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Your Friendly Neighborhood Sanctions Running Strategy

posted by Anna Gelpern

We are about to hit an anniversary of sorts, a year since Venezuela was surely going to default on its debt ... except that it still hasn't, so the U.S. government has decided to nudge it along. Retroactive debt sanctions imposed on August 25 prohibit, among other things, extending new credit to the government of Venezuela and its state oil company PDVSA beyond 30 days and 90 days, respectively, as well as any transactions in previously issued government debt, and, separately, any direct or indirect, old or new bond-buying from the Venezuelan government. The sanctions are a big headache for U.S. bank compliance departments, but they also got some glorious creative juices running. Mark & Mitu offer a contrarian reading of the sanctions order and one of the general licenses issued by the Treasury's Office of Foreign Assets Control (OFAC) as part of its implementation. As M&M read it, Venezuela cannot restructure all its debt in a debt swap (that would require issuing new bonds), but it could amend some of its old bonds using collective action clauses (CACs), and gain breathing room until oil prices recover, things change, or pigs fly. 

The M&M reading rests on an OFAC license passage that seems to undo a chunk of the executive order: it permits "all transactions related to, the provision of financing for, and other dealings in" previously issued Venezuelan securities listed in the annex to the license. The list includes nearly all outstanding Venezuelan debt securities, except one bond that the government had issued to itself last December and tried to unload at a deep discount in May-June.  (An extra-dodgy specimen.) Would "all transactions related to" and "financing for" Venezuela's outstanding bonds include amending the bond terms to give Venezuela more time to repay ... or even writing down the debt?

The idea behind the license seems to be to let U.S. banks trade outstanding Venezuelan debt for as long as they do not send new money to the Maduro government. Here is OFAC on the idea behind this Rube Goldberg set-up:

The Government of Venezuela is selling assets for much less than they are worth at the expense of the Venezuelan people and using proceeds from these sales to enrich supporters of the regime. Bonds and other securities are among the assets being sold. The prohibitions and related general licenses are meant to prevent U.S. persons from contributing to the Government of Venezuela's corrupt and shortsighted financing schemes while mitigating market disruptions and harm to investors.

As M&M concede, amending old bonds to give breathing room to the Maduro government would surely run counter to the stated purpose of the executive order-license package. My hunch (DISCLAIMER: AM NO SANCTIONS EXPERT) is that the U.S. government would also view such an amendment as an extension of new credit to Venezuela. OFAC pretty much says so in its Venezuela FAQ:

These prohibitions [on issuing new debt] extend to rollover of existing debt, if such rollover results in the creation of new debt with a maturity of longer than 90 days (with respect to PdVSA) or longer than 30 days (with respect to the rest of the Government of Venezuela). [emphasis added]

So maybe an amendment is not, strictly speaking, a "rollover," but what U.S. bank would want to argue the point with its regulators, let alone OFAC? Consider also OFAC's analysis of drawdowns under existing credit facilities:

If a U.S. person entered into a long-term credit facility or loan agreement prior to the sanctions effective date, drawdowns and disbursements with repayment terms of 90 days or less (for PdVSA) or 30 days or less (for the rest of the Government of Venezuela) are permitted. Drawdowns and disbursements whose repayment terms exceed the applicable authorized tenor are not prohibited if the terms of such drawdowns and disbursements (including the length of the repayment period, the interest rate applied to the drawdown, and the maximum drawdown amount) were contractually agreed to prior to the sanctions effective date and are not modified on or after the sanctions effective date. U.S. persons may not deal in a drawdown or disbursement initiated after the sanctions effective date with a repayment term of longer than 90 days (for PdVSA) or 30 days (for the rest of the Government of Venezuela), if the terms of the drawdown or disbursement were negotiated on or after the sanctions effective date. Such a newly negotiated drawdown or disbursement would constitute a prohibited extension of credit. [emphasis added]

OFAC reiterates this concern with newly negotiated terms, rather than a distinct new IOU, when it gives the green light for U.S. firms to sell their participations in long-term loan facilities ... so long as Venezuela does not get better terms in the bargain.  

M&M may well be right that there is daylight between new advances and forgoing payments on old advances, but I just do not see any regulated firm taking the risk. Compliance departments are already running ragged looking for disguised Venezuelan government entities lurking behind every trade. ("U.S. persons are not authorized to purchase, directly or indirectly, bonds on the List of Authorized Venezuela-Related Bonds from the Government of Venezuela." See also Sec. 1(b) of the Executive Order.) Messing around with sanctions is front-page ugly, and banks have to keep their noses clean and their eyes on the prize

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