Russia and China condemn new US sanctions on Venezuela

Russia and China strongly criticized U.S. sanctions placed on Venezuela, with the former pledging to support the beleaguered President Nicolas Maduro.

Russian Foreign Minister Sergei Lavrov said Tuesday the sanctions completely undermined confidence in a international financial system that is dominated by the U.S., Russian news agency Interfax reported.

"Russia is doing everything to support the lawful government of Maduro," Lavrov added, calling U.S. sanctions against Venezuelan state energy firm PDVSA "cynical." Kremlin spokesperson Dmitry Peskov added that the restrictions continue an "undisguised interference in its (Venezuela's) internal affairs," calling them "illegal."

The U.S. administration announced sanctions against the state's dominant energy firm PDVSA on Monday in a bid to damage the socialist dictator, President Nicolas Maduro, who is clinging to power amid a leadership battle.

Last week, the opposition leader of Venezuela's National Assembly, Juan Guaido, named himself interim president after street protests against Maduro. The U.S. recognized that claim and has been encouraging support for regime change in Venezuela, a country hit by the economic policies of Maduro.

'They should bear responsibility'

Marco Bello | Reuters
Venezuela's President Nicolas Maduro talks to the media after a meeting for signing an agreement on guarantees for the vote at the National Electoral Council (CNE) headquarters in Caracas, Venezuela March 2, 2018.

Earlier on Tuesday, China also voiced its opposition to sanctions, saying the U.S. should bear responsibility for their consequences. Foreign Ministry spokesman Geng Shuang said historical experience showed foreign interference "only makes situations more complicated," Reuters reported.

"The relevant country's sanctions on Venezuela will lead to the deterioration of conditions of people's lives," Geng told a regular news briefing in Beijing, referring to the United States.

Vested interests

Both China and Russia have vested interests in the stability and the status quo in Venezuela.

China has lent more than $50 billion to Venezuela through oil-for-loan agreements over the past decade, securing energy supplies for its fast-growing economy, Reuters noted. The news agency calculates that Russia too has lent Venezuela at least $17 billion in loans and credit lines since 2006.

In November 2017, Russia agreed to restructure Venezuelan sovereign debt of $3.15 billion, with repayments lasting 10 years. Although PDVSA's debts were not thought to be part of this deal. On Tuesday, Russia's finance ministry said Venezuela is due to pay Russia $100 million in March and that debt servicing problems were possible, Interfax said.

Russia is also heavily involved in Venezuela's energy industry with Russian energy firm Rosneft holding a large stake in a subsidiary of PDVSA. PDVSA used 49.9 percent of its shares in its U.S. subsidiary Citgo as collateral for loan financing from Russia's majority state-owned Rosneft in 2016.

Russia thus stands to suffer from U.S. measures to freeze PDVSA's oil transactions and those of its U.S. asset Citgo (to which most of the Venezuela's exports destined for the U.S. go).

Citgo has already become a focus for Maduro's rival Guaido. Just ahead of U.S. sanctions Monday, the self-proclaimed interim president ordered Congress to appoint new boards of directors to PDVSA and Citgo.

A new 'cold war'

Meanwhile, Helima Croft, the head of commodity strategy at RBC Capital Markets, told CNBC Tuesday that the U.S.' decision to "finally pulling the trigger" with sanctions on Venezuela's energy firm was "a significant development."

"This will effectively amount to an embargo on PDVSA products into the U.S.," she told CNBC's Steve Sedgwick in Florence. "It's going to create a lot of confusion for foreign IOCs (international oil companies) and how they deal with a now-sanctioned entity."

As well as Russia and China's support, Maduro still has the support of the Venezuelan military which could prove vital to him holding on to power, although a high-profile Venezuelan diplomat to the U.S. defected at the weekend, encouraging others to do the same.

Croft was uncertain about how long the military would continue to support Maduro.

"The recovery of this country is going to be an enormous challenge and we're just not there yet. We keep saying, well will the military rise up against Maduro? Well, this is technically a military government ... So, the question is, will these sanctions put so much pressure on the Venezuelan military that they finally turn on Maduro? It's a real open question," Croft said.

Maduro's hold on power also depended on whether he could get more financial backing from his international allies, she noted.

"Is anyone going to step up and provide new financing (to Venezuela)? So again, look to Russia, look to China, they are the ones who can determine how long Maduro stays in power. If they give him a lifeline, he may have some more time," she said.

'The eighties are back'

Other geopolitical experts have likened the opposing U.S. and Russian stances on regime change to a return to the Cold War. "The eighties are back, in other words, the Cold War is back," Russ Dallen, managing partner of investment bank Caracas Capital Markets, told CNBC Tuesday.

"Russia and the U.S. are facing off in Latin America for a military dictatorship. We're using all the tools in the democratic arsenal, this oil embargo is perhaps one of the last of the economic tools we have before it requires armed intervention." he said.

Dallen, former head of the Latin American operations of Oppenheimer & Co., told CNBC's Brian Sullivan that Russia was "heavily involved" in Venezuela and that there could be a fight over Citgo.

"They (Russia) made a loan to Venezuela of $1.5 billion ... and as collateral they (PDVSA) put up 49.9 percent of Citgo in the U.S. Now the U.S. is never going to let Russia have that and (Treasury Secretary) Steven Mnuchin has already said that. However, they do have rights to force the sale of the collateral which would then take it away from the opposition (in Venezuela)."

Dallen was uncertain whether U.S. sanctions would ultimately lead to Maduro's fall from power.

"Whether it's going to force him out (is uncertain). We've had a blockade on Cuba for 60 years and that hasn't worked so it will hurt them. But oil is a fungible commodity and they will be able to sell it elsewhere," he said.

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