Debt of $29.3 Billion... How Did Venezuela Lose Its Companies to the US? [Song Seungseop's Financial Light]

Venezuelan Company Facing US Auction
Venezuela Steeped in 90s Left-Wing Populism
Government Seized Oil Company Profits to Distribute Cash
Investment Halted and Staff Reduced... Debts Soar
Unable to Repay Debt, Prime Company at Risk of Transfer

The Delaware court in the United States is soon holding an unprecedentedly unique auction. It is the auction of CITGO, the 7th largest oil refining company in the U.S. The company itself is up for auction. If you pay and win the bid, you can secure shares of CITGO. Of course, the owner of CITGO would not be pleased. After all, their company is up for auction. Who owns CITGO? It is Venezuela. The U.S. court has put a Venezuelan company up for auction. How did Venezuela end up losing its company to the U.S.?

Citizens lining up in a long queue to obtain drinking water in Venezuela. [Image source=Yonhap News]

CITGO is an American oil refining company. It is a large company ranked 7th in drilling capacity among companies extracting crude oil in the U.S. Its parent company is PDVSA (Petr?leos de Venezuela, S.A.). The Venezuelan government holds the shares of PDVSA. Therefore, although CITGO operates in the U.S. and employs Americans, its management and supervision are conducted by the Venezuelan government. Important decisions and board meetings are held not in the U.S. but in Venezuela.

PDVSA and CITGO are very important companies for Venezuela. PDVSA accounts for 70-90% of Venezuela’s foreign income. Moreover, CITGO’s market value is equivalent to one-seventh of Venezuela’s Gross Domestic Product (GDP). Its annual revenue exceeds Venezuela’s annual food import expenditure. Therefore, CITGO is considered the most important and valuable overseas asset held by the Venezuelan government.

A Prime Company Fallen into Insolvency Due to Left-Wing Populism

However, PDVSA has a very serious problem: debt. According to the financial statements released by PDVSA through state-run media, its debt stood at $34.9 billion as of the end of 2021. Converted to Korean won, this amounts to approximately 41.566 trillion won. The quality of the debt is also poor. Among this, shares of CITGO held as collateral amount to $23.6 billion. This means that if the debt is not properly repaid, creditors can forcibly sell CITGO shares, a subsidiary of PDVSA.

The reason the U.S. court is auctioning CITGO is precisely because the debt has not been properly repaid. Since 2017, PDVSA has failed to pay the principal and interest on bonds maturing. It has been effectively in default since then. Most bond interest payments were suspended, and overdue interest has reached tens of billions of dollars. When PDVSA failed to repay in 2020, creditors eventually went to court. They are trying to sell CITGO, which was held as collateral, to recover funds.

FEDEBESA Logo

How did PDVSA accumulate such massive debt? Was it due to incompetent management? No. From 1994 to 1998, PDVSA was a powerful company in terms of production volume. It was not the management but politicians who ruined PDVSA. When Hugo Ch?vez became president of Venezuela in 1999, PDVSA began its path to decline.

Former President Ch?vez abandoned neoliberalism and adopted socialism. He greatly increased cash-based populist support. The huge funds were secured by nationalizing private companies. Ch?vez enacted the Oil Industry Law, allowing the government to intervene in the management of oil companies. It also became possible for the government to take profits. As government levies became excessive, PDVSA was unable to make new investments. Naturally, it was doomed to be eliminated from the market.

The nationwide strike of Fedebesa union members that occurred from 2002 to 2003.

There was also a shortage of competent employees. In 2002, as government interference in PDVSA intensified, thousands of union members stopped work and took to the streets. Ch?vez then identified 19 executives as behind the protests and dismissed them. Their positions were filled with his close associates. After the strike ended, Ch?vez fired 18,000 employees, accounting for 40% of the workforce, most of whom were technicians. With insufficient investment and massive layoffs, competitiveness sharply declined.

Adding Insult to Injury... Restructuring Hindered by U.S. Regulations

Of course, PDVSA could have restructured its debt with creditors to repay the increased debt. Creditors generally do not want to sue in court or participate in auctions to recover money. It takes a long time, and court rulings are uncertain. Even if an auction starts, if the asset is sold at a low price, creditors could suffer greater losses. Therefore, creditors often agree to restructuring by extending maturities or reducing principal and interest.

Nicol?s Maduro, President of Venezuela [Photo by Yonhap News]

The reason creditors did not restructure is due to U.S. regulations. The U.S. did not recognize Nicol?s Maduro, who took office as Venezuela’s president in 2019, as the legitimate government. Therefore, the U.S. issued executive orders banning transactions with the Venezuelan government within the U.S. Assets of individuals and organizations supporting the regime were also frozen. It was prohibited to remit CITGO’s earnings to PDVSA in the form of dividends or profits. Financial benefits such as debt forgiveness were also banned.

Ultimately, Venezuela’s difficulties stem from decades-old populist politics. Due to the misguided decisions of politicians who chose popular appeal, the nation itself is now drowning in debt. Venezuela is currently known to have debts amounting to approximately $150 billion.

Editor's NoteFinance is complicated. Confusing terms and complex backstories are intertwined. Sometimes, you need to understand dozens of concepts just to grasp one word. Yet finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those with no financial knowledge can immediately understand these 'light' stories, which illuminate the 'fire' of finance.