It Feels Good To Punch Goldman Sachs On Venezuela. But Are We On A Risky Path?

May 31, 2017

COMMENTARY

Goldman Sachs made a dumb p.r. move last week when it bought a $2.8 billion tranche of Venezuelan government bonds – and did so in a way that appears to have handed President Nicolás Maduro’s embattled socialist government an important financial lifeline.

But while I don’t defend Goldman Sachs – I’m neither a fan of the investment firm’s questionable debt dealings (see Greece) nor of Maduro’s catastrophic rule – I’d advise anyone concerned about Venezuela to step back and ask two, longer-term questions: Is Goldman Sachs just a convenient punching bag? And if so, should we be punching ourselves instead?

To answer those questions, though, we need to punch Goldman Sachs some more.

READ MORE: Venezuela's Exiled Opposition Leader Vecchio: Regime May Be Close to 'Breaking Point'

Anti-Maduro Venezuelans from Caracas to New York to Miami are angrily denouncing  the Wall Street firm this week. Meanwhile, economic and political analysts are shaking their heads at its cluelessness. They say this was hardly a tactful moment to strike a sweet, 31-cents-on-the-dollar bond deal with Venezuela – when people there are starving thanks to Maduro’s authoritarian incompetence, and 60 people have been killed protesting his regime since April.

Shocked, shocked by the rebukes, Goldman Sachs insists that it didn’t stuff the $865 million purchase price directly into the Venezuelan regime’s pockets – that it bought the bonds second-hand.

Short-term, a trade embargo would cause more awful hunger and pain for the average Venezuelan. Long-term, Cuba is a nearby reminder that chances are it won't work.

But Russ Dallen, who heads the Caracas Capital Markets investment firm in Miami, says in his newsletter this week that Goldman Sachs’ claim sounds like “bullsh-- technical spin.” That’s because the purported "seller" looks more like a straw broker for Venezuela – and because Venezuela’s plummeting international reserves shot up as soon as the bond transaction took place.

Goldman Sachs also can’t understand why no one believes it was just making “an investment in Venezuela” – you know, a Good Samaritan’s bet that conditions will improve there. But if conditions end up improving in favor of the Maduro regime’s survival, Goldman Sachs looks like the patron of a corrupt, tin-pot leftist.

But for all of Goldman Sachs’ optics blindness, there are bigger forces giving sustenance to Maduro and the Chavista revolution he heads. I’m referring to anyone in the U.S. who’s filled up a gas tank this week – including Venezuelan exiles railing at Goldman Sachs.

Venezuela still has the world’s largest oil reserves – and it’s still the U.S.’s No. 3 foreign source of crude, behind Canada and Saudi Arabia. The U.S. imports almost 800,000 barrels per day from Venezuela, more oil than Alaska pumps daily.

HEAVY CRUDE

Even at today’s collapsed prices that’s more than $11 billion a year going to Venezuela’s state-run oil monopoly, Petróleos de Venezuela (PDVSA) – which issued the bonds Goldman Sachs bought – and therefore to Maduro’s coffers. (Coincidentally, $11 billion about equals what's left of Venezuela’s foreign reserves.)

Why does the U.S. keep buying Venezuelan oil? First, proximity. Of America’s five largest foreign suppliers, four are in this hemisphere. And jobs. Before the Chavistas took power in 1999, Venezuela was the U.S.’s top foreign provider. Because Venezuelan crude is especially heavy, U.S. importers built a lot of refineries designed to upgrade it, and they want to keep some of them humming.

A Venezuelan oil rig in Lake Maracaibo.
Credit Ana Maria Otero / AP via Miami Herald

Still, Venezuela supplies only 7 percent of America's foreign oil. So should the U.S. continue buying it if it's serious about seeing the Chavista regime tumble – and if folks really are outraged about companies like Goldman Sachs doing business with that regime?

“It’s a viable possibility that if the Maduro government’s violence against its own people increases, we could see the U.S. cut the cord on Venezuelan oil the way we eventually did with Iran,” says Phil Flynn, senior market analyst at the Price Futures Group in Chicago.

But a move like that – amounting essentially to the U.S. trade embargo Florida Governor Rick Scott called for this week against Venezuela – is dicey. Short-term it would cause even more awful hunger and pain for the average Venezuelan. Long-term, especially if it's not multilateral, the U.S. has a big, nearby reminder that chances are it won't work: Cuba, where after 55 years Washington is still waiting for a trade embargo to bring down communism.

So while it feels good to punch Goldman Sachs, think hard about the risky directions this no-business-with-Venezuela fever might be headed. Especially as you fill up this summer.