GOOD QUESTION: How Will China Take Its Venezuela Lesson?
Beijing proceeded in Venezuela much as it has in East Asia and elsewhere along its Belt and Road route. The China Development Bank (CDB) extended loans. At their peak in Venezuela they amounted to over $50 billion. The funds seemed to be at Caracas’ discretion but were tied explicitly to sales of specific volumes of oil to China at a fixed price. The arrangements state that Venezuela’s state oil company Petrolos de Venezuela (PDVSA) will sell to mostly state owned Chinese companies, at market prices. According to the terms, these buyers, rather than sending the money to PDVSA, deposit the sums into an account at the CDB, which then withdraws the amount needed to service the debt. When market prices fall below the fixed price, Venezuela has had to deliver more oil. If, as has been the case for some time now, Venezuela cannot deliver the required volumes, the CDB has extended what it calls “forbearance arrangements” on which Venezuela accrues a further obligation on the delayed payments.
As Venezuela has fallen into chaos, some $25 billion in such loans remain outstanding. The forbearance China already extended between 2016 and 2018 was pegged to the rate on U.S. Treasuries and hardly compensates Beijing for the risks involved. Venezuela pumps so little oil these days that it cannot possibly meet its obligations. Even if Maduro were to remain in power, and that is far from a sure thing, Venezuela will fail to meet its obligations to the CDB. If Juan Guaido secures power, the fate of these arrangements would become even more ambiguous. At the very least, China will have to take a haircut on what remains outstanding. Though $25 billion is a manageable sum for the CDB and certainly for the cash-rich People’s Republic of China, there is a larger lesson for Beijing in this turn of events. China will also lose all the influence the loans were meant to buy. Even if Maduro prevails, he might see China as a weak partner who insisted on legalities when he was in jeopardy. If Guaido wins, China will not just lose influence, it will have incurred considerable hostility for its support of Maduro.
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