Investors Won Battle on Venezuela Sanctions -- WSJ
2024-02-14 07:32:05.734 GMT
(Wall Street Journal) -- Bondholders warned Washington that Russia and its
allies were benefiting from U.S. trading ban
By Kejal Vyas and Alexander Saeedy
After the U.S. dropped a broad array of sanctions against Venezuela in
October, it warned that it could reimpose all of them, except one. The White
House admitted that its ban on buying Venezuelan bonds was a failure that had
potentially benefited enemies of the U.S.
Behind the scenes, a group of powerful Wall Street investors had been feeding
Washington a stream of evidence that showed Venezuelan bonds were being traded
by investors with ties to Russia. They said Moscow was hoping to gain
influence in the U.S.'s backyard.
The Biden administration said dropping the debt-trading ban "would have the
positive effect of displacing nefarious players in this market." It was the
first time the U.S. publicly acknowledged that banning U.S. investors from
buying debt of a sanctioned country could backfire.
The investors stood to benefit from the end of the ban, because prices of
Venezuela's bonds were expected to rise. They did, giving the investors a
windfall of hundreds of millions of dollars.
The U.S. has ramped up its use of sanctions in the past two decades. In
response, countries such as Russia, Iran and North Korea have become
increasingly adept at moving cash and goods across their borders. Debt-buying
bans, which have also been imposed on Russia and Belarus, are now seen as
giving foreign buyers a chance to profit and potentially influence debt
restructurings while making it harder to track the trades.
The Trump-era sanctions on the government of Venezuela's authoritarian leader,
Nicolás Maduro, were meant to hammer the regime. The White House made it
illegal for American investors to extend new loans to Caracas, and it barred
investors from buying any of the government's outstanding bonds. Venezuela at
times stashed outstanding bonds in domestic financial institutions or offshore
and sold them when it needed cash.
U.S. firms held bonds valued at about $50 billion, which typically were issued
by the national government or the country's state-owned oil company, Petróleos
de Venezuela. Investors liked them because they offered high yields and were
backed by hard-currency cash flows from the sale of oil. U.S. investors sold
about half of those bonds.
A group of creditors to the Venezuelan government, including Fidelity
Investments, T. Rowe Price and Greylock Capital, didn't sell and fought the
ban. Some members of that group gave State Department officials transaction
records of billions of dollars in Venezuelan bond purchases by investors from
Qatar, the United Arab Emirates and Cyprus, people familiar with the situation
said. All of those places are well-known conduits for Russian money.
"Nobody in the U.S. government seemed to understand what market participants
told them were the obvious consequences of the policy," said Hans Humes, chief
investment officer at Greylock Capital and co-chairman of the Venezuelan
creditors group that lobbied to end the sanctions.
Fidelity and T. Rowe Price each held more than $1 billion of Venezuelan bonds
while Greylock had about $1.5 billion of bonds, people familiar with the
matter said.
When the ban was lifted, Venezuelan bond prices surged from 13 cents to around
20 cents on the dollar. Some investors expect Venezuelan bonds to be added
back to JPMorgan's closely tracked emerging-markets bond index as soon as next
month, potentially giving prices another boost.
The bondholders told U.S. officials that they believed there was a strong risk
that investors in the Middle East and Cyprus were frontmen for Moscow. And
they provided Washington with records and images of trade tickets showing how
the same buyers based in Qatar, the U.A.E. and Cyprus who had purchased
Venezuelan bonds in 2022 and 2023 had also been active buyers of Russia's own
bonds after Washington slapped on similar sanctions against Moscow after it
invaded Ukraine in 2022.
They told officials in the State Department that they believed Russia was
accumulating a position in Venezuelan debt and could pursue a deal for
Venezuela to sell assets to Russia in exchange for writing off the debt,
according to a copy of a memo from the creditors' group sent to the U.S.
government in 2023.
"Venezuela is Russia's most respected partner in Latin America," Kremlin
spokesman Dmitry Peskov said in an email. But he noted that, because of
sanctions, his government's cooperation with Caracas is piecemeal.
A U.S. State Department spokesperson said, "We take seriously attempts by
external actors such as Russia to expand their influence in Venezuela and take
action as appropriate."
While the investors didn't have a smoking gun linking Moscow to the trades,
the State Department's Venezuela Affairs Unit included bondholders' concerns
in a classified and previously unreported cable sent in early 2023. The unit's
analysts viewed the bond-trading ban as counterproductive.
The State Department later warned in the diplomatic cable that the U.S. could
be cut out of any talks to restructure Venezuela's debt, potentially providing
Russia or other countries more influence, according to people with knowledge
of the cable.
Their case was bolstered last April by the appearance of a large Russian
delegation in Caracas. Russian Foreign Minister Sergei Lavrov warned that
Venezuela shouldn't succumb to Western financial pressure.
The National Security Council, which has led the rapprochement efforts with
Maduro, declined to discuss intelligence that it reviewed before deciding to
drop the sanctions.
"We ultimately concluded that the sanctions were bad for the United States and
good for our adversaries," a senior U.S. official said. "They had created
openings for China and Iran and Russia to be able to expand a strategic
foothold in Venezuela."
Unlike the other sanctions that the U.S. government reversed last fall, the
debt-trading ban has been permanently removed. Washington, citing the Maduro
regime's arrest of political opponents and banning some from running in
elections, has reimposed one of the sanctions and another is expected to come
back in April.
Marshall Billingslea, who was a senior Treasury Department official under
former President Donald Trump, defended the sanctions against Maduro's regime,
which he said weren't enforced strictly enough.
Concerns over Russian meddling, Billingslea added, were part of a
fearmongering campaign by critics.
Write to Kejal Vyas at kejal.vyas@wsj.com and Alexander Saeedy at
alexander.saeedy@wsj.com
This article is being republished as part of our daily reproduction of WSJ.com
articles that also appeared in the U.S. print edition of The Wall Street
Journal (February 14, 2024).
(END) Dow Jones Newswires
(Wall Street Journal) -- Bondholders warned Washington that Russia and its
allies were benefiting from U.S. trading ban
By Kejal Vyas and Alexander Saeedy
After the U.S. dropped a broad array of sanctions against Venezuela in
October, it warned that it could reimpose all of them, except one. The White
House admitted that its ban on buying Venezuelan bonds was a failure that had
potentially benefited enemies of the U.S.
Behind the scenes, a group of powerful Wall Street investors had been feeding
Washington a stream of evidence that showed Venezuelan bonds were being traded
by investors with ties to Russia. They said Moscow was hoping to gain
influence in the U.S.'s backyard.
The Biden administration said dropping the debt-trading ban "would have the
positive effect of displacing nefarious players in this market." It was the
first time the U.S. publicly acknowledged that banning U.S. investors from
buying debt of a sanctioned country could backfire.
The investors stood to benefit from the end of the ban, because prices of
Venezuela's bonds were expected to rise. They did, giving the investors a
windfall of hundreds of millions of dollars.
The U.S. has ramped up its use of sanctions in the past two decades. In
response, countries such as Russia, Iran and North Korea have become
increasingly adept at moving cash and goods across their borders. Debt-buying
bans, which have also been imposed on Russia and Belarus, are now seen as
giving foreign buyers a chance to profit and potentially influence debt
restructurings while making it harder to track the trades.
The Trump-era sanctions on the government of Venezuela's authoritarian leader,
Nicolás Maduro, were meant to hammer the regime. The White House made it
illegal for American investors to extend new loans to Caracas, and it barred
investors from buying any of the government's outstanding bonds. Venezuela at
times stashed outstanding bonds in domestic financial institutions or offshore
and sold them when it needed cash.
U.S. firms held bonds valued at about $50 billion, which typically were issued
by the national government or the country's state-owned oil company, Petróleos
de Venezuela. Investors liked them because they offered high yields and were
backed by hard-currency cash flows from the sale of oil. U.S. investors sold
about half of those bonds.
A group of creditors to the Venezuelan government, including Fidelity
Investments, T. Rowe Price and Greylock Capital, didn't sell and fought the
ban. Some members of that group gave State Department officials transaction
records of billions of dollars in Venezuelan bond purchases by investors from
Qatar, the United Arab Emirates and Cyprus, people familiar with the situation
said. All of those places are well-known conduits for Russian money.
"Nobody in the U.S. government seemed to understand what market participants
told them were the obvious consequences of the policy," said Hans Humes, chief
investment officer at Greylock Capital and co-chairman of the Venezuelan
creditors group that lobbied to end the sanctions.
Fidelity and T. Rowe Price each held more than $1 billion of Venezuelan bonds
while Greylock had about $1.5 billion of bonds, people familiar with the
matter said.
When the ban was lifted, Venezuelan bond prices surged from 13 cents to around
20 cents on the dollar. Some investors expect Venezuelan bonds to be added
back to JPMorgan's closely tracked emerging-markets bond index as soon as next
month, potentially giving prices another boost.
The bondholders told U.S. officials that they believed there was a strong risk
that investors in the Middle East and Cyprus were frontmen for Moscow. And
they provided Washington with records and images of trade tickets showing how
the same buyers based in Qatar, the U.A.E. and Cyprus who had purchased
Venezuelan bonds in 2022 and 2023 had also been active buyers of Russia's own
bonds after Washington slapped on similar sanctions against Moscow after it
invaded Ukraine in 2022.
They told officials in the State Department that they believed Russia was
accumulating a position in Venezuelan debt and could pursue a deal for
Venezuela to sell assets to Russia in exchange for writing off the debt,
according to a copy of a memo from the creditors' group sent to the U.S.
government in 2023.
"Venezuela is Russia's most respected partner in Latin America," Kremlin
spokesman Dmitry Peskov said in an email. But he noted that, because of
sanctions, his government's cooperation with Caracas is piecemeal.
A U.S. State Department spokesperson said, "We take seriously attempts by
external actors such as Russia to expand their influence in Venezuela and take
action as appropriate."
While the investors didn't have a smoking gun linking Moscow to the trades,
the State Department's Venezuela Affairs Unit included bondholders' concerns
in a classified and previously unreported cable sent in early 2023. The unit's
analysts viewed the bond-trading ban as counterproductive.
The State Department later warned in the diplomatic cable that the U.S. could
be cut out of any talks to restructure Venezuela's debt, potentially providing
Russia or other countries more influence, according to people with knowledge
of the cable.
Their case was bolstered last April by the appearance of a large Russian
delegation in Caracas. Russian Foreign Minister Sergei Lavrov warned that
Venezuela shouldn't succumb to Western financial pressure.
The National Security Council, which has led the rapprochement efforts with
Maduro, declined to discuss intelligence that it reviewed before deciding to
drop the sanctions.
"We ultimately concluded that the sanctions were bad for the United States and
good for our adversaries," a senior U.S. official said. "They had created
openings for China and Iran and Russia to be able to expand a strategic
foothold in Venezuela."
Unlike the other sanctions that the U.S. government reversed last fall, the
debt-trading ban has been permanently removed. Washington, citing the Maduro
regime's arrest of political opponents and banning some from running in
elections, has reimposed one of the sanctions and another is expected to come
back in April.
Marshall Billingslea, who was a senior Treasury Department official under
former President Donald Trump, defended the sanctions against Maduro's regime,
which he said weren't enforced strictly enough.
Concerns over Russian meddling, Billingslea added, were part of a
fearmongering campaign by critics.
Write to Kejal Vyas at kejal.vyas@wsj.com and Alexander Saeedy at
alexander.saeedy@wsj.com
This article is being republished as part of our daily reproduction of WSJ.com
articles that also appeared in the U.S. print edition of The Wall Street
Journal (February 14, 2024).
(END) Dow Jones Newswires
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