(Reuters) – The sight of Venezuela’s National Assembly president tearing up a Supreme Court ruling and warning foreign firms against making deals with the leftist government will no doubt resonate in international boardrooms.
The ruling ripped up by Congress head Julio Borges on Thursday was designed to allow President Nicolas Maduro to create oil ventures without congressional approval, easing investment in the cash-strapped country’s floundering oil industry.
And it may well facilitate deals with companies including Russia oil major Rosneft, which Reuters reported earlier this month had been offered a stake in an oil joint venture with Venezuelan state oil company PDVSA as part of a broader deal with Caracas’ key ally.
But the ensuing muddy legal framework and international outcry is likely to further raise anxiety levels at foreign oil companies already nervous about buying oil field stakes in Venezuela because of the country’s shaky finances, as well as stricter regulatory scrutiny at home, according to oil executives, lawyers, and other industry sources.
Under the Venezuelan constitution, Congress must approve contracts of “national public interest” with foreign companies. But the Supreme Court just ruled Congress does not have a say over joint ventures anymore, while lawmakers retort the top court is illegitimate, creating a legal maze.
That bodes poorly for Venezuela’s ravaged economy, which depends on oil shipments for over 90 percent of its export revenue as millions skip meals due to food shortages and roaring inflation.
“This complicates any investment decision,” said a Caracas-based source at a foreign oil company that partners with PDVSA, asking to remain anonymous because the person was not allowed to speak to media.
Still, Russia is becoming an increasingly crucial financier for isolated Maduro at a time when many other foreign companies were already reluctant to pour money into Venezuela given the poor business climate and debts.
And should Venezuela manage to pull off further sales or loans with Rosneft, that could help Venezuela make some $2.5 billion in bond payments due in April and shoulder other operational costs.
But while Venezuela may receive a short-term boost from the decision, in the long-term foreign oil companies will likely be stymied from potential further investments in the country with the world’s biggest crude reserves.
PDVSA and the oil ministry did not immediately respond to a request for comment. Rosneft declined to comment, as did US major Chevron Corp, which has four joint venture operations with PDVSA.
Spain’s Repsol, which last year extended a $1.2 billion credit line to bolster a joint venture it has with PDVSA, also declined to comment.
Other foreign oil companies operating in Venezuela, including state-run China National Petroleum Corp, did not immediately respond to a request for comment.
But for the low-profile foreign oil companies which remain in Venezuela despite a wave of nationalizations and company exits, the Supreme Court ruling is another worry amid complex currency controls, a brain drain, and out-of-control crime.
Many companies were already concerned about Venezuela’s legal framework after the opposition took control of the National Assembly in January 2016 and warned oil majors that investment deals affecting national interest required their approval.
When Rosneft bought a stake in the Petromonagas joint venture early last year, the National Assembly slammed the purchase as “illegal” because it bypassed the legislature. Rosneft responded that the deal was legal.
Some companies may also be betting that they would have enough muscle to negotiate with a hypothetical opposition-led government in the future to “legalize” any purchases made without the congressional green light, sources say.
But the recent Supreme Court move is unlikely to assuage the fears of foreign partners who have strict internal compliance and legal guidelines, especially as protests and international condemnation grow.
“This doesn’t solve the problem,” said Francisco Monaldi, fellow in Latin American energy policy at the Baker Institute in Houston.
“It might for the Russians, but I doubt an international company would dare do anything here. This can definitely put a brake on the creation of new joint ventures.”