The global rout continues: yet another oil-dependent country is falling victim to the volatile market and low oil prices.
Venezuela has been fighting a losing battle with itself recently. The country’s inflation rates have been in the triple digits, and shortages of food and common products like toilet paper have increased.
And now oil, the commodity that accounts for 96% of the country’s export revenue, is reaching historic lows. This has hurt the country literally more than they can afford.
However, where Venezuela has gone for help might surprise you. You see, China, despite its own economic slump, has always been the country’s biggest creditor.
And now it is coming to the rescue again.
This week, China has agreed to loan $5 billion to Venezuela to help cover the costs of higher oil production. Glut or not, oil is still Venezuela’s bigg
est commodity, and it will be essential in repairing the country’s economy.
Understand, this is not the first time China has offered financial assistance. The Asian country has lent Venezuela more than $50 billion since 2005, and in fact offered another $5 billion loan earlier this year.
As payment for the loans, Venezuela supplies China with—you’ll never guess—crude oil. Due to the tar-like consistency of Venezuela’s oil, it is often very cheap on international markets. This kind of loan payment deal offers the country more support and better returns than the current oil market has.
Venezuela’s debt securities are some of the riskiest in the world, and China’s assistance may help reduce that debt and lessen the pressure on bond markets.
And make no mistake, this deal isn’t purely economic. Venezuela’s upcoming parliament elections will occur in December this year, and the current ruling party must make some changes—getting its constituents food for a start—or abdicate power at the end of the year.
More and more we are seeing both economic and political changes taking place due to the low oil market. Smart investors can still find ways to take advantage of this, though the volatility seems to be sticking around for a little while longer.
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Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
