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Part 1 – Maduro Looks To Have Pulled And Whiffed On His 3 Big Levers To Stay In Power

By Dan Tsubouchi

Its been a bad week for Maduro in his bid to stay in power.  And we believe the end of his regime is going to happen very quickly, likely within weeks and it could even be within days.  We won’t be surprised if we woke up any day now to read he has left the country.  We thought it was inevitable for Maduro to leave as we saw his financial assets/reserve crumble.  That was the thesis in or Jan 13, 2019 Energy Tidbits memo “Are Dwindling Gold Reserves The Timing Catalyst For Venezuela Regime Change?” [LINK].  We looked at Maduro having 4 (3 big ones and 1 smaller levers) he had to pull on to give him a chance to stay in power, to give him money so he can keep the army onside and have them believe he can survive. The 3 big levers were offshore gold/cash reserves, PDVSA/CITGO cash flow, and Russia.  The 4th and smallest was China.  These are the major levers that Maduro has tried to call on to give him cash to keep the country afloat and the army behind him.  Its all about keeping the army supporting him because once they leave, it is over.   He has pulled on his 3 big levers to get cash to fund his fight to stay in power and he has whiffed thereon, and he may be down to his 4th (and smallest lever) and we believe that one will also strike out if it hasn’t done so already.  He has effectively struck out and the only question will he walk back to the his or the opposition’s dugout.  Part 2 of this blog series will highlight how we see Venezuela under Guaido, in particular the impact on oil markets, which seem to be different than other views.

The army is the prime time player who will dictate when its over.   We outlined our view of the army’s role in our Jan 27, 2019 Energy Tidbits memo was titled “Increasing Momentum For Change, Is The Army Talking/Negotiating With Maduro On An Exit?”.  We have been told our view is different than others and we certainly don’t mean to diminish the role of Maduro and Guaido, but we have a different view on the prime time players. We see 4 primetime players – Maduro, Guaido, the army and Trump.   We look at two of them, Maduro and Guaido, as being front and center for the world to see but they are really the marquee name lead actors going thru their roles.  Their roles are important and keep the flow of the play going, but the timing and nature of regime change is being  determined or predicated by actions of others.  Guaido will keep moving to convince Venezuelans and other countries he can and should be the new president and trying to get Maduro to see the futility and leave.  Guaido needs the army to stop supporting Maduro to take over.   Maduro will keep trying to stay in power, most of all to keep the army on his side (so far he has), and is trying to find out if its salvageable (which there is a glimmer as long as the army supports him).  But its all about the army for when it tips and how it tips.  The army is the most important prime time player and Trump is #2 but he has really played the key setup card (PDVSA sanctions) a week ago.  Trump is basically in wait and see for now until the army takes its next course of action, but he is making sure the army sees that the US will turn up the heat if there isn’t change.  Whereas its now in the army’s hand and they will determine if Maduro leaves peacefully on his own accord (walks back to his dugout), or ends up taken into custody (walks to opposition dugout).  Up until the past week, the army could also be buying into the glimmer of hope (ie. gold/cash reserves and Russia) that Maduro had the financial wherewithal to hang on, but with Maduro striking out on these 3 big levers, the army has to realize the writing is on the wall for a regime change any day.   And we have to believe the army will want the credit with Guaido for orchestrating a regime change, which is why we have believe they must be talking/negotiating with Maduro.

Big lever #1 and the biggest lever – Venezuela’s offshore gold and cash reserves.  This has always been the key life preserver.  At first, it was just that Maduro’s cash burn was so high he was depleting the gold and cash reserves at an accelerated pace.  Our Jan 13, 2019 Energy Tidbits memo was titled “Are Dwindling Gold Reserves The Timing Catalyst For Venezuela Regime Change? and highlighted The Gartman Letter Jan 10 disclosure that Venezuela liquidated $700 million in gold from their gold reserves in Nov, putting Venezuela’s gold reserves at $5.45 billion at Nov 30, down from $6.12 billion at Oct 31.  The takeaway being an accelerating liquidation of its safety net gold reserves, and that dwindling gold reserves meant he was running out of time.  And the army had to look at this dwindling gold reserves (safety net) as being a signal that Maduro will be running out of options to fund his fight against the growing opposition movement.  We thought that it was a matter of time ie. how long will the gold last?   But this changed in the past week from two key events. First, the multiple reports that the Bank of England refused Venezuela’s request to ship back $1,2 billion of gold.  Second, the Reuters [LINK] and others that “Portugal-based Novo Banco halted a transfer of $1.2 billion by the government of Venezuelan President Nicolas Maduro to banks in Uruguay, a Venezuelan legislator said on Tuesday, a day after the opposition denounced what they called the theft of public funds.   Opposition leader Juan Guaido, who most European and Western Hemisphere nations have recognized as the country’s legitimate leader, said on Monday that authorities were trying to move up to $1.2 billion to banks in Uruguay.”  We can debate about the significance of the request to move the money to Uruguay banks and not Venezuela’s central bank (ie was it for his escape plan?), but the significance is that it was refused.  These two events are significant. Its no longer how many more months will the offshore gold and cash last to fund Maduro’s fight to stay in power, rather these assets are effectively gone to zero and the question is how much offshore gold and cash can he actually get to fund his fight to stay in power.  This is excluding any offshore gold and cash he has already moved to fund his retirement, wherever that may be. These offshore gold and cash reserves are his most important big lever, he has pulled it and whiffed.

Big lever #2 – PDVSA and Citgo cash flows.   Everyone knows the story of declining Venezuela oil production and exports, but the reality is that last week’s additional US sanctions will accelerate the decline in PDVSA oil exports and PDVSA/Citgo cash flows that can be returned to Venezuela to hep Maduro fight to stay in power.  On Jan 28, 2019, the US announced additional sanctions on Venezeula and this time included PDVSA.  [LINK]  And by including PDVSA and Citgo, the US has effectively stopped any cash flows generated with US activities from gong back to Maduro.  It also wipes out the expectation for continued US oil imports from Veneuzela.   Theoretically, Venezuela can redirect all the oil it exports to the US to other markets.   We don’t believe that is possible, but even if they do, their netbacks on oil will be less than delivering to the premium US market with cheaper tanker delivery costs.  And this will also hurt Citgo US refinery operations and cash flows, which can’t be sent home with the new sanctions.  Plus unless Venezuela replaces US diluent/naptha, Venezuela’s oil exports have to be hit.  Venezuela uses diluents/naptha to blend at the field level with heavy oil so the blended oil can flow by pipeline to the export ports and then be shipped at the blended level to meet refinery specifications.  Less diluent/naptha to blend means less available blended oil to transport and export. We estimate Venezuela oil exports would be reduced by >200,000 b/d if Venezuela cannot replace the imported US diluents/naptha.  Maybe its not fair to call this a Maduro strike out, but it means that his big lever #2 will, at best, generate about 20% less than expected a week ago.  And it’s a whiff.

Venezuela Oil Production


Source: Bloomberg

Big lever #3 – Russia won’t/can’t come to the rescue.  The  Bloomberg story this morning “Russia Starts to Worry Maduro’s Grip May Slip in Venezuela[LINK] reminded us that Russia won’t/can’t come to the rescue for money and enough military to help him hold power.  This was probably Maduro’s second biggest lever to hold on to power as they could bring money and potentially security support.

  • First, no new life preserver is coming from Russia, or for that matter other countries. We believe there is significant added risk on any new cash injections/transactions post the increasing number of major countries following the US lead in formally recognizing Guaido’s government as the rightful government of Venezuela.  We believe it adds too much risk for any country to put money into Maduro’s government and then make a subsequent  case for a legitimate debt if Maduro falls. We don’t believe the Bank of England or the Portuguese based banks or others would redirect offshore Venezuela gold or cash for any deal done post the formal recognition of Guaido’s government. Bloomberg’s comment today make sense “Despite the history of support, Moscow has ruled out providing new money to an ally that’s had to have past debts restructured”.
  • Second, it seems that Russia sees the inevitability of Maduro leaving. This makes sense.  Russia would know about Venezuela’s deteriorating gold/cash reserves, can’t see the case for new money and, as Bloomberg indicates, they are too far away to send in a lot of troops to try to stabilize the situation for Maduro.  Bloomberg notes “After pledging full support for the embattled regime of Venezuelan President Nicolas Maduro, Russia is starting to show signs of doubt about his ability to survive an opposition challenge.”  And “Unfortunately, time isn’t on Maduro’s side,’’ said Vladimir Dzhabarov, first deputy chairman of the international affairs committee in the upper house of Russia’s parliament.In a situation of worsening economic crisis, the mood in society can quickly turn against him.’’
  • Third, we believe that Russia has to have noticed that the army isn’t as enthusiastically behind Maduro as it was in 2017. Bloomberg notes something that we highlighted in our Jan 27, 2019 Energy Tidbits memo [LINK] on how the army has not gone hard after protestors like they did in the protests of 2017.  In our memo, we wrote “Especially since the army hasn’t acted as of yet like they did in 2017. Its early in the protest period, there were several people killed this week in the protests and the protests have really just started, but, at least to date, the army hasn’t acted as harshly as they did to put down the protests as they did in 2017Coincidentally (?) the protests started in Jan 2017, but escalated thru the spring and the story were more deaths and lots of arrests of prominent opposition politicians”.  The Bloomberg story this morning noted “While Moscow hasn’t given up its public backing of Maduro, it increasingly recognizes that the disastrous state of Venezuela’s economy is inexorably draining what remains of his public support, said two people close to the Kremlin. At the same time, the army’s reluctance to crack down on its own citizens limits his ability to use force to crush the challenge to his rule, said the people, who asked not to be identified because the issue is sensitive.
  • Fourth and perhaps most important is the fact that Bloomberg says Putin has been silent on Maduro and Venezuela. While Bloomberg notes that that senior Russians have voiced support, Putin has not.  No one will dispute that Putin is the person who calls the shots in Russia.  And Bloomberg notes “Though lesser officials have backed the Venezuelan leader, Russian President Vladimir Putin has made no public statement in support of Maduro since the crisis erupted beyond a phone call to him on Jan. 24.”  A silent Putin is not of any help to Maduro in his fight to stay in power.

Lever #4, is a smaller one that wasn’t as likely to save Maduro by itself, but nevertheless has to be a another strike out – China coming to the rescue.   We never saw China as being a savior by itself, but even if it did want to save Venezuela, they really can’t right now.  Its not just that China has its own economic pressures to deal with right now, its the point noted earlier– the formal recognition of a government change by the US and many other leading countries.   It has to make it harder for China to put new money into Maduro now and then, in the event of a Maduro downfall, expect to be successful in any debt collection process for any new deals.  We don’t see how the US and others like the EU would recognize any new money to Maduro as having a legitimate claim post a regime change.

Look for our Part 2 blog early next week on how we see Guaido impacting oil markets.