U.S. Toughens Penalties on Venezuela by Curbing Its Access to Funds

By Ian Talley Features Dow Jones Newswires

The U.S. on Friday restricted the ability of Venezuela to tap American debt markets for funding, escalating Washington's economic crackdown against Venezuelan President Nicolás Maduro's cash-strapped government.

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President Donald Trump's executive order prohibits institutions in the U.S. from trading new bonds with Mr. Maduro's government, including through the state-owned oil company, Petróleos de Venezuela SA. It doesn't curb trading of existing Venezuelan bonds in secondary markets and allows short-term trade finance to facilitate oil transactions between Venezuela and the U.S.

The actions are aimed at severely limiting the government's ability to finance itself, undermining Mr. Maduro's legitimacy among domestic supporters and further estranging the leader within his own political circle.

The administration said it is ratcheting up the sanctions pressure on Venezuela to try to return the country back to democracy and penalizing the Maduro government for what it calls human rights abuses and state-led corruption.

"We will not allow the United States' financial system to participate in the underwriting of the Maduro dictatorship" amid "a wholesale looting of the Venezuelan economy and the violent oppression of the Venezuelan people," a senior administration official said. "We're closing off his access to the markets for the financing he's been using to prop up his regime and to fund the security apparatus that is repressing the Venezuelan people."

The sanctions also ban the PdVSA and its refining company operating in the U.S., Citgo, from profit earned in the U.S. back to Venezuela. They do allow Citgo to continue raise new debt and the trade of Citgo bonds.

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Write to Ian Talley at ian.talley@wsj.com

WASHINGTON -- The U.S. on Friday restricted the ability of Venezuela to tap American debt markets for funding, marking a significant escalation in Washington's economic crackdown against Venezuelan President Nicolás Maduro's cash-strapped government.

President Donald Trump's executive order prohibits institutions in the U.S. from trading new bonds with Mr. Maduro's government, including through the state-owned oil company, Petróleos de Venezuela SA. It doesn't curb trading of existing Venezuelan bonds in secondary markets and allows short-term trade finance to facilitate oil transactions between Venezuela and the U.S.

The actions are aimed at limiting the government's ability to finance itself, undermining Mr. Maduro's legitimacy and estranging him from the leadership of his own Socialist movement.

The Trump administration said it aims to return Venezuela to democracy and penalize the Maduro government for what it calls human rights abuses and state-led corruption. This is the third round of sanctions the administration has levied against Venezuela in half a year. It previously targeted 30 top officials in the Maduro government, including the president himself.

"We will not allow the United States' financial system to participate in the underwriting of the Maduro dictatorship" amid "a wholesale looting of the Venezuelan economy and the violent oppression of the Venezuelan people," a senior administration official said. "We're closing off his access to the markets for the financing he has been using to prop up his regime and to fund the security apparatus that is repressing the Venezuelan people."

The sanctions, reported by The Wall Street Journal early this week, also ban the oil company, known as PdVSA, and its refining company operating in the U.S., Citgo Petroleum Corp., from sending profit earned in the U.S. back to Venezuela. They do allow Citgo to continue to raise new debt and the trade of Citgo bonds. There is also an exemption allowing humanitarian assistance. One recent Venezuelan bond issuance held exclusively by the government is completely banned from trading. Taken together, the actions effectively prohibit Venezuela from restructuring its debt with U.S. entities.

Bond investors expressed relief that the new sanctions didn't ban trading of all the country's existing bonds, an outcome that would have caused major disruptions in emerging debt markets. Venezuela government bonds due in 2027 edged down 1.2% to 40.9 cents in Friday afternoon trading, according to traders. PdVSA bonds due on Nov. 2 were up 0.4% to 93.4 cents, following a 6% gain the day before, according to traders.

High risk premiums mean Venezuelan government already has been effectively shut out from new international debt issues. U.S. officials said the new measures are meant in part to hit the personal wealth of army officers, businessmen and ruling party officials who industry sources say own Venezuelan bonds and rely on them for income. This will make it harder for them to make use of these resources in international markets.

"We urge those around Maduro to take note, to take heed, and to actively distance themselves from the violence and the dictatorship," the senior official said.

Venezuelan Foreign Minister Jorge Arreaza, speaking at the United Nations, called new U.S. financial sanctions "the worst aggressions to Venezuela in the last 200 years, maybe," the Associated Press reported. Mr. Arreaza said his government wouldn't let the U.S. "create a humanitarian crisis."

Angel Alvarado, an opposition lawmaker in Venezuela's congressional finance committee, said the measures weren't as restrictive as some expected. "The message from Washington is political, not financial...No one wants for the humanitarian crisis to get worse. This is a signal to the president to change course."

A second senior administration official said Washington would continue to escalate its sanctions regime until "the Maduro regime holds free, fair, transparent and internationally-monitored elections, releases all political prisoners unconditionally and respects the authority of the legitimate national assembly."

Washington has condemned Mr. Maduro's move to rewrite the country's constitution, his imprisoning of dissidents and the treatment of the former attorney general, as evidence "Maduro has fully embraced dictatorship," the official said.

Venezuela is suffering from a deep, multiyear contraction. Inflation hit 700% this year and is expected to top 2000% next year amid a widespread shortage of food, medicine and other critical supplies, according to the International Monetary Fund. Nearly one in three Venezuelans eat less than three times a day.

The government has been on the verge financial collapse for months, with markets pricing in a near-term default. Russia has kept the country on life-support through loans that have cost the country dearly in terms of interest, oil and stakes in the state-owned petroleum sector. U.S. purchases of Venezuelan oil -- which Washington has threatened to ban, but has left as a major, final escalation in its sanctions arsenal -- are still allowing Caracas to pay interest on its debt.

Still, the sanctions will make it harder for PdVSA to meet the $3.5 billion in bond payments due in October and November by limiting its scope for financing deals. Last October, the company issued $3.4 billion of new bonds to swap with investors for the debt maturing that year. The new measure prevents the repeat of such a deal.

Venezuela has $9.7 billion in international reserves, though analysts estimate that less than $1 billion of it is in cash or other liquid assets. Its foreign-currency obligations, U.S. administration officials say, outstrip its foreign exchange income, pushing the country to the brink of default.

The measures against PdVSA, which is the lifeblood of Venezuela's economy, puts the company closer to a default in the coming months, said Nymia Cortes de Almeida, a credit analyst at Moody's. "Even though the company still has access to other major world capital markets, the sanctions increase the risk of refinancing the $3.2 billion in debt that matures before the end of the year," she said.

The latest sanctions prohibit the type of deal that brought Goldman Sachs Group under fire in May for buying $2.8 billion in Venezuelan bonds. The bank has said it bought the securities from a broker and didn't interact with the Venezuelan government. Because of sanctions risk, Credit Suisse Group has prohibited trading of certain Venezuelan bonds.

Treasury and State Department officials meanwhile have been reaching out to allies in Latin America, Europe and beyond to encourage those countries to enforce the sanctions. U.S. officials say Mexico, Peru, Colombia and other nations have already committed to rolling out parallel sanctions. And although some European Union member states are resistant, large allies in the region back implementing similar efforts, according to people familiar with the matter.

--Carolyn Cui contributed to this article.

Write to Ian Talley at ian.talley@wsj.com

(END) Dow Jones Newswires

August 25, 2017 15:54 ET (19:54 GMT)