Caracas Shockwaves: The Global Financial and Monetary Fallout
Washington’s seizure of Nicolas Maduro in Caracas has forced a lot of reconsideration and recalibration in the Americas and across the globe. Strategies have had to change on all levels – military, diplomatic, economic, and financial. It is wise to leave speculation on matters military and diplomatic to those with special expertise (although too many in the media seem to think otherwise). There is nonetheless plenty to consider in this column’s economic and financial area of focus. Energy and oil are one area, but finance and monetary matters are not only less noted in the media, but also more interesting and likely more significant.
Why Venezuela’s Oil Reserves Matter Less Than Expected
Even though President Trump and the media seem obsessed with Venezuelan oil, it, except from a very long-term perspective, is a minor concern. Although Venezuela sits atop the world’s largest reservoir of proven oil reserves, it has long ceased to be a major player in the global oil business. Venezuela’s output constitutes less than 1% of global oil production. Whereas Venezuela once pumped some 3 million barrels of oil a day, the neglect of infrastructure under Maduro and his predecessor, Hugo Chavez, has reduced that flow to just 930,000 barrels a day, according to statistics offered by the Organization of Petroleum Exporting Countries (OPEC). Little wonder that global oil prices hardly moved on the otherwise dramatic news. Even if Venezuelan oil were to receive the massive investments of which Trump speaks—and no one has promised—it would take years for Venezuelan supplies to regain their former global significance.
Limited Impact on Global Energy Markets and Oil Trade
On this basis, what happened in Caracas on January 3rd does little to change the energy status quo. Neither oil importers, like Europe, the United Kingdom, China, Japan, or India, nor oil producers, like Russia, the United States, Canada, or OPEC, need make any adjustments over a time horizon of years, possibly even decades. Even China, which is the largest customer for Venezuelan oil and has a contract to consume 1 million barrels a day, actually takes only some 470,000. Washington has not even hinted that this flow will stop. Indeed, casual remarks by Trump suggest that it will continue. Even if it were to stop, it constitutes a mere 4.5% of all China’s seaborne oil imports. China would have no trouble substituting for the loss of Venezuelan oil with increased purchases from Russia. Such a shift would amount to about a 20% increase in Russian sales to China, which presently stand at about 2-2.4 million barrels a day. While Russia’s beleaguered economy would no doubt welcome the added sales, they would hardly be a game changer.
China’s Financial Exposure to Venezuela
Even though most of the world has little at stake financially in Venezuela, financial questions are more imposing and significant. Because Maduro and his predecessor Chavez scorned most of the developed world, neither the United States, Japan, Europe, the United Kingdom, nor most other nations have much in the way of assets or loans in the country. China, however, is another matter. According to estimates from The Center for Strategic and International Studies, the Chinese government, its state-owned enterprises, and some private firms have a total value of $62 billion in loans outstanding in Venezuela. Most of this money has gone to support major contracts with Chinese firms—mostly state-owned—to build port facilities, other infrastructure projects, and, of course, oil field development.
A lot of this lending and investment has come under the auspices of Beijing’s Belt and Road Initiative (BRI) and involves the China Development Bank. China’s Huawei Technologies operates Venezuela’s 4G network, while China’s ZTE is developing a so-called “Homeland Card” for Venezuela, a kind of identification marker needed by citizens to access public services, and incidentally a wonderful surveillance device, something in which China has surpassing expertise. The China National Petroleum Corporation (CNPC) has joint oil development projects with Venezuela’s state-owned Petroleos de Venezuela (PDVSA). Though no decisions have been made—in Washington or elsewhere—all these assets and contracts are at risk. Beijing’s National Financial Regulatory Administration has already demanded that banks and other lenders assess the risks involved.
Perhaps the biggest immediate impact lies on the monetary front, where Washington will gain at Beijing’s expense. Maduro’s Venezuela was a partner in Chinese President Xi Jinping’s ambition to internationalize Chinese yuan and so challenge the dollar as the premier means of international exchange and store of wealth, what bankers and economists refer to as the “global reserve.” To serve this ambition, Venezuela priced its oil in yuan, instead of dollars, as do most oil producers, and conducted most of its international trade in yuan. Whatever Washington decides for Venezuelan oil and Venezuela trade, the yuan preference will certainly give way to a renewed dollar preference for pricing and for most financial holdings. Xi, no doubt, will continue to pursue his ambition, but it will suffer a severe setback from this.
Long-Term Economic and Monetary Fallout Still Taking Shape
It is, of course, early days. Calculations and perceptions will change as decisions are made, mostly in Washington, and as events unfold. Over the longer term especially, the fallout has the potential to significantly alter economic, financial, and monetary structures, not to mention military and diplomatic calculations. For now, however, the financial and monetary directions outlined here seem most salient.
