past decade, China has sent an estimated $62 billion to Venezuela in one form or another, representing about half of all the money that China has lent to Latin America. For years, Venezuela has been sending oil shipments to China as repayment, and last year it shipped roughly 330,000 bpd to China, sales that earned Caracas little or no revenue.

China’s patience with Venezuela seems to have worn thin. Reuters reported last month that China is likely to roll over a current financing arrangement it has with Venezuela, allowing for lenient repayment terms, but that it won’t lend the Venezuelan government any more money than it already has. China remains Venezuela’s largest debt owner with $23 billion in outstanding debt.

But CSIS argues that China remains a key piece of the puzzle propping up President Maduro’s repressive “narco-regime.” The think tank says that China’s excessive influence is both bad for Venezuela and it also raises security concerns. Related: Oil Prices Poised To Rise As Cycle Comes To An End

China’s hunger for commodities has led to “long-term dependency,” essentially preventing Venezuela – and other commodity-exporting countries in Latin America – from ever developing more sophisticated valued-added sectors of the economy. Venezuela will remain in a colonial-like state, serving as a place for resource extraction for China’s benefit. Indeed, China’s appetite for commodities is only expected to grow.

Moreover, China’s loans to Venezuela are particularly opaque. CSIS says that China has often routed its investment in Venezuela through Hong Kong to undisclosed locations. And oil-for-cash deals are especially difficult to track. Countries that overly dependent on oil exports have historically been prone to corruption, but China’s effort at obscuring the money trail to Venezuela has added “yet another layer to the entrenched corruption of the Maduro regime,” CSIS wrote in its report. “The international community should be skeptical of the seemingly endless amounts of untraceable money pouring into a country with a history of corruption, deep-state narcotrafficking, and without checks and balances.”

That dirty money is then spent on military weapons, rather than food and other essentials for the Venezuelan people. Even as the country crumbles and people go hungry, CSIS says that Venezuela ranks 21st in the world in terms of military expenditures, and first in Latin America. And all that hardware is often put to use against its own people.

Meanwhile, the lack of cash has already resulted in debt defaults. CSIS says that Venezuela has not paid a sovereign bond since September 2017 and is actually in a state of default on 16 sovereign bonds, totaling $1.81 billion in missed payments. Still, up until now, the totals could be miniscule compared to what might lie ahead in the near future – Venezuela has more than $9 billion in bond payments coming due in 2018.

A full-blown debt default would result in a new stage of suffering for the Venezuelan people. It would also leave Caracas with fewer options for selling its oil if creditors around the world try to seize oil shipments. This scenario would also likely result in even greater influence for China and Russia over Venezuela’s resources. Related: Oil Prices Head Higher On Large Crude Draw

Chinese and Russian state-owned oil companies “will probably market a significant share of PDVSA’s exports and operate an increasing share of its production, guaranteeing the repayment of their loans,” according to March report from the Atlantic Council. In other words, Venezuela will have to more or less hand over its oil to Chinese and Russian companies if it wants to sell any oil on the international market at all.

Unfortunately, there are few good options. The U.S. is reportedly considering sanctions, although it is unclear when or what form those might take. While there is an urge to do something, sanctions would likely only deepen the misery in Venezuela, with uncertain odds of affecting change. Moreover, what is clear is that U.S. sanctions could knock even more oil production offline, significantly raising the odds of default, and potentially opening up Venezuela to more control by China.

By Nick Cunningham of Oilprice.com

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