How Venezuela lost Citgo

Francisco Rodriguez is professor of public and international affairs at the University of Denver.

A Delaware court will soon begin an auction for Citgo Petroleum, the seventh-largest oil refiner in the United States. Barring an unlikely last-minute deal, the company will be auctioned off to pay unpaid debts of its owner, the Venezuelan government.

Venezuela is reeling from the largest economic contraction in the modern history of the Western hemisphere. Citgo, whose refineries are tailored to process Venezuelan oil, could play an important role in the country’s economic recovery. The company’s market value is roughly one-seventh of the country’s gross domestic product, and its annual profits are greater than the amount Venezuela spends on food imports in a year. 

Given Citgo’s sheer size and its potential for helping Venezuela out of crisis, one would expect the country’s leaders to be doing everything possible to avoid losing it . . . right?

Think again. This is Venezuelan politics, after all. Rather than trying to stop the sale of Citgo, the country’s duelling political factions prefer to devote their energies to blaming each other for the impending loss. Listen to Nicolás Maduro and you will hear that the sale of Citgo is a thinly-veiled plot by US politicians (and a subservient Venezuelan opposition) to strip away the country’s assets and hand them over to US corporate interests. Maduro’s opposition will say that Citgo’s loss has been inevitable for years, because of the accumulation of unpayable debts by the Chávez and Maduro governments.

Both interpretations are incorrect. There is no basis to allege, as Maduro claims, that the sales process is being directed by the White House to benefit US corporate interests. In fact, the judge overseeing the sale has rebuked the US government several times, even arguing that the Treasury Department lacks sufficient expertise to interpret its own regulations. Rather than benefit any particular buyer, the court has taken special care to design a transparent bidding process aimed at equitably compensating creditors — many of which aren’t US based.

Yet the opposition’s self-serving story leaves out some crucial details as well. Yes, it is true that the Chávez and Maduro governments irresponsibly took up high levels of debt while they should have been saving revenues from an unprecedented oil boom. But many governments around the world become highly indebted, and almost none of them lose their assets as a result.

One reason why defaulting sovereigns rarely lose control over their foreign assets is that there are important legal safeguards that make it difficult for creditors to seize them. (Remember the Argentine frigate briefly seized by Elliott Management in Ghana? It’s back sailing the world under its Argentine flag). When governments prove unable to pay their debts, they usually agree on a restructuring plan with creditors. The overwhelming majority of creditors find that it is in their interest to reach a deal that lowers the aggregate debt burden to a sustainable level. They rarely choose to enter the tortuous, costly and uncertain world of litigation.

So why didn’t creditors sit down with Maduro to negotiate such an agreement? The answer is that the US forbade them from doing so in an August 2017 executive order that remains in effect. Then, in January of 2019, the US handed the control of Venezuela’s overseas assets to Maduro’s opposition. This meant that from a legal standpoint, only the opposition could restructure the debt. Of course, given its lack of control over the country’s oil revenues, this capacity was meaningless.

Even after these decisions, it was far from clear that creditors would be able to seize Citgo. Sure, Venezuela owed around $150bn in external debt, but as of early 2019 only a tiny fraction of that — $3.4bn, to be precise — was tied to instruments that gave owners a firm legal right to seize Citgo shares. There’s a big difference between being an unsecured creditor of Venezuela and having a claim on Citgo. For starters, Citgo is owned by a holding company that belongs to PDVSA, which is legally distinct from the government of Venezuela. The principle of limited liability, the bedrock of modern financial legislation, establishes that the assets and liabilities of a firm are distinct from those of its owner. You can’t go after a company’s assets to collect on its owner’s debt any more than you can go after someone’s personal assets to collect on a company’s debts. 

Now, let’s look at what happened to that number. Over the past four years — on the opposition-led interim government’s watch — the liabilities owed to creditors with a legal right to seize Citgo shares mushroomed from $3.4bn to $23.6bn:

Liabilities owed to creditors with legal right to seize Citgo shares

The 2019 number was small enough that Venezuela could service it even with its depleted oil revenues (in fact, that is exactly what Maduro was doing up until Venezuela’s US bank accounts were transferred to Guaidó). The 2023 figure is almost double the estimated market value of Citgo, and thus essentially unpayable under current conditions.

Why did these debts grow so rapidly? The answer is that a large share of creditors successfully argued that the Venezuelan government was using Citgo for its own purposes. In legalese, they showed that PDVSA was an alter ego (literally, “another self”) of Venezuela. Once you do that, limited liability goes out the window, and a creditor has free rein to claim the assets of a firm owned by the debtor. Of the $24bn in liabilities shown above, $19bn have their origin directly in this decision.

What is most striking about the Delaware Court’s decision is that it had nothing to do with Maduro. Rather, it is based on the finding that the opposition-led interim government had used Citgo as its instrumentality. (The decision was recently upheld by the Third Circuit on appeal.)

Judge Leonard Stark’s 61-page opinion reads like a list of what you are not supposed to do if you want to avoid creditors seizing your assets:

“The Guaidó Government has accessed PDVSA’s US subsidiaries’ assets in the United States and used them to fund itself, bypassing any right PDVSA may have had to corporate dividends. The Guaidó Government has also used PDVSA assets to fund Venezuela’s legal Defense . . . PDVSA has started, only later to stop, paying its debts at the direction of Venezuela. President Guaidó announced that he intends to treat Venezuela’s debts and PDVSA’s debts the same in an eventual debt restructuring.”

Let’s stay with this last point for a minute. In July of 2019, the interim government published a set of guidelines for the renegotiation of the country’s external debt which mandated that:

“ . . . no different treatment shall be accorded to eligible foreign currency-denominated claims as a result of their origin . . ., the nature or domicile of the holder of the claim, and/or the identity of the public sector obligor.”

Say what? The Venezuelan government was stating that it would pay a New York law creditor with a US court judgment on the same terms as a PDVSA contractor whose claims were only theoretically enforceable in Venezuelan courts? It was committing to pay owners of PDVSA bonds on the same terms as Venezuela bonds, despite the fact that the latter were trading at a 25% premium to the former? And it was doing so in plain sight, without even claiming to have consulted the PDVSA board, thus essentially proving creditor claims that it was treating PDVSA as an instrumentality?

These decisions seemed hard to understand at the time — and still do. Shortly after they were published, I wrote that:  

“ . . . the only way in which Venezuela can be expected to be successful in holding to the equal treatment principle is if creditors prove unsuccessful in enforcing their claims in international courts.”

Why the interim government took decisions so clearly prejudicial to the nation remains unclear. It should trouble us to learn that one of the firms that materially benefited from the Delaware ruling had also formerly employed the official responsible for many of these decisions. The existence of grave and serious conflicts of interests of this magnitude would, at the very least, merit the opening of a thorough and transparent investigation. Regrettably, to this date the opposition leadership has remained deafeningly silent.

For years, Venezuelans have put their confidence in the prospects for democratic change to bring an end to the Maduro regime’s rampant corruption and abuses. But in many cases where the opposition has managed funds, accusations of mismanagement, corruption and cronyism have emerged. It is not surprising that political outsiders who played no role in the opposition’s interim government are currently leading in polling for upcoming presidential elections.

Maduro and the opposition could have agreed on a joint strategy to negotiate with creditors and safeguard Citgo. In contrast, they used their control over the nation’s assets for their own political and personal gain, leading Venezuela to lose an important source of revenue sorely needed to address its economic and humanitarian emergency. Venezuelans were once again left to foot the bill for the country’s destructive political conflict.