Russian Interests in Venezuela: A New Cold War?

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When I wrote an essay for Americas Quarterly in the winter of 2015 asking, “What’s Vladimir Putin’s interest in the Western Hemisphere?” I concluded that Russian investments were “commercially driven with lesser geopolitical purposes.” I was wrong.

As far as Venezuela is concerned, Russian interests have grown with the intent to disrupt western democracies and achieve a firm foothold in the Western Hemisphere’s largest oil reserve. Russia has helped keep President Nicolás Maduro in power despite a humanitarian tragedy that has been compounded by a crisis in governance: corrupt and incompetent leadership, absence of the rule of law, compromised judges, and the detention of hundreds of political prisoners.

The Kremlin’s financial interest in Venezuela began to deepen in late 2013, when Igor Sechin, the CEO of Russia’s state oil company Rosneft, announced plans to acquire Lukoil’s assets in Junin 6, a lucrative oil block in the Orinoco Belt, and invest $13 billion in Venezuelan oil and gas assets over the following 5 years. In early 2016, Rosneft announced a further investment of $500 million in Petro Monagas, in the Orinoco Basin, and became a partner with Venezuela’s state-run oil company PDVSA for offshore gas drilling. That same year, Rosneft acquired a 49.9 percent interest in the Venezuelan oil distribution company Citgo for a further $1.5 billion, although U.S. pressure led it to swap its interests for oilfield stakes and a fuel supply deal. 

In short, Vladimir Putin, through Sechin and Rosneft, has kept Maduro and PDVSA afloat with loans, guaranteed by oil and gas shipments. When it was unable to pay Rosneft’s credit lines, PDVSA sought and obtained a bond restructure. Maduro’s lifeline to pay government workers and the military is in fact the Russian government. Opposition legislators in Venezuela claim that Russia is behaving more like a predator than an ally.

There are other examples: A 2006 project to construct the largest Kalashnikov factory outside Eastern Europe for the annual production of 25,000 AK-103 assault rifles and 50 million rounds of ammunition stalled, but re-emerged in April this year, when the Russian and Venezuelan defense ministers announced that production would begin in 2019. Financing for this project remains murky.  

So what is Moscow up to?

Recently, a gathering of Russian and Venezuelan scholars at the Woodrow Wilson Center in Washington analyzed the security purposes of Russia’s interests in Venezuela today.[i] According to panelist Vladimir Rouvinski of the Center for Inter-Disciplinary Studies at Icesi University in Colombia, Russia will continue to meddle in Venezuela so long as the U.S. and European governments interfere in Ukraine; both are viewed as each other’s near abroad. To a Russian public seeking to reassert their country’s global status, Putin can demonstrate the capability to retaliate for western action in Ukraine. He also sees Russian interests in Venezuela as fostering a multi-party world with a network of friendly nations, including the late Hugo Chávez’s Bolivarian alliance, known by the acronym ALBA, that leans leftward and is more independent from the U.S.

However, Putin prefers to hide Russia’s direct hand and therefore encourages Sechin, his close ally, to carry out Russian interests. Sechin is known as “Darth Vader,” and is widely considered the second most powerful man in Russia after Putin. He dispenses with competitors through court convictions and settles comfortably into Rosneft’s Bombardier aircraft to escape cruel Russian winters in the Caribbean and Latin America. Speaking good Spanish and Portuguese, he has constructed a network of allies in the Western Hemisphere with whom he can conduct Russian government business.  

So close to the US…

Why is Venezuela so attractive to Sechin and the Russian government?  

First, Venezuela’s key value is its proximity to the United States. With its vast resources of oil and gas, Venezuela presents an opportunity to invest and to disrupt. Russian citizens are nostalgic for Soviet times, eager to see Russia play on the world stage and bring down the U.S. a peg or two. Sechin and Russia can play in Venezuela at a minimum cost. The Caribbean nation is sufficiently far from Russia that citizens need not delve into the details of Venezuela’s economic and social chaos. Furthermore, it allows Russia to resume a collaborative project with Cuba, an island from which it withdrew in the early 1990s upon the collapse of the Soviet Union. The old Soviet/Cuban mutual trust has not been restored, but working together on regional projects might build confidence in the relationship and reinvigorate Russian desire for warm-water projects. With the recent decline of Venezuelan oil exports to Cuba by more than one half, Russia resumed delivery of oil and diesel to the island in May 2017, something unseen since the Cold War. Likewise in Nicaragua, Venezuelan oil supplies have dropped significantly, impacting the Nicaraguan budget and requiring austerity plans that have been resisted fiercely in the streets of Managua. If not a return on capital, Russia has found a return on public relations and the resumption of friendship ties with nations fronting the Caribbean.

Second, while oil prices were high, there existed plentiful opportunity for military-to-military collaboration. In 2008, under Chávez, Russia extended Venezuela a $1 billion loan for arms production and the following year offered a further $2 billion for arms purchases. No formal ties or permanent presence was established, but private arms sales could thrive. Venezuelan pilots and army colonels trained in Russia, and Russian arms salesmen, found opportunities. Still, the 2006 Kalashnikov project went nowhere until April 2018, when defense ministers made their announcement of a production start date in late 2019. (It is debatable whether Venezuela can implement this project.) In 2011, the extension of loans with which to manufacture or buy weapons was tied to demands for access to rich oil and gas blocs in the Orinoco Belt. Facing the reality of Venezuelan incapacity to carry out promised projects, Russian arms manufacturing and sales shifted to the acquisition of stakes in lucrative oil and gas fields. 

A third factor has influenced the strengthening relationship: Both Russia and Venezuela face sanctions from the United States and European states. Both are restricted from accessing the U.S. bond market, traveling to the U.S. and buying much needed spare parts. Both seek alternative markets. A common sense of resentment has led to closer collaboration.

Not a great investment

Nevertheless, Russian investments in Venezuela have produced heavier costs than expected. Mismanagement, corruption and incompetence in both the government and PDVSA have resulted in employees not showing up for work, no spare parts to repair essential machinery and a serious fall in oil production from 3.5 million barrels a day (bpd) to 1.43 million bpd. In just one month this year, from March to April, production fell by 41.7 bpd.[ii] Payments on principal and interest for loans estimated at $120 billion have yet to be paid in full. In May 2018 the Inter-American Development Bank halted any new loans to Venezuela after the government fell behind on servicing $2 billion in debt. The Second District Court in New York decided in favor of the holders of promissory notes, and the U.S. Treasury Department reviewed Rosneft’s stake in Citgo. Swiftly, Rosneft swapped its Citgo collateral – given for a 2016 loan of $1.5 billion – for more tangible benefits in other PDVSA ventures. These include stakes in two offshore natural gas fields holding reserves of 14 trillion cubic feet.

While the Chinese government has publicly demonstrated its annoyance at Venezuelan mismanagement and suspended its concessionary repayment schedule, the Russian Finance Minister agreed in November 2017 to restructure approximately $3 billion in Kremlin loans. Thanks to the restructuring, Venezuela is now able to pay off its government debt over 10 years, thus freeing up cash for Maduro to pay his armed forces, continue the Kalashnikov project and purchase much needed food and medicines. Russian ministers led the negotiations to restructure the Kremlin loans. 

Igor Sechin’s role in Venezuela remains a mystery. His reputation for business acumen was sealed when he took over Rosneft in 2012 and turned the majority state-owned company from the sick man of Russian energy to its undisputed leader. Today, Rosneft accounts for 6 percent of the world’s crude output, valued at approximately $65 billion, with $53 billion transferred to the Russian state in 2016. Sechin, who owns 0.127 percent of Rosneft shares and is worth approximately $83 million, is reputed to be a ruthless micro-manager, intolerant of failure. So why does he tolerate the mismanagement of PDVSA? Does he see this Venezuelan partnership as a longer-term commercial enterprise or as a geopolitical extension of the Kremlin’s foreign policy?  

To date, and despite the incompetence, Sechin has extended a $6 billion lifeline to PDVSA. He has acquired valuable blocs of oil and gas in the richest seams of the Orinoco Belt and swapped his stake in Citgo for the right to commercialize Rosneft’s share of oil output from all joint ventures. Despite being the junior partner, Sechin has negotiated PDVSA’s permit to export Rosneft’s shares of its entire production in Venezuela. (This latest agreement counters the previous requirement that junior partners, Rosneft included, sell their output from joint projects to PDVSA.) In a desperate need to roll over foreign debt, Maduro has acceded to Sechin’s demands.

Implications for Russian power

Back home, Sechin is the epitome of a Russian oligarch. In 2003, he sought to undermine Mikhail Khodorokovsky, the owner of Yukos, and took over the now-defunct oil and gas firm’s assets when Khodorokovsky was convicted of tax evasion. In 2014, Sechin allegedly asked prosecutors to bring charges against Vladimir Yevtushenkov, the owner of Bashneft, another oil company. When Yevtushenkov was convicted and Bashneft nationalized, Rosneft purchased the company from the state. In 2017, Sechin accused then-Economy Minister Alexei Ulyukaev of soliciting a bribe. In the ensuing court case, Ulyukaev was convicted and sentenced to 8 years in jail. Sechin is ruthless in pursuing his goals.

Rumors abound in Moscow as to whether Putin believes Sechin went too far in bringing down Ulyukaev. Does Putin still need Sechin? Yes. Does Putin support Sechin’s unannounced ambition to become his heir in the 2024 presidential elections? No one knows. 

One way to find out is to watch how Sechin manages the Venezuela portfolio. If he can produce a positive return on Rosneft’s investments in Venezuela, then his negotiating style may end up winning him a place on the ballot. If he fails to produce a commercial return, then Rosneft’s loss may be Sechin’s undoing. Russians toy with Venezuela’s crisis, knowing that they irritate Washington, hold valuable rights in long-term oil and gas reserves, and show solidarity among victims of U.S. sanctions. Whether these geopolitical plays outweigh heavy commercial losses is yet to be seen. If Sechin fails to bring in sufficient economic returns, Putin may have found the justification to deprive him of the heir’s footstool. He need never show his hand; Maduro’s mismanagement will have done it for him.  

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Villiers Negroponte is a public policy scholar at the Woodrow Wilson Center