When the President of a country is his own Press Secretary, it becomes difficult to sort out the news in detail, because in this particular case, there are seldom questions and/or clarifications. Such was the case of the multiple announcements this week on new agreements between Venezuela and China both on oil exploration in the Junin 4 heavy crude oil field and a loan of US$ 20 billion given by China to Venezuela. All of these announcements were supposed to be part of high level agreements signed between Chavez and the Chinese President Jintao, during the latter’s visit, but the Chinese earthquake forced him to cancel his visit and the whole affair lost some of the thunder Chavez wanted to have.
Typical of the confusion is this news item from UPI, which only adds to the confusion since after a headline of the Chinese lending Venezuela US$ 20 billion, says the highlight of the deal is the US$ 16.3 billion investment in the Junin 4 field.
The two things have nothing to do with each other, they are two separate deals which are much different in nature. Let’s eal with them separately:
1) The PDVSA-China Junin-4 deal: This is nothing new, the Junin 4 field had been assigned to the Chinese company CNPC quite a while back, terms had been agreed to, this was just the formal signing and announcement of the bonus to be paid. As an example, Reuter published this summary of the Junin field at the beginning of April including the part about Junin-4 being assigned to the Chinese company, production levels, etc.
The only question is the usual one: PDVSA announces a huge investment, in this case US$ 16.3 billion, but PDVSA has to put up 60% of that, in this case US$ 9.78 billion. It sounds great, but where is the money going to come from, as I discussed in a previous post. This is something not even Ramirez can answer, his and the administration’s management style seems to be “oil and God will provide”. PDVSA is in the end a typical Venezuelan family.
2) Then, we come to the US$ 20 billion, ten year loan. Sounds great, no? At a time of tight cash flow and foreign currency problems the Chinese advance you the not irrelevant amount of 20 billion dollars.
But did they?
I have no idea. According to the CNPC website:
“Under the long-term financing cooperation framework agreement, China will provide Venezuela a 10-year wholesale financing loan. PDVSA and CNPC also signed an oil purchase and sale contract to guarantee PDVSA’s repayment.”
which makes it clear the loan will be paid with oil, but “wholesale financing loan” is a strange term.
While I may not understand it, many interpret this as the Chinese giving Venezuela US$ 20 billion now, to be paid in dollars. With this, Venezuela’s foreign currency deficit for the year is no longer an issue, Morgan Stanley’s concerns get pushed until at least 2011.
But then, we read that:
“framework agreement on financing” under which the China Development Bank (CDB) will provide a USD 10 billion loan and other credit amounting to 70 billion Yuan (USD 10.25 billion)” (note that when you subtract the 10.25 billion yuan, you get almost exactly what PDVSA needs to finance its shares of the Junin-4 field, is that all Venezuela is getting, Junin’s financing over the years plus the Yuans for Chinese purchases?)
So, over half the credit is now in Yuan, a non-convertible currency, last I heard. And “other credit” sounds like loans to buy Chinese products in Yuan, if I am reading this correctly. But really, I am not sure, it is all very fuzzy. Ramirez also said PDVSA will not need to issue new bonds in 2010, which is good news for Venezuela and PDVSA bonds, but immediately said that PDVSA was looking into financing from banks to the tune of US$ 1.5 billion in the next few months.
Once again, It may be as high as US$ 21.5 billion or as low, as…anybody’s guess. Are the US$ 10 billion of the US$ 20 billion not in Yuan a one time ten year loan? It sounds like it, but I can’t swear to it.
So, it appears as if: Venezuela signed a project for US$ 16.3 billion with China and received US$ 20 billion in financing from China. But, about half of that (the 20 billion) is in Chinese local currency and the other half, happens to be exactly what is needed in financing for PDVSA to fund its share in Junin-4.
But I don’t know which one it is. Does anybody outside the Government?
Footnote: My next post was going to be on the Guri dam and the electric problem. I was going to estimate how much rain we needed to have the dam in good shape for 2011 and talk about the funny statistics of Opsis which at some point made me doubt that I was right in thinking there would be no collapse in 2009. But then I saw this post in this very professional new blog about Venezuela called Setty’s Notebook and it made no sense to duplicate. Please check it out!
The Devil's Excrement 
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April 21, 2010 at 3:46 pm
In hock at 10% interest for the laughable claim of producing 400,000 bls. of crude from Junin by 2014. Chinese arithmetic will insure that every dollar/yuan will be paid in full with the growing interest piling up doubling this loan for future generations to pay.
April 21, 2010 at 3:29 pm
I have a feeling Ramirez will be disappointed if he thinks the other project’s joint partners will be so generous with total financing for a minority stake with the current PDVSA.
April 21, 2010 at 10:41 am
thanks. Still way to go to catch up greece bonds.
Got to work on memorizing this yield-to-maturity syntax.
April 21, 2010 at 9:47 am
correction: meant that the interest has gone down after the news
April 21, 2010 at 9:46 am
@Miguel Octavia: For not that expert in finance matters you mean like:
After the news about those chinese contracts the interest for PVDSA and Venezuelan bonds has gone up? And if yes how much? And how could I look for myself?
April 21, 2010 at 8:53 am
What the chinese are doing is the same thing the Americans did before… Read “Confessions of an Economic Hitman” by John Perkins. They set up contracts, give loans, but at the end all the money and benefits go to China, the work, if any, only gets done when it is convinient (eg., extracting oil to send to China), and it’s a disaster when it is not (build a power plant for cities outside the area where the Chinese are doing their thing).
April 21, 2010 at 8:29 am
Miguel,
I spent some time trying to piece together the China deal, too, and the whole thing is so mangled you can barely believe it.
I’m with Setty here in that the key thing to grasp is that these loans – the part in Yuan, anyway – are loans to Venezuela in-name-only. Really they’re export guarantees to Chinese exporters. Venezuela places an order for 100 Yuan worth of Chinese goods. The China Development Bank pays the Chinese exporters. Venezuela gets the goods and the bills. None of that money’s ever going to get to BCV because how could it? Like you say, the Yuan’s not convertible.
April 21, 2010 at 8:26 am
José Gregorio,
Really, you’re an affluent reader of Miguel’s blog? You should check out my blog, we’re going to start accepting donations soon!
😉
April 21, 2010 at 8:07 am
Say Hi to the new Imperialists on the Block folks! China needing more oil and going after it is no secret. This is just another case of Big Chief trading black goo for beads, guns and packets of Raman Noodles for the Peons.
April 21, 2010 at 7:47 am
70 billion Yuan loan? wow….what happens if the Chinesse revalue the currency? make it more expensive….huh? Miguel, I am an affluent reader of your blogs. Keep up the good work.
April 21, 2010 at 7:12 am
I don’t know, but I suspect it’s classic “economic hit man” stuff — rich country (China, Brazil, formerly USA) loans huge sum to developing country for vanity projects with limited economic payback (3rd Orinoco bridge, high-speed rail, arms) during a commodities boom. Boom country keeps borrowing through downturns (like last year), putting it in a debt trap. Lenders start setting conditions, most importantly that the cash never arrives in the “recipient” country — the money goes straight from ExImBank, Bands, or China Development Bank to domestic conglomerates, which then do their work with minimal cost- and quality-control, often (though not in Venezuela) using foreign labor. Hopefully you’re right and this will go to Junin 4, which at least is a useful project!
April 21, 2010 at 6:35 am
Some Chinese guys also know the answer – and they haven’t exactly been known for making deals that are lousy for China. They’re also known for making announcement that sound grandiose, but have a few not-loudly-publicized catches that give them sound excuses for not reaching the full extent of the announcement. Just ask Nestor Kirchner about the $40 billion the Chinese government was going to invest in Argentina. Or that’s what he thought, when the reality was nothing more than a Chinese willingness to think about it.
April 21, 2010 at 5:46 am
Sounds like you are “punch drunk” in Venezuela!
Off topic but another feather in the cap for your Magistrates- if only they were in the West the compensation claims would be in the hundreds of millions.
A thought for that poor girl and her family.
April 21, 2010 at 4:01 am
I notice Chinese companies doing loads of work in Trinidad, much of it financed by the Chinese companies doing the work. Are the Yuan to pay the thousands or tens of thousands of Chinese workers headed to Venezuela?
April 21, 2010 at 4:00 am
Thanks very much for finding all those sources.
I told you, Miguel: I was sure Hugo was going to find the money for this year’s election. You said 12 billion was a hard card to pull this time but here he gets 20. He will get that money no matter what with Venezuela’s future.
There is a video of Chavez talking to the Chinese delegation. He calls Hu Jintao and the others “amigo” a million times and he says a couple of things that are so kitsch that you can see one Chinese startled by the words.
Chávez can keep getting money like that for quite some time still. The oppo leaders cannot just wait (which is anyway plainly wrong)
April 21, 2010 at 12:07 am
After reading this, the only thing I can think of is this: (with a fake Chinese accent) “Chavez, yuan idiot! Yuan asshole! Yuan insane lunatic ruining future for everyone!”