By Marisela Luzardo | 2023-08-10

CARACAS -- Venezuela and China have begun to rekindle ties after years of estrangement and mutual distrust.

Senior Chinese officials met with close advisers to President Nicolás Maduro in Caracas in May to discuss restructuring the country's long-standing line of credit.

Neither side disclosed the result of those talks.

Venezuela and China have engaged in a close relationship, marked by multimillion-dollar loans, more than 500 memoranda of understanding, ambitious technological projects and high-level diplomatic visits.

However, over the past two decades this alliance has left Venezuela only with a heavy debt burden and a legacy of mutual distrust.

According to a report by The Dialogue organization published on March 24, "Venezuela, which has accounted for the largest share (44 percent) of China's total development finance in the region [Latin America] since 2005, was among the first in the region to work with China to adjust the terms of certain loans."

Beijing then realized the problems Venezuela had.

"China sought to address the country's repayment problems by offering grace periods on principal payments and extending the life of at least one loan. China's DFIs (development finance institutions) ceased lending to Venezuela starting in 2016, noting deteriorating economic conditions in the country," added The Dialogue.

The beginning

Starting in 1998, Hugo Chávez sought China as Venezuela's top buyer of oil, making it his country's most significant ally, surpassing even Brazil and Argentina.

Chávez's rise to power in Venezuela in 1999 provided Beijing with an opportunity to expand its influence in Latin America. A few months after his victory, Chávez received the first visit by a Chinese president to his country: Jiang Zemin was in Caracas in April 2001.

Furthermore, during his presidency, Chávez visited China on five occasions. Chinese officials made 12 high-level visits to Venezuela in that period.

His successor, Maduro, has tried to continue this relationship, visiting China on three occasions since taking office in 2013.

China sought alliances with Latin America, focusing on securing oil reserves, securing public contracts for infrastructure projects and expanding the market for its tech products.

Meanwhile, Venezuela wanted a reliable partner who would not question Chávez's leadership style and could provide finances and skilled labor to maintain and enhance its oil industry. Unfortunately, the relationship failed to deliver on these expectations, as few or none of the commitments was fulfilled.

Debt trap

According to a recent investigation by Transparencia Venezuela, China lent Venezuela a staggering $62 billion between 2005 and 2016, accounting for 44% of China's total loans granted to Latin American countries. This substantial amount highlights China's significant financial influence in the region and sheds light on Venezuela's reliance on foreign investments to sustain its economy.

"Between 2000 and 2019, close to 500 agreements were signed, as well as billion-dollar loans for the development of Venezuela, with poor results in some cases and unknown in others," the report detailed.

The alliance with China made Venezuela the main recipient of Chinese financing in Latin America. These loans financed infrastructure projects, such as power plants and highways, as well as the purchase of Chinese goods and services.

"Although the loans had the sale of prepaid oil as a shield and the commitment to repay them was assumed by PDVSA [Petróleos de Venezuela, S.A., the Venezuelan state oil company], these credits have been directed not only to the oil sector but have also been to ... projects in other areas, such as infrastructure, transportation, communications, electricity and agriculture, among others," added the Transparencia Venezuela report.

These loans have also contributed to Venezuela's growing debt burden, which is now estimated to exceed $150 billion.

In return for the loans, Venezuela would sell China up to 1 million barrels of oil per day through its state-owned oil company, PDVSA, which was on the brink of collapse from under-investment and lack of maintenance. This agreement would help Venezuela to weather its economic crisis, but it would also come at a high cost.

Mutual distrust

Chinese companies were not making progress on the agreed infrastructure projects, and distrust was beginning to appear on both sides. This suspicion stemmed from a number of factors, including the complexity of the projects, the opacity of the Venezuelan government, and the corruption rampant in both countries. As a result, the relationship between Venezuela and China began to sour, and the loans that Venezuela had received from China became increasingly difficult to repay.

By 2012, Venezuela's oil production had fallen to 640,000 barrels per day, of which a third was used to repay debt to China. A year later, China lent Venezuela an additional $5 billion to build houses in the poorest sectors, one of the few cases in which ordinary Venezuelans benefited from Chinese investment.

The dynamics between the parties began to unravel from a combination of factors, including mutual corruption, opaque behavior and violations of agreements. The United States' imposition of sanctions on the Maduro government also played a significant role in causing tensions to escalate.

According to the NGO Vendata, between 1999 and 2019, the Venezuelan and Chinese governments signed more than 500 agreements. However, the public has complete information on only 62 of these agreements (12.75%). It has partial information on 109 agreements (22.42%) and only "a few references or just the name of the agreement" in the vast majority (315 agreements, or 64.81%) of cases.

This lack of transparency raises concerns, as it makes it difficult for the public to understand the implications of these deals with the Chinese government and companies.

In 2016, Maduro requested a debt renegotiation with China, which resulted in more flexible payment terms. The agreement extended the principal payment deadline by two years, during which only interest and fees were due.

"I ask for the help of China; I ask for the help of Xi Jinping," said Maduro in November 2020, cornered by debts and sanctions. The Venezuelan president wanted China to support the controversial "anti-blockade law", with which Caracas sought to circumvent Washington's sanctions.

Maduro went so far as to approve a special law for energy agreements with China through his National Constituent Assembly, in a move to avoid sanctions.

But already the relationship was undermined.

China's promises to help its once-best partner in Latin America revive its oil and electricity industries fell flat. Power failures and blackouts continue to be a constant in Venezuela, while the oil industry works at 30% of capacity and PDVSA estimates that it will need $58 billion to restore 1998 production levels, as reported by Reuters in May 2021.

Fill the vacuum

Other countries have filled the vacuum left by China, such as Iran, which has signed multiple cooperation agreements on energy matters even though it lacks Beijing's financial muscle.

The difference between Venezuela's relationships with China and its ties with Iran is that the latter is more experienced in operating under sanctions, said energy consultant José González.

"China now has companies operating in all parts of Latin America, including in the United States. China no longer sees Venezuela as the great opportunity; its investments in the country have not paid off as expected," he said. "It sees an unstable country, with a lack of guarantees, and it also fears that the sanctions will reach it."

"On the other hand, Iran does see Venezuela almost as an equal, with a particular geopolitical interest. For that Tehran has sent some ships with fuel and naphtha, it maintains a consistent diplomatic presence and they have maintained their commercial relationship," he stressed to Entorno.

The cooling of relations with China has forced Maduro to seek new allies among the planet's most radical political and commercial actors, as he struggles to guarantee the permanence of him and of "Chavismo" in power.