Wednesday Morning Rant

In the wake of the US's audacious raid on Venezuela and it's successful capture of that country's dictator, many countries now face a difficult question: "what is our exposure to Venezuela?" For some countries, it's significant. Executing an American arrest warrant against Maduro for drug trafficking is the official purpose of the raid, but as many have pointed out, there is much more than that going on. Venezuela is much more than a drug nexus.

Venezuela is also an oil producer and sits in a geographically convenient place for coordinating trade amongst various enemies and rivals of the United States. There is a complex web of trade between these countries, and Venezuela is often involved. It sometimes finds itself in the trade system between Red China, Iran and Russia, and is a major supplier of oil to Red China. This oil moves in a "dark fleet" of tankers under US sanction, and they sometimes operate without flag or transponder on the high seas to run US blockades.

That oil has a common destination: Red China, and it serves a purpose beyond that country's endless need for energy. As everyone knows, Red China has numerous major projects throughout the world, using infrastructure and development deals in pursuit of its diplomatic objectives as its global reach continuous to expand. It has found a willing partner in Maduro's Venezuela, and Red Chinese investment has flooded into Venezuela over the years. Red China, however, doesn't usually extend credit for these projects willy-nilly and there is often security involved. In Venezuela's case, that security is oil.

So what happens now that this oil supply is threatened? Not only have the initial US actions against Venezuela's "dark fleet" threatened oil shipments to Red China, the US raid on Venezuela has caused them to essentially stop. Venezuelan state-owned oil company PDVSA's primary external partner - Chevron - has resumed oil shipments, but per recent shipping data, none of those shipments are flowing to the Orient. PDVSA's production continues to fall and its exports to Asia - which is to say, its exports to Red China - are in free-fall.

This poses a problem for Red China, which has major investments in Venezuela backed by oil-for-loans deals between those two countries. Red China invests in Venezuela's infrastructure (and gains an important foothold in this hemisphere and a means to coordinate and enable trade with major partners), and protects its capital exposure by using oil as security. With the oil trade between the two countries now collapsing, risk is back in a big way. Red China has now demanded that its major lenders assess their exposure to Venezuela and determine their risks in the new environment:

The National Financial Regulatory Administration (NFRA) also advised banks to strengthen risk monitoring of all Venezuela-related credit, seeking to assess potential dangers to China's lenders, the report added.
...
The Bloomberg report said the NFRA's move highlights growing concerns among regulators over potential shocks to the banking sector as geopolitical risks mount. Billions in loans have been extended over the past decade by China to the South American country, primarily led by policy banks such as China Development, the report added.

All of Red China's investments in Venezuela and Cuba, and some of its investments elsewhere in Latin America, could end up being total losses for Red China's lenders, and that may be a major blow. Time will tell. No wonder Red China has been so loud about this action as, per Reuters, it "tests [the] limits of China's diplomatic push." That may be putting it mildly.

Many of America's rivals and enemies have capital or operational exposure to Venezuela, but Red China leads the pack. Red China's external noise masks its internal scrambling to determine just how much exposure it has to Venezuela - and underscores how big a blow toppling Maduro may have been.

posted by Joe Mannix at 10:50 AM

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