From Stratfor
Despite having tendered its resignation in July, Citibank will keep representing Venezuela’s state-owned oil company, Petroleos de Venezuela (PDVSA). On Sept. 7, PDVSA announced that the bank would continue to act as its pay agent. In fact, it appears that Citibank is contractually obligated to maintain its position until a new pay agent has been found to replace it. And given the risk entailed in representing the company, other banks may be loath to take on the task.
According to the terms of its agreement with PDVSA, Citibank may opt to resign from its post, as it has. However, the bank may not cease its functions until a successor has been located. Consequently, Citibank will have to carry out its duties until at least April 2017, when one of PDVSA’s last major debt payments — about $3 billion — is due. In the meantime, the company is scheduled to make other hefty payments on its debts: roughly $1 billion due in October and another $2 billion in November.
Citibank has not said whether it will continue in its role past April 2017. It may have its own internal deadline for cutting ties with PDVSA (banks have varying policies for dropping customers), or perhaps it will find some legal loophole that would allow it to back out of its contract. Regardless, lining up a successor could prove difficult. In the wake of Citibank’s resignation, other banks such as UBS, HSBC, SAFRA, Santander and Bank of America will probably be reluctant to take over PDVSA’s account. Venezuela, after all, has one of the worst performing economies, hyperinflation expected to surpass 2,000 percent by the end of 2017, and a volatile social and political climate. In addition, officials from an array of the country’s institutions — including PDVSA — currently face sanctions from U.S. authorities for a range of offenses, including human rights abuses, corruption and money laundering. Representing PDVSA is a risky endeavor, even though the company is willing to keep paying its debt.
Nonetheless, Citibank’s obligation will not reduce the chances that Venezuela will default on its bond payments, especially since about 95 percent of the government’s revenue comes from oil. With a stagnant private sector and diminished oil income, Venezuela will remain at a high-risk of defaulting, no matter what bank represents its oil company.
