Reassessing the Chinese Debt Trap

Date: 01/10/2022

Author: Kent Moors, Ph.D.

Last week, Richard Moore addressed the so-called “Chinese Debt Trap.” This involves Beijing using credit lines extended to other countries as a tool to make them vulnerable to broader Chinese policy interests.

Now the fact that Moore made the comment…and in public…is unusual. He is the Director of the British Secret Intelligence Service, better known as MI6. Until a few years ago, anything in the press from the spy head known informally as “C” was simply unheard of. The moniker followed the post after the agency’s founder Captain Sir Mansfield George Smith-Cumming would sign his paperwork simply C in green ink. Both the nickname and the ink would remain part of the office thereafter.

For that matter, until a few years ago, even publishing the name of the individual who held C’s chair was a crime in the UK. Push it back a few decades, publishing that MI6 even existed was against the law. So, I guess there have been some advances.

In any event, Moore’s comments paralleled previous work I had done in tracing how China has introduced a more sophisticated approach to energy matters. Previously, Beijing would acquire oil assets abroad and export extraction back to a thirsty domestic market. This became such a major issue in Kazakhstan that the government there suspended all future Chinese acquisitions until officials could figure out how much of the national asset they actually controlled.

However, the approach when entering Latin America marked a new chapter. Here, the Chinese would advance significant loans to the host’s central government and major national oil companies and then use the indebtedness to extract other objectives. Now, Beijing could care less where the producing companies would sell its oil abroad. Instead, China came to control the proceeds from those sales in payment of the loans.

This has resulted in progressively greater control over local administration than the outright ownership of oil fields.

And that has prompted a return to analysis I earlier wrote on the matter.

A while back I witnessed the next stage of Chinese oil market moves. This was taking place in Ecuador. While Beijing continues to pursue sources of crude oil for export back home, the Ecuadorian approach marked a new sophistication.

Advising on a refinery project to be built by Chinese giant Sinopec (with some 33 percent of the finance initially coming from Iran), I experienced firsthand how Chinese loan practices came to control the oil export revenues of OPEC’s smallest member.

Despite having no previous experience in running wellhead production, Sinopec had been granted upstream licenses by a besieged central government in Quito.

Under the guise of my advisory position, I traveled up the Rio Napo, a headwater moving into the Amazon River basin, to survey Sinopec field operations. The opposition by indigenous Indians and pronounced ecological damage were well underway.

That both Halliburton and Schlumberger were involved in the project had not offset the problems. But the control of extraction sites would now combine with something else.

Both the central government and state company Petroecuador ran into severe budgetary constraints and China provided loans. As a result, the country’s oil export revenues came under Beijing’s aegis. Ecuador became the first OPEC member to lose control of its oil proceeds.

Thereafter, the Chinese would allow the export of Ecuadorian crude anywhere. Aside from the production it controlled from projects like the one being run by Sinopec, however, the play had morphed from moving the transit flow back home. Instead, loan repayments took the revenue flow from Ecuador and siphoned it back to China.

What resulted was the first time an OPEC member relinquished control over its own financial lifeline.

A new strategy was evolving to use finance as a better way of orchestrating broader global oil trade. Similar moves then took place in Brazil, Peru, and especially in Venezuela.

The next stage of a Chinese policy expansion unfolded there, where Venezuela quickly came to owe Beijing over $50 billion.

What subsequently transpired in the streets of Caracas is reminiscent of what took place years ago in Vienna. Then the severe winter of 1946-47, crop collapses, a run on the Austrian schilling and dueling Allied post-war bureaucracies culminated in massive food riots beginning on May 5, 1947. In the Soviet occupation zone, the popular unrest was put down by tanks.

These days, food shortage riots in Venezuela are hardly limited to the capital city. The government of President Nicolas Maduro is confronted with the initial stages of outright civil insurrection.

The primary culprit, of course, was Maduro’s predecessor. The charismatic prado champion Hugo Chávez orchestrated a massive network of government-sponsored programs for an increasingly dependent population. Fueled by oil revenues, the system collapsed soon after Chávez died in 2013. That spiral downward was then accentuated by the rapid decline in oil prices beginning in late 2014 and lasting through 2015 followed by a near collapse of oil production in country.

Beleaguered national oil company PDVSA was put into an unsustainable position. Overseeing the world’s largest oil reserves in the Orinoco basin, the state company became the government-mandated importer of food and other staple commodities for an increasingly desperate population.

As one of my contacts at the company frustratingly put it, “We are an oil company not a supermarket.”

PDVSA is still saying that the civil unrest is not affecting production, Nonetheless, the volume is lower than at any point in the last thirty years, lower even than the depths experienced in 2003 during a massive and prolonged oil workers’ strike.

Drilling continues but support, spare parts, and expertise in the lifting of heavy oil are still suffering from Chávez’s decision over a decade ago to throw out Western international oil companies (IOCs). Unpaid bills are accelerating the problems leading to the departures of other oil service companies. Maintenance problems and a rising tide of outright theft at fields are hardly helping either, augmented by the lack of equipment and power shortages at ports.

All of which puts added pressure on an already precarious financial situation. The implosion of the domestic economy is paralleled by the descending value of both PDVSA and sovereign debt. Venezuela’s bonds are now considered the riskiest global sovereign paper, trading at a yield approaching 50 percent higher than U.S. Treasuries.

The destructive cycle is accentuated by the terms of the Chinese loan payback. This comes in the form of in-kind oil transfers and cash. Those oil payments, in turn, are based on a per barrel value. As the price of oil came under pressure, the number of barrels needed increased.

That put Caracas between the proverbial rock and hard place.

Caracas is known to want a one-year suspension of the in-kind payments, likely to add at least $3 billion to the available revenue to service debt. Unfortunately, the condition of the domestic economy will continue to deteriorate.

Sources confirm that the Chinese are not prepared to provide a long grace period unless export crude from Venezuela falls under $50 a barrel. At that point Beijing will require the introduction of a sliding scale, eroding the advantage to Caracas of the payment suspension.

However, that is still some way off. PDVSA contacts acknowledge that its oil is usually set at a 25 percent discount to Dated Brent. [editorial note: Brent closed Friday (January 7, 2022) at $81.83 a barrel].

Yet here is the kicker…and the other shoe about to fall (no pun intended). My sources confirm that the debt restructuring will progressively put more of Venezuela’s fiscal operations effectively under the control of a specialized bank established in 2008.

That bank was set up by China, Russia, and Iran to provide finance for Orinoco operations after Western majors were thrown out. It largely financed the purchase of services from national oil companies in the three countries, along with providing some finance for oil trading and contract swapping among them.

Subsequent decisions by Russian companies to pull out of a consortium set up to work selected projects in the Orinoco, rising Western sanctions against Tehran, and decisions in Beijing to emphasize field moves elsewhere doomed the initial initiative.

Word has been emerging that China now effectively manages fund transfers coming through the Caracas bank, as both Iranian and Russian interests in the house have waned.

Welcome to the next stage of Chinese leverage over Venezuela’s oil sector. From product to finance to fiduciary control.

Don’t be surprised if the model is extended to other “needy” governments in the hemisphere.

That last line turned out to be prescient. As the domestic financial situation deteriorates, contacts are now telling me that the Brazilian government is increasingly interested in advancing amounts of Chinese lines of credit. The payback here is once again control over export revenues, this time minerals as well as oil.

Dr. Kent Moors

This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).

After moving through the inner circles of royalty, oligarchs, billionaires, and the uber-rich, he discovered some of the most important secrets regarding finance, geo-politics, and business. As a result, he built one of the most impressive rolodexes in the world. His insights and network of contacts took him from a Vietnam veteran to becoming one of the globe’s most sought after consultants, with clients including six of the largest energy companies and the United States government.

Now, Dr. Moors is sharing his proprietary research every week…knowledge filtered through his decades as an internationally recognized professor and scholar, intelligence operative, business consultant, investor, and geo-political “troubleshooter.” This publication is designed to give you an insider’s view of what is really happening on the geo-political stage.

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