Debt, sanctions and taxes put this South-South relation to the test
Originally published on Global Voices
For more than 20 years, Venezuela has been China’s closest ally in Latin America. Yet, Venezuela’s stunning economic unraveling, U.S.-imposed sanctions, and a new oil import tax imposed by China have called into question what the future holds for the alliance.
In practice, the partnership consists of dozens of agreements in which Venezuela received cash in exchange for oil shipments. Critics in Venezuela claim this scheme is a debt trap, one that has brought little to no benefit to Venezuelans. However, the Venezuelan and Chinese governments say the partnership is crucial for Venezuela.
China and Venezuela became close allies in the early 2000s when Hugo Chávez rose to power with a strong anti-imperialist, anti-U.S., and anti-liberal international order stance. In the rapid rise of China, Chávez saw an opportunity to push forward his ideal of a “multi-polar world.” For its part, China saw in Venezuela a door to Latin America and the Caribbean, as well as a source of much-needed commodities and markets for its products.
The Venezuelan and Chinese governments were also drawn together by their rejection of any sort of “international meddling in domestic affairs” — including criticism of their human rights records. These claimed values are at the core of their political, economic, and financial relations. Unlike other international lenders such as the World Bank and the International Monetary Fund, China offered Venezuela fresh funding without strings attached.
Oil in exchange for development?
By 2020, Venezuela received $68.7 billion U.S. dollars from China, of which 91 percent were state-to-state loans. This is nearly half of all Chinese loans to Latin America and the Caribbean in the same period. Venezuela committed to repaying China with oil, the amount of which varied depending on its price.
China’s cash came along a particular narrative: Chinese funds were part of bilateral cooperation to improve Venezuela’s economic and social development, benefit both countries and become a model for South-South relations. In 2014, both countries upgraded to a “comprehensive strategic partnership.“
China and Venezuela officials and their vast network of state-affiliated media have been aligned in portraying China as a critical ally of Venezuela. Yet, none of the agreements are publicly available.
With the little accessible information, Venezuelan experts and independent media conducted thorough analyses of the loans. They have reached a vastly different conclusion.
Some critics consider the loans to be counterproductive, and that Venezuela was led by its own government and by China to a debt trap. “Debt trap” refers to a lending practice in which the debt becomes too heavy of a burden for the borrowing country, which in turn gives China more political and economic leverage. Critics note that the repayment terms are simply too onerous and even contribute to Venezuela’s humanitarian crisis by slashing government revenue.
Other international observers assessed that Chinese loans and investments in Venezuela are, in reality, a lose-lose situation. Besides the obvious loss of natural and economic resources, Venezuela’s struggle to repay the debt damages China’s foreign image, including its Belt and Road projects.
With regards to results, Venezuelan critics have also decried that many — if not most — Chinese-funded projects in infrastructure, machinery, and equipment in oil, mining, and energy industries have not been concluded, in spite of millionaire investments; and that China’s funding did nothing to improve the living conditions of Venezuelans. In their view, Venezuela is repaying China at the expense of Venezuelans. All the while, the country has not truly reaped any tangible benefit from the funding received.
Between both governments, the initial frenzy has been followed by a more sober period. China has not made any new loans to Venezuela since 2016, right at the onset of the economic and financial crisis that has devastated the South American country. Venezuelan officials tried to obtain fresh funding, to no avail.
In early 2019, the U.S. added sanctions on Petróleos de Venezuela (PDVSA), Venezuela’s state-owned oil company that provides over 90 percent of export revenue. Until then, refineries in the U.S. had been the top buyers of Venezuela’s heavy crude.
China then became the main destination of Venezuelan oil exports, receiving oil from Venezuela through hidden means. According to Bloomberg, among the mechanisms used by traders are mixing Venezuelan crude with other additives in a practice known as “doping,” ship-to-ship transfers, payments via shell companies, and vessels that silence their satellite signals.
China has not taken any real action to halt the shipments. On the contrary, Chinese officials, including China’s ambassador to Venezuela, Li Baorong, regularly criticize the imposition of sanctions on Venezuela as unjustified and illegal, claiming that they are an affront to Venezuela’s sovereignty.
For its part, the Venezuelan government, eager to showcase its powerful allies, usually promotes its meetings with Chinese officials. In these meetings, they often discuss how to strengthen their relationship and the rejection of sanctions, seen as unjustified meddling in domestic affairs.
Despite the defiant rhetoric and China’s consent of Venezuela’s opaque shipments, sanctions have in fact stood in the way of business as usual. When the U.S. threatened sanctions against foreign energy companies trading or working with PDVSA in August 2019, the state-owned China National Petroleum Corporation (CNPC) canceled direct purchases of Venezuelan oil.
More than a year later, Reuters reported that direct shipments had resumed, likely in anticipation of a change of government in the U.S. However, indirect shipments circumventing sanctions have increased, an indication that Chinese official entities may be wary of sanctions against them.
An unpleasant surprise
In May 2021, China imposed a new environmental tax on oil imports, which tests once again whether the China-Venezuelan partnership goes beyond shared rhetoric.
The new tax significantly increases the price of the Venezuelan crude in China and makes it less profitable to import, thus discouraging traders from engaging in an already high-risk operation. The Venezuelan government has not commented on the issue, whereas independent experts have warned that the new tax may negatively affect Venezuela’s oil exports.
China and Venezuela claim that their alliance is as important as ever, but the Venezuelan government has not received much support to sustain the oil industry that once was the center of it. Experts at Argus Media, a London-based independent media outlet covering energy and commodities markets, note that China seems more interested in “lending a hand to state-owned refiners than keeping the spigot open for Venezuelan crude,” indicating that priorities in Beijing have changed.
This story is part of a Civic Media Observatory investigation into competing narratives about China’s Belt and Road Initiative and explores how societies and communities hold differing perceptions of potential benefits and harms of Chinese-led development. To learn more about this project and its methods, click here.