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Talking to Putin Tomorrow to Figure Out How to Stabilize Oil Prices

Venezuela has struck a deal with China, its most generous creditor in recent years, for $5 billion designed to increase oil production in the coming months. Venezuela President Nicolas Maduro confirmed the agreement via a television broadcast on the evening of September 1 but was not specific on exactly how much extra production the loan would yield. The two countries share a trade agreement in which China receives Venezuelan crude in exchange for servicing debt.

Venezuela Scrambling to Keep its Head Above Water

VenezuelaThe Wall Street Journal estimates Venezuela needs breakeven oil prices of $117.50 to support its 2015 fiscal budget, and the desperate country is taking drastic measures. Speculation of the country selling its gold reserves did not pique analyst interest, with many critics saying banks are unlikely to take a chance on collateral in a junk-rated economy.

The South American member of the Organization of Petroleum Exporting Countries (OPEC) has been one of the more vocal critics of the cartel’s refusal to scale back production. Like its cartel peers, the country has been bleeding cash from lost revenue. Unlike some of its peers, Venezuela’s limited sovereign wealth fund gives it a much shorter rope. Oil accounts for 96% of Venezuela’s export revenue and its foreign reserves are hovering around $16 billion – the lowest in more than a decade.

Reports emerged last week of the South American nation pushing for an emergency OPEC meeting with Russia. Bloomberg reported that Maduro pulled a daily average of $65 million from the central bank reserves from late March to mid-June. Analysts believe Venezuela could default as early as 2016, and Maduro’s support has fallen below 25% among his countrymen.

Friends that Remain: Xi and Putin

China, however, continues to stick with its trading partner through its difficult time. The world’s most populated nation has lent Venezuela more than $50 billion since 2005, and about $20 billion of that amount is currently outstanding. Venezuela received an additional $5 billion of China-based financing in April of this year, which was also aimed at ramping up development.

The fledgling OPEC member hired a Moscow bank to arrange the sale of $1.6 billion in notes in June. Maduro is meeting with Russian President Vladimir Putin tomorrow to discuss “possible steps” in stabilizing prices. The Kremlin touched base with OPEC in June for what was referred to as “simply an exchange of information.”

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