World Economy

Cash-Starved Venezuela Close to Bankruptcy

Crude oil accounts for 96% of exports and around half of state revenue.Crude oil accounts for 96% of exports and around half of state revenue.

Venezuela might look bad right now amid protests, scarce food and political turmoil. But analysts warn the worsening debt crisis could greatly exacerbate the dire situation—and possibly force a regime change.

Venezuela's long slide into destitution has prompted protests, pillaging and political tensions. But it could soon get a lot worse, according to analysts, because of a debt emergency raising the specter of default, DW reported.

Defaulting on its debt, estimated at over $100 billion, would cut the oil-rich but cash-starved Latin American country off from capital markets. Lenders could seize assets—tankers, refineries, accounts—belonging to state oil company PDVSA. And the humanitarian crisis could deepen as already limited imported essentials dry up completely and more desperate citizens leave.

Venezuela, an OPEC member with the largest proven oil reserves in the world, is almost totally dependent on crude oil, which accounts for 96% of exports and around half of state revenue.

So far, President Nicolas Maduro's government has gone to extraordinary lengths to service the nation's debt, prioritizing debt repayments over all else, including badly needed imports of food, medicine and other essentials.

But all-important oil production and revenues have been declining, and Venezuela's currency reserves have shrunk to just $10 billion. Most of that is in gold, locked away in Caracas as security for loans.

Together with the low prices—and the 30% of output it ships to the United States, its biggest customer—the falling oil production has made it difficult for Caracas to meet its commitments. Venezuela accounts for about 8% of US oil imports.

According to Gunther Maihold, deputy director of the German Institute for International and Security Affairs, only around half of US imports from Venezuela is used for the domestic market. The other half is refined on US mainland by PDVSA's subsidiary Citgo and then re-imported to Venezuela.

As collateral for Russian credit, the South American nation put up ownership of Citgo, resulting in a 49.9% minority stake for Russian government-owned oil company Rosneft.

If a default were to happen, Rosneft could take over Citgo—but that would likely fall foul of US sanctions on Russia. "The US government will not be happy with the idea of having Rosneft taking control of a US-based refiner and fuel distributor," said Juan Carlos Rodado, head of Latin America Research at the Natixis investment bank in New York.

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