by Caleb M. Larson. He covers American security and foreign policy as well as European defense with a focus on Eastern Europe and Russia. He holds a Bachelor of Art in History from UCLA and a Master of Public Policy from the Willy Brandt School of Public Policy.
Russia and Venezuela are friends of convenience. Under the regime of Hugo Chávez their relationship centered around a common enemy, the United States. Today under Nicolás Maduro, the Moscow-Caracas axis centers around economic opportunities, influence, and security. The Maduro regime is concerned with self-preservation, and Moscow is deeply intent securing lucrative economic opportunities in the oil sector. As a realist state, Russia is also determined to increase influence in Latin America at the expense of the United States. The unstable political situation in Venezuela allows Moscow to achieve some of these foreign policy goals through economic means as Venezuela’s lender of last resort.
Venezuela likewise continues to invest heavily in Russian products, mostly military equipment and weapons systems. Under Maduro, Venezuela has also partnered most prominently with the Russian oil company Rosneft in trading Venezuela’s enormous oil assets and future development projects for loans, and in establishing the Petro, the world’s first state-backed cryptocurrency. Venezuela is currently heavily indebted to external creditors, in particular to Russia, and its solvency is in question. Russia in turn, continues to provide the Maduro regime with lines of credit and armed manpower via the private military company Wagner and regular troops, in return for payments in oil, exploration deals, and cryptocurrency support of dubious value.
Guns & Gestures
The arrival of two Tupolev Tu-160’s in Caracas and subsequent military maneuvers over the Caribbean made headlines last December, but it is not the first time the nuclear-capable platforms have visited Venezuela. Two Tu-160’s also paid a visit to Venezuela in September 2008 and 2013. A part of the Russian Navy’s Northern Fleet also participated in joint naval maneuvers in the Caribbean with Venezuela in 2008. Although the United States has blasted the current Russian aviation presence in Venezuela, it is not without precedent.
Russian and Venezuelan partnership in the arms industry is extensive and includes small arms as well as larger weapons platforms. In 2007, Venezuela purchased 5,000 Dragunov sniper rifles (delivered in 2008, according to Stratfor), 100,000 AK-103 assault rifles (Anna Khakee, Pablo Dreyfus, and Anne-Kathrin Glatz, “An Uphill Battle: Understanding Small Arms Transfers“, Small Arms Survey, 2006, p. 87), and was in negotiations to open a plant to build 25,000 licensed-built AK-103 rifles annually. As of 2009, over $4 billion in arms sales were reported for 92 T-72’s, the Buk-M2 and the S-300 air defense systems, and BMP-3’s, 24 Sukhoi-30MK’s, and an assortment of helicopter gunships and cargo transports (see also a SIPRI’s listing of weapon systems supplied by Russia to Venezuela between 2000 and 2018).
Under Chávez, Venezuela also secured a nuclear cooperation agreement with Russia in 2010, intending to build a nuclear reactor, ironically to ease power blackouts caused by unreliable electric grid infrastructure in the world’s most oil-rich nation. These nuclear plans have yet to be realized, and in the post-Fukushima world, future development would appear unlikely.
Sold to Moscow
The vast majority of Venezuela’s purchasing power stems from both proven and unproven oil reserves. Venezuela enjoys the largest proven oil reserves on the planet, at over 300 billion barrels, and has used this potential source of income to finance a mismanaged economy via lines of credit given by Russia in return for oil and natural gas exploration and development rights, and by shipments of millions of barrels of oil to repay debts. Although the heyday of massive Soviet financial assistance in Latin America is long over, continued Russian investment into the region indicates a renewed, long-term interest in maintaining and deepening ties between Caracas and Moscow.
In 2011 at least two $4 billion loans were secured from Russia ostensibly to modernize Venezuela’s aging military. A further $6.5 billion was given from the Russian oil company Rosneft to the Venezuela state-owned oil and natural-gas company, PdVSA for 4 million barrels of crude oil per month, which Venezuela is unable to deliver in full. This credit-for-oil scheme delivers oil straight to Rosneft and prevents oil from being sold on the world market to refineries, further impoverishing the Venezuelan economy and making Caracas more beholden to Moscow.
In 2016, Rosneft and PdVSA proposed jointly developing Venezuelan offshore natural gas fields. Additionally, Venezuela offered 49.9% of PdVSA’s Citgo shares (a US-based, Venezuelan-owned refinery) as loan collateral to Rosneft for a $1.5 billion loan top of PdVSA’s previous bond swap using 50.1% of its Citgo shares. Citgo is Venezuela’s most valuable foreign asset. Thus, Rosneft’s Citgo ownership is concerning, although Citgo is in the process of cutting ties with PdVSA to avoid US sanctions against Venezuela and to ensure that creditors would not seize Citgo if Caracas defaults on debt payments.
Additionally, Rosneft owns 40% stakes in four significant PdVSA oil exploration and development projects, Petromonagas, Petrovictoria, Petroperija, Boqueron, and a 32% stake in Petromiranda. Incredibly, PdVSA also offered Rosneft a 10% stake in Petropiar, perhaps PdVSA’s most valuable project (“Vladimir’s Venezuela“, Reuters, 11.08.2017). The Petropiar project centers around the Orinoco Oil Belt, one of the world’s largest recoverable oil accumulations, and likely one of Venezuela’s most valuable domestic assets.
Russian entry into Venezuela’s oil economy represents a serious coup for a non-OPEC member. Low oil prices have significantly reduced Russian economic clout, but Russian influence in Venezuela’s oil industry could allow Rosneft to raise global oil prices by controlling much of Venezuelan output. Depending on the success of the above oil projects, Rosneft is poised to absorb a significant amount of the world’s oil wealth.
A look into Venezuelan finances paints a clearer picture of how Rosneft stands to gain from these deals. Venezuela owes over $100 billion to external creditors, and possibly as much as $150 billion. In 2018, oil production was approximately at 1.5 million barrels a day, down from 3.2 million a day in 2008.
Whether Venezuela defaults on debt and loan payments or not, solvency is precarious. Serious inroads have been made by Russia, in particular in securing significant stakes in oil projects by Rosneft. Russian strategic positioning as Venezuela’s lender of last resort gives Rosneft a significant amount of leverage over Maduro and his cronies and has resulted in Russian ownership of a large number of significant Venezuelan oil assets.
Introduced in February 2018 as a way to skirt sanctions from the United States and to access financing and investment from abroad, the Petro was to be backed against Venezuela’s oil, gold, gas, and diamond reserves and was the first state-back cryptocurrency. The move was aimed at increasing Venezuela’s foreign currency reserves via online Petro sales in order to provide Venezuela some degree of freedom from US sanctions.
Russia too has voiced support for a financial system that could rival the dollar in order to sidestep US and European sanctions. The Bitcoin and burgeoning cryptocurrency craze provided a convenient and cost-effective opportunity to experiment on alternative financial markets. Given the unregulated nature of cryptocurrencies, Russia could in theory, introduce a cryptocurrency at home that would allow it to skirt US sanctions, much the same as the Petro aims to do. Rather than create an online version of the Ruble that could jeopardize the Russian currency, Russia encouraged Venezuela to attempt an initial foray into state-backed cryptocurrencies itself and learn from the Caracas experiment.
Maduro announced the introduction of the cryptocurrency flanked by two Russian advisors during a stiff and choreographed Petro cryptocurrency launch. The Venezuelan Minister of Finance Simón Zerpa Delgado was later photographed in Moscow hand-delivering a report on the findings of the Venezuelan experience with the Petro to his Russian counterpart (see the Twitter message below). Maduro, in turn, directed companies in Venezuela to execute international transactions through the Russian Evorfinance Mosnarbank.
En esta reunión hemos pasado revista a la cooperacion económica y financiera entre ambos países, con énfasis en el nuevo criptoactivo de Venezuela: El Petro. Entregamos al Min. Siluánov información actualizada de nuestra criptomoneda. pic.twitter.com/BYSFZvIdaf
— Simón Zerpa Delgado (@SimonZerpaD) February 21, 2018
The success of the Petro is hard to gauge. Maduro announced via Twitter that the Petro had raised $5 billion, although but this figure may be unreliable and is difficult to prove. Hindering the Petro’s success is the White House Executive Order forbidding any transactions in Petro. Of great concern is how the Petro would facilitate money laundering and other criminal activity due to the anonymity such currencies offer to online buyers and sellers.
Wagner, a Partnership Continued
As previously detailed, Wagner is a Russian private military company that has had a presence in North Africa, the Middle East, and Ukraine. Wagner members have provided training, security, and participated in direct action operations on behalf of both Russia and their host countries. Made up mostly of Russian ex-military, Wagner functions an easily-deniable extension of the Russian Ministry of Defense and a useful tool in advancing the Russian foreign policy agenda.
Recently the group has been observed in Caracas, seemingly as a Pretorian Guard of sorts for the embattled Maduro, who has had to contend with both an assassination attempt (see video below), and a rival to the presidency that is widely recognized within the Americas and Europe. Interestingly, this contingent of Wagner members may be augmenting a preexisting Russian presence in Venezuela. A Reuters source claims that Wagner has had some presence in Venezuela since May of 2018. The same report also claims that the latest contingent made its way to Caracas not directly from Russia, but from various countries where they had been executing other missions.
Wagner’s independence from Venezuelan politics ensures reliability and dependability. When considering the massive amount of sunk costs that Russia has put into the Maduro government, having boots on the ground would help to preserve the declining Maduro regime. A physical presence would also be useful to protect oil infrastructure if an armed conflict breaks out, especially with the rhetoric coming from the White House. Rosneft in particular would be glad to see a Russian presence in Venezuela, given the massive amount of investment and prospective profits to be made via oil and natural gas exploration.
Regular Soldiers for “Regular Work”
Additional regular Russian personnel were seen landing in Caracas on March 24th. Russia denies claims that this additional contingent will have any involvement in military operations, but a look at what and who arrived raises questions. According to reports, approximately 100 personnel and 35 tons of supplies, mostly foodstuffs arrived. One of the reported passengers was Colonel-General Vasily Tonkokurov. Tonkokurov, who previously served with distinction in Afghanistan and Chechnya, was recently appointed as Chief of the Main Staff of the Ground Forces.
More interesting than the size and composition of the Russian contingent in Venezuela is Tonkokurov’s presence. What could a decorated and combat-tested general be up to up Venezuela? Playing the role of a weapons salesman and armorer? This may be true. However as previously stated, Russia, via Rosneft, has put a massive amount of money into keeping the Maduro regime afloat. Having a battle-tested general in-country would certainly help to retain newly acquired assets if a civil war or armed conflict breaks out. Official statements by the Russian Ministry of Foreign Affairs state that the timeline of the Russia presence in Venezuela is open-ended; Russia is conducting “the implementation of agreements in the field of military-technical cooperation. How long? As much as they need. As much as the Venezuelan government will need.”
Skeptics are reminded that Russian entry into the Syrian Civil War was predicted to be quagmirical, but that Russia effectively saved Bashar al-Assad from defeat. Russia gained combat experience, has tested weapon systems, and was able to secure its strategic interests in the Middle East. Combined with a dysfunctional US Congress and an unclear foreign policy agenda, Russian intervention in Venezuela looks more like a well thought, low-risk, high-reward gamble.
A Pebble in America’s Shoe
Ultimately Russia is not so interested in Maduro the man as Venezuela the investment. Preserving Maduro in Caracas protects Russian investments in Venezuela’s potentially profitable oil sector, and could entail more arms sales down the line. Perhaps more importantly however is how Venezuela is facilitating a Russian presence in Latin America. From Caracas, Moscow has the opportunity to project itself, and its agenda, not only into neighboring South American countries but also into large swaths of Latin America.
Russia has shown a desire for an increased presence globally. Wagner and other private military contractors have been the vehicles of Russian foreign policy in Syria, CAR, Sudan, Libya, and Ukraine. By offering predatory investments to a dictator willing to sell out his country for a song, and by slowly building up both an overt and covert armed presence in Caracas, Russia is creeping into Latin America and cheaply accomplishing strategic economic and foreign policy objectives. Future developments should be closely watched.