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Bad to Worse: PDVSA, Sanctions, and Government Mismanagement

05/22/19 7 minute read

PDVSA Sanctions

The U.S. government has sanctioned Venezuela’s state oil company, Petróleos de Venezuela, S.A. (PDVSA), as part of efforts to pressure Venezuelan President Nicolas Maduro to resign. The sanctions, first imposed on Jan. 28, provide a set of general licenses set to expire between April and July and several exemptions granted for dealings with the U.S. PDVSA subsidiary CITGO. They also block U.S. parties from doing business with anything owned 50% by PDVSA, directly or indirectly.

Sanctions against a company as central as PDVSA necessarily threaten Venezuela’s already crumbling economy. But the Venezuelan government’s actions, past and present, have made things much worse. PDVSA’s operational sprawl, numerous subsidiaries, and connections to sanctioned Venezuelan officials all have magnified the sanctions’ impact. And they leave the door open for future actions.

Unintended Consequences

Former President Hugo Chavez spent years seeking to convert PDVSA into a fulcrum of economic development by funneling Venezuela’s oil wealth into social programs. As part of this shift, PDVSA converted minority-owned joint ventures with multinational companies into majority-owned state enterprises.

In 2019, this change has had an unintended effect: the indirect sanctioning of all those state-owned companies. Under U.S. law, any company majority beneficially owned by a sanctioned entity is also technically sanctioned, even if the U.S. Department of the Treasury doesn’t explicitly announce sanctions against it.

We have identified more than 250 active PDVSA subsidiaries, some owned through multiple corporate layers. This includes at least 45 different upstream oil subsidiaries, each minority-owned by foreign oil companies from the U.S., Russia, France, and other countries. If those subsidiaries want to receive U.S. dollars or send wire transfers to U.S. companies, they need a Treasury license or risk prosecution.

Mission Creep

As part and parcel of Chavez’s social policies, PDVSA also stuck its fingers into practically every economic pie imaginable. Through nationalizations, acquisitions, and the creation of new companies, PDVSA grew to own enterprises including a dairy company, a lightbulb factory, and a (little-watched) television station.

It can be difficult to figure out exactly which Venezuelan government entity owns these subsidiaries—or if they’re even still active. For example, PDVSA’s 2009 management report heralds food distribution subsidiary PDVAL for working toward “the nutritional sovereignty of the Nation.” But the Venezuelan federal register indicates that PDVAL was sold to the Vice President’s Office just a year later.

This opacity complicates research into PDVSA’s holdings. Because Venezuela has no centralized online corporate registry, analysts risk being misled by out-of-date regulatory filings or government press releases about a subsidiary that may no longer exist. (Venezuelan public records do exist, though, if you know where to look!)

And with the collapse of the country’s economy, the tally of inactive or transferred subsidiaries seems to have increased. In 2017, PDVSA reported owning 43 inactive subsidiaries, plus 25 undergoing liquidation and 16 transferred to other government entities. Those that remain are subject to U.S. sanctions, impeding the government’s investments in sectors that it has deemed strategically critical.

One step forward, two steps back

The Venezuelan government has seemingly lurched between trying to pare back PDVSA and committing to its sprawl. In 2015, the Venezuelan government decided to transfer eight PDVSA subsidiaries directly to the Ministry of Petroleum, outside PDVSA’s corporate structure, to focus the company on core oil-related activities. These eight subsidiaries included PDVSA Industrial, which owns the lightbulb factory; PDVSA America, which owns the company’s joint ventures across Latin America and the Caribbean; and PDVSA Servicios de Salud, which operates Coromoto Hospital in the city of Maracaibo. The government expected the transfer of the subsidiaries to be complete by the end of 2016.

Had this decision taken effect, dozens of PDVSA subsidiaries, including key Treasury targets like ALBA de Nicaragua, would have avoided the brunt of U.S. sanctions. But during 2017, the government reversed course. It re-incorporated the eight subsidiaries into PDVSA’s financial statements, opted to keep PDVSA America entirely, and appears to be slow-walking the transfers of the other subsidiaries. This has exacerbated the impact of U.S. sanctions on PDVSA’s finances.

Rogues’ gallery

Even if foreign multinationals secure licenses to transact with specific PDVSA entities, the company remains deeply interwoven with the country’s political power structure.

This includes multiple separately sanctioned government officials. At least three of PDVSA’s directors or board members are currently sanctioned: Simon Zerpa, Tareck El Aissami, and Manuel Quevedo. Treasury sanctioned Quevedo after PDVSA merely for continuing to serve as the company’s President. Given Treasury’s multiple rounds of Venezuela sanctions, financial institutions may be wary of dealing even indirectly with the company.

More PDVSA Sanctions Ahead?

If additional sanctions levied on a Russian bank for providing support to PDVSA are any indication, the Trump administration is poised to implement further sanctions on individuals and entities linked to PDVSA. And with the unsuccessful recent uprising by the opposition, international financial institutions, governments, and creditors likely will have to grapple with U.S. sanctions well into the future.

Venezuelan public records data, as featured in this research, is available through Sayari Search! If you’re curious how this data could drive insights for your team, please reach out here.

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