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Published on Jun 15, 2020
Establishing itself as a strong player in Latin America, Russia’s policy in the region also focuses on undermining US interests, where possible.
Rosneft’s exit and Russia’s continued role in Venezuela

In an update to its shareholders on 15 May, Rosneft declared that it had ‘completely discontinued’ its operations in Venezuela. This had been first announced in March 2020, soon after imposition of additional US sanctions on Rosneft as a result of its involvement in Venezuela. As per the details available, the discontinuation is applicable to ‘production JVs, oilfield service companies and trading operations.’

This development has been crucial because since the US sanctions on Venezuela intensified after the 2018 re-election of President Nicolas Maduro, a development rejected by the local opposition and some members of the international community, Rosneft had become crucial to the survival of state energy company PDVSA. This support from the Russian state oil giant also helped the Venezuelan government by demonstrating crucial political and financial support.

It was argued that since the crude delivery was in exchange for debt extended to Venezuela in earlier years, Rosneft was not violating US sanctions.

As the Latin American country dealt with a failing economy due to severe economic sanctions, Russia decided to the use the presence of Rosneft as a geopolitical tool to consolidate its presence and prop up the Maduro regime. This was done through Rosneft ‘acting as an intermediary’ by shipping Venezuelan oil to its customers. It was argued that since the crude delivery was in exchange for debt extended to Venezuela in earlier years, Rosneft was not violating US sanctions. Russia also opposed unilateral sanctions imposed on Venezuela, a country to which it extended both economic and military aid. This position put it in direct opposition to the US, which has been to see the ouster of the incumbent Venezuelan president.

But earlier this year, in February 2020, Rosneft Trading SA, an extended arm of parent Rosneft was hit with US sanctions, followed by another subsidiary in March. The US argued that these companies were skirting the sanctions by carrying out ship to ship transfers. This dealt a blow to Rosneft’s international operations, hindering its ability to transact in US dollars. Given that Rosneft is considered one of Russia’s top strategic companies, a new plan of action was necessary to protect it from further US sanctions while also considering Russia’s geopolitical position in Venezuela. This was done through creation of a new company ‘Roszarubezhneft’, which is owned by the Russian government, to takeover Rosneft’s assets. It remains to be seen how the role of this new company shapes up in helping the present Venezuelan government survive politically and financially.

Rosneft in Venezuela: Background

Rosneft had been intimately involved with the state-run oil company Petroleos de Venezuela (PDVSA). Considering that oil revenues account for 95% of Venezuela’s export earnings and that PDVSA is the dominant operator, the Russian company’s support had become even more crucial after imposition of crippling US sanctions. Sanctions had increased economic pressure on the Maduro government, accelerating a decline in oil production. Already, as a combination of sanctions and lack of investments, Venezuela’s oil output declined to about 0.7 to 1.0 million barrels per day (bpd) from about 3 million bpd in the early years of the last decade. The loss of revenue from oil only exacerbated the already deteriorating situation in Venezuela, economically and socially.

Rosneft provided PDVSA with around $6.5 billion in loans from 2014 to 2017, agreed to be repaid in oil supplies, close to four million barrels per month.

Rosneft had entered into a contract with PDVSA in 2010 for extracting oil reserves in Orinoco River Basin. However, other members of the Russian National Oil Consortium LLP saw little gains in investing there and left the country, paving way for Rosneft to scale up its operations in Venezuela. Between 2014 and 2016, Rosneft went a step forward and arranged for pre-payments to a cash strapped PDVSA for crude oil. Rosneft provided PDVSA with around $6.5 billion in loans from 2014 to 2017, agreed to be repaid in oil supplies, close to four million barrels per month. It also invested in other energy ventures such as Carabobo-2, 4 (PetroVictoria), Petromonagas etc. in the state, owning stakes in the petro reserves. In 2016, it was announced that Rosneft would be investing an additional $500 million in the Petromonagas joint venture in the Orinoco belt region, raising the company’s stake to 40%.

As noted earlier, apart from investing in energy ventures in Venezuela, Rosneft had also been the main trader for the state’s crude, shipping the oil to the buyers of Venezuelan oil who didn’t want to directly deal with the Latin American country for the fear of breaching US sanctions. China and India, the traditional clients of PDVSA, imported oil through this channel. Last year, Venezuela also modified a cooperation agreement and provided incentives to Rosneft for the development of two offshore natural gas fields in the Patao and Mejillones fields in Venezuela’s eastern coast.

The geopolitical dimension 

Russia’s economic intervention through its state-oil company in terms of investing heavily in the state’s energy sector has been geared towards preserving the current regime while also expanding its influence in the country. For President Putin, the return to Latin America was a move to showcase Russia as a prominent player on international stage. He also looked to portray the Russian presence in Venezuela to garner public support at home, seeing the development as part of restoring Moscow’s influence in global affairs.

For President Putin, the return to Latin America was a move to showcase Russia as a prominent player on international stage. He also looked to portray the Russian presence in Venezuela to garner public support at home.

Venezuela still possesses world’s largest oil reserves and the country’s political stability also has impact on the world energy market which keeps the United States occupied in Venezuela. Russia also understands that a control over Venezuela’s energy resources could prove to be a game changer and contribute well enough for its future as the leading global energy player. Russia is trying to fill the void left by China during the Chavez government. Beijing was the principal lender to Venezuela investing in billions of dollars for oil. Though, it has scaled back its operations mainly due to US sanctions against the Latin American country.

Challenges involved 

Russia’s policy in Venezuela has not been without its challenges, despite its success in keeping the Maduro government afloat. Russian companies had been investing in Venezuela without gaining much in dividends. The Venezuelan oil fields required constant maintenance as they had grown old. Even the service units were withdrawing due to partial payments for quite some time now. Also, under the pressure of intense sanctions, it had become increasingly difficult for Rosneft to conduct the business smoothly in the country. There are also lingering questions about its investments in a post-Maduro scenario for Venezuela, in case the opposition is able to mount a successful challenge.

Kremlin’s foreign policy in Venezuela had also proven costly. The Russian Federation aimed to establish itself as an important regional player with huge military exports and investments in various sectors. Though, with the recent economic mismanagement and internal political disorder in Venezuela, the Russian equation changed. Last year when President Putin met Maduro, there were no further economic promises made to the government and no additional aid was granted. Though, leaving Venezuela altogether would clearly send a wrong signal back home and to its regional allies such as Nicaragua, Cuba and Bolivia.

Kremlin’s foreign policy in Venezuela had also proven costly.

Conclusion

Establishing itself as a strong player in Latin America, Russia’s policy in the region also focuses on undermining US interests, where possible. Venezuela also became a market for Russian arms makers, having bought weapons worth $4 billion from Moscow in the last decade. By deepening Kremlin’s involvement in the country’s economy while supporting an authoritarian regime, President Putin aimed to strengthen Russia’s footprint in the region. The political instability in Venezuela due to the power struggle between President Maduro and Juan Guaidó, a key figure in the Venezuelan political crisis who declared himself as the acting President of the country, had created an opportunity for Russia to extend its support for the incumbent.

The withdrawal of Rosneft is a setback for the Maduro government and the already crippling Venezuelan economy. It remains to be seen how effective the new company Roszarubzhneft will be in advancing Russian national interests in Venezuela, given the declining oil prices and global recession, reducing further demand. While the Russian ambassador to Venezuela has struck a positive note about the new company, explaining that the transfer of assets were made to the Russian government directly and the partnership would continue, the role of the new entity remains to be seen in helping strengthening Russian presence in Venezuela and through it, the broader Latin American region.

India has been one of the largest export destinations for Venezuela in terms of oil. Though, the decline in production lately, has had a temporary impact on the oil relationship between the two countries. The sanctions have made it difficult for Venezuela to export oil as well. With events unfolding, it would be beneficial for India if there is an uptick in oil production along with the resolution of logistical complications.


The author is a research intern at ORF.
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