Venezuela has reached its breaking point. Over the last year, Venezuela's government crossed a critical inflection point, transitioning from a socialist experiment backed by weak (yet functioning) democratic institutions, into a dictatorship that is systemically destroying the economic, financial, political, and social order of the country.
The human suffering is hitting society at every level—hyperinflation, violent crime, widespread deprivation, deepening poverty, and stifling import quotas that exacerbate the scarcity of critical goods. Constitutional rule is being shunted in favor of new dictatorial powers for the ruling elite and, day by day, the Maduro government is dismantling the last vestiges of democratic principles and institutions. Sunday's local elections are the latest example of how far the government has moved from democracy. In a shocking result, the government captured 17 of 23 governorships. The opposition parties, which were widely expected to perform strongly, denounced the results as a "massive electoral fraud."
"[W]e think owning Venezuela bonds is no longer compatible with socially responsible investing."
Against this bleak background, the global capital markets are providing the critical lifeline of liquidity and financial support to an increasingly totalitarian and repressive Maduro government.
Three recent financing deals connect the dots between the capital markets and the strengthening of totalitarianism in Venezuela:
- In March, Venezuela received a $300 million loan from the hedge fund Fintech Advisory, backed by $1.3 billion of Venezuelan bonds.
- In May, Goldman Sachs Asset Management went even bigger, purchasing $2.8 billion notional value of bonds directly from Venezuela's central bank, just as the government was dismantling democratic institutions, intensifying the crackdown on political opposition, and diverting even more resources from imports critical to maintaining a functioning society.
- China, Russia, and major private sector oil companies are providing critical support to the regime via "oil for cash" contracts. Through these and other ad hoc liquidity strategies, Venezuela has successfully paid approximately $6 billion in debt service payments in 2017, but still faces another $2.9 billion in the fourth quarter and $7.5 billion in 2018.
This commitment to debt service at any cost is using up scarce resources that could otherwise be used to finance critical imports or to stabilize the downward spiral in growth, incomes, and security.
Tight restrictions on essential imports also give rise to thriving black markets, opening even wider channels for potential corruption and exploitation. Corruption and black market deals have siphoned billions of dollars of national wealth from Venezuela.
Recently announced U.S. sanctions against Venezuela and its leaders are too weak to foster change. The sanctions only restrict the flow of new debt issuance, while granting wide exemptions allowing normal trading in the underlying debt stock. Furthermore, the sanctions do nothing to close Venezuela's alternative sources of liquidity—i.e. China and Russia. Finally, the sanctions do nothing to discourage companies from engaging in "oil-for-liquidity" deals being used in support of new exploration and production.
The UN Principles for Responsible Investment (PRI) call for incorporating Environmental, Social, and Governance (ESG) principles into the formation and implementation of investment decisions. By applying these ESG criteria to Venezuela, it is inescapably clear that holding debt issued by the Venezuela government, or other government-sponsored entities, is providing significant support to a totalitarian regime that is inflicting human suffering on its population. For this reason, we think owning Venezuela bonds is no longer compatible with socially responsible investing.
We would even go so far as to suggest that the U.S. tighten existing sanctions to prohibit all trading in Venezuela bonds until democratic institutions are restored and the government prioritizes the urgent needs of its population ahead of paying debt service to its international creditors.
We also think that the U.S. should ban oil imports from Venezuela, closing a critical financial lifeline that is keeping the Madura regime afloat.
And, the U.S. should consider potentially expanding the sanctions list to include companies under contract with the Venezuela government.
Venezuela is a potentially rich country but its natural wealth is being plundered, leaving a humanitarian crisis in its wake. This is the tragic paradox of Venezuela. And, at the present time, we think that owning Venezuelan bonds is morally incongruent with socially responsible investing.
Commentary by Nathan B. Sandler, the co-founder and managing partner of ICE Canyon, an alternative investment management firm specializing in emerging markets credit strategies. Sandler has been investing in the emerging markets, including Venezuela, since 1994.
Disclosure: Neither Nathan B. Sandler nor ICE Canyon currently own any investments in or related to Venezuelan bonds. They are totally divested.
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