While I was on vacation, I wrote a post based on a document a reader had sent me, in which the Minister of Energy and Oil and President of PDVSA, Rafael Ramirez, asked Chavez for the excess money in the Chinese Funds to be returned to PDVSA.
Since I was on vacation, I concentrated on the numbers given there for Venezuela’s oil production, which contradict official numbers. What I fail to understand or comprehend, is that the document is a huge indictment for the illegality of the Chinese Funds, which the Government has been using to finance its activities and bypass the structure of the State.
In fact, as I will show, the whole mechanism is not only illegal, but it represents a perverse scheme for the Government to spend without the usual oversight, while simultaneously severely damaging PDVSA’s finances. For completeness, here is that document again:
Between jet lag and catching up, I had not gone back to the document, even if I meant to. But two things made me look back: One, the interview in today’s papers (El Universal here, El Nacional, by subscription) with Deputy Miguel Angel Rodriguez and a simple question: What is Venezuela’s US$ debt service per year.
In the interview, Rodriguez says: “The truth is that crude is advanced, but money is returned”. This piqued my interest, together with the fact that I calculated that 430,000 barrels of oil a day, at US$ 100 per barrel for a full year, corresponds, to the staggering amount of US$ 15.7 billion dollars a year. Since the official document above clearly states (page 6) that the total debt of the Chinese Funds is US$ 20.8 billion, how could it be that it takes US$ 15.7 billion to service that debt per year?
Clearly, something did not add up and it was time to go back to the document and really study it!
The whole thing is perverse, incredible and totally illegal, here is how the whole thing works, as clearly explained in the document by the Minister of Energy and Oil and President of PDVSA:
1) PDVSA sells the oil to the China National Oil Corporation (CNOOC)
2) CNOOC pays the oil into a Bandes account at the Chinese Development Bank (CDB), which is the lender to the Republic of Venezuela.
3) CDB subtracts from the amounts debt service, both capital and interest.
4) If there is an excess, PDVSA asks CDB that the money be transferred to pay royalties to the Government, taxes to the Government and cover some of the production and refining costs.
Except that starting on Jan 2010, as the document clearly states, PDVSA stopped even getting that. It got zilch, the Funds got it all!
So, let’s make it really simple: The Republic borrows US$ 20.8 billion from the Chinese. PDVSA “pays” for this loan to the tune of US$ 15.7 billion per year, clearly an inordinate amount of money for the loan received. The Chinese collect interest and capital and any “excess”, of which there is a lot, returns to the Government, not to PDVSA, via parallel funds, which bypass the controls and approvals of Venezuelan Laws.
This is absolutely illegal for a number of reasons: First of all, as Deputy Rodriguez says in the interview,the Organic Law for the Financial management of the Public Sector says in its Art. 93 that no credit operation can be guaranteed with income or assets of the Republic. This is exactly what the Chavez Government has been doing by guaranteeing it with oil. Second, there is a clear intent here to bypass the laws of Venezuela, spending the money outside of the budget and controls of both the National Assembly and the Comptroller in the interest of “expediency”, but the law was clearly established to guarantee the money is well spent and this represents a way to circumvent both the spirit and the letter of the law. But the worst crime is that the Republic is making use of PDVSA funds to pay for its debts, a clear violation of the law, but in the process, Chavez and his Government are weakening the finances of the company, as stated by Minister Ramirez in the memo to the President.
When Richard Nixon was President, in the midst of the Watergate affair, there was a big scandal with comic strip Doonesbury, which presented a cartoon indicting one of Nixon’s collaborators, by saying “Guilty, Guilty, Guilty”. Most of you can’t even remember this, but here is that strip:
Some newspapers did not run this, the Washington Post even ran an Editorial on it criticizing the cartoon for “reaching a verdict” on the Watergate affair in such fashion.
Well, today much like then, Hugo Chavez is ‘Guilty, guilty, guilty” of creating a mechanism to bypass the controls of the State, not only in violation of the law, but in order to spend the money at his discretion. The Chinese may one day have to face up to these illegalities and its consequences, but Chavez and his collaborators, if they lose power, will have to answer to Venezuela’s Courts.
Guilty, Guilty, Guilty!