Russia nationalizes Venezuelan assets to skirt U.S. sanctions

By Dina Khrennikova and Olga Tanas on 3/29/2020

MOSCOW (Bloomberg) - Russian oil giant Rosneft PJSC sold its assets in Venezuela to the Russian government, in what may be a maneuver to avoid any U.S. sanctions in an escalating fight between Caracas, Washington and Moscow.

Rosneft is selling local production, service and trading assets to a state-owned company, it said in a statement. The move is to protect shareholders’ interests, according to company spokesman Mikhail Leontyev.

The U.S. slapped sanctions on two units of Rosneft earlier this year for operating in Venezuela, stopping short of sanctioning the listed parent company. President Donald Trump is trying to oust Venezuelan President Nicolas Maduro, who is clinging to power in the oil-rich but increasingly impoverished nation.

The fight over Venezuela fits into a much larger geopolitical battle between Trump and Vladimir Putin, with both turning to oil as the weapon of choice. Russia’s decision to all but abandon the OPEC+ alliance earlier this month was seen as part of its strategy to weaken the U.S. shale industry.

That move in turn prompted Saudi Arabia to launch a price war, which has pushed crude to about $20 a barrel, threatening U.S. shale producers, as well as the budgets of oil-producing states.

It was unclear from Rosneft’s statement what will happen to the business in Venezuela. Rosneft’s Leontyev said the company has left the country and declined to comment on whether Rosneft may offer its expertise to the new owner. The Kremlin didn’t respond to a request for comment.

But Russia’s ambassador to Venezuela, Sergey Melik-Magdasarov, indicated on Twitter that the new owners would continue business as usual.

“Don’t worry! This is about Rosneft’s assets being transferred to Russia’s government directly. We keep moving forward together!” he said, in a message that also posted on the embassy website.

The move also prompted speculation that it could herald a shift in the various power plays, particularly in the context of the oil-price war. The U.S. has tried to get Saudi Arabia to show restraint -- so far without success. Even as the oil market breaks under the twin pressures of a massive demand slump and glut of extra production, both Saudi Arabia and Russia are digging in.

Assets for Shares. The sale may serve two goals for Rosneft CEO Igor Sechin, according to Konstantin Simonov, head of the National Energy Security Fund think tank in Moscow: To avoid further U.S. sanctions and to cut costs, as Rosneft leaves Venezuela.

“Russia leaves Venezuela and Sechin transfers his losses to the Russian state,” he said.

A company representative said that after its exit from Venezuela, Rosneft has the right to expect the U.S. to fulfill its promises. The U.S. has said sanctions “need not be permanent and are intended to change behavior.” The U. S. “will consider lifting sanctions for those who take concrete, meaningful, and verifiable actions to support democratic order in Venezuela.”

Russia controls Rosneft with just over 50% of its shares. BP Plc is the second-largest shareholder with 19.8%, and Qatar’s QH Oil Investments owns 18.9%.

As part of the transaction, Rosneft will receive a 9.6% share of its own equity capital. Those shares will be held by a 100% subsidiary of Rosneft as treasury stock. Rosneft shareholders will decide what to do with the shares, Leontyev said. It’s not yet clear if Russia’s control is materially affected.

Debt Deals. In addition to joint ventures with Rosneft, Venezuela’s oil producer PDVSA was supplying crude to the Russian company under prepayment deals.

By the end of third quarter PDVSA reduced its debt principal to Rosneft to $800 million. Rosneft didn’t disclose the remaining debt in its fourth-quarter report, but earlier this year Otabek Karimov, vice president for commerce and logistics in Rosneft, told investors that PDVSA was making payments as agreed.

The assets sold include Rosneft’s stakes in local upstream companies Petromonagas, Petroperija, Boqueron, Petromiranda and Petrovictoria, as well as oil-service, commercial and trading units.

Rosneft has said its oil trading operations in Venezuela are linked to the oil supply deals it reached with PDVSA before the U.S. introduced wide-scale penalties for companies and individuals operating in Venezuela’s oil sector in early 2019. It has said the sanctions are illegal.

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