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Chinese debt crisis: After Sri Lanka, Venezuela the next target of China’s debt-trap diplomacy?

Although China has been quiet on the Venezuelan crisis and default and so far has not been hostile in clawing back the money it had pumped into the South American nation, if history is anything to go by, Beijing could inflict serious punishment on Venezuela for not meeting its financial commitments.

Debt-trap diplomacy is one of the significant hallmarks of China’s foreign policy. Over the turn of the century, as Beijing’s economic clout began to expand inexorably, China started saddling borrowing nations with enormous debts so as to increase its leverage over them. After Pakistan and Sri Lanka, Venezuela appears to be the latest in the list of nations staggering under the shadow of China’s crippling debts.

China and Venezuela’s ‘loans-for-oil arrangement’

The relationship between China and Venezuela and other South American nations began to blossom in the first decade of the 21st century. The commodity-led boom in China ushered in a big trade flows of agriculture, mining, oil commodities from South America to China. Soon enough, Beijing became the number one trade partner for Brazil, Chile and Peru. With Venezuela having the world’s largest oil reserves, it was well-poised to become a perfect partner for Beijing to fulfil its rising oil requirements.

China’s growing financial heft during the 2000s also played a role in the Venezuelan President Hugo Chavez’s marked shift toward Beijing. Venezuela under Chavez saw deepening ties between the two countries that stood out not just in South America but across the globe. Chavez and China’s “superbank” ‘China Development Bank’ (CDB) together entered into a symbiotic agreement—loans-for-oil partnership—that extended credits to the South American nation in exchange for crude oil. The relationship was particularly beneficial to Chavez, who viewed China as a panacea to the economic crisis plaguing Venezuela.

The massive loans-for-oil arrangement with China provided a steady supply of economically and politically trade-able funds that no other international creditors could or would provide to Venezuela. In addition to this, by highlighting China’s socialist bona-fides, Venezuelan President also served to bolster his Bolivarian Revolutionary agenda at home and abroad.

On the other hand, for China, Venezuela seemed like a crucial partner, in its efforts to control the nation’s abundant natural resources, including its vast oil reserves, and in implementing its radical foreign policy. For both, Venezuela and China, the partnership between the two countries seemed to be economically and politically prudent strategy. However, starting in 2012, the fear of aligning with Venezuela was palpable in Beijing, which were heightened at the reports of Hugo Chavez’s ill-health.

Chavez died in 2014 and was replaced by a leader in whom Beijing had far less confidence. Add to the mix, the global downturn in the prices of oil. What followed then was a catastrophe that fundamentally altered the relationship between the two countries. The all but meltdown of Venezuela meant that the government was unable to honour the original terms of the whopping $60 billion loans it had taken from Beijing in exchange for oil.

Almost seven years since then, Venezuela is still struggling to pay its outstanding debt to Beijing. As of August 2020, Venezuela still owed more than $19 billion to the Chinese and had entered an agreement with the Chinese banks for a grace period till the end of the year to pay off its outsize debt. The political turmoil in Venezuela, with the government of President Nicolás Maduro and the opposition engaged in a bitter power struggle, has only served to amplify the concerns in Beijing over the loan repayment.

Venezuela’s plummeting iron ore exports to China fuels the country’s debt crisis

Not just the state government but even the Venezuelan business entities couldn’t resist the urge of falling into the debt trap offered by the Chinese banks. It all started over a decade back in 2009 when Venezuela signed a compelling deal with China for the export of iron ore to Beijing. China would lend $1 billion to Venezuela and in exchange, the state-run mining behemoth CVG Ferrominera Orinoco would deliver 42.96 million tonnes of iron ore to the Chinese steel company Wuhan Iron and Steel Corporation (Wisco) over the next eight years.

However, what initially appeared as a dream deal for Venezuela, soon turned out to be a frightening nightmare as debts for the South American nation soared dramatically even as its business commitments to China remained largely unfulfilled.

In 2009, when the deal was sealed between the two countries, production at the Venezuelan company, part of the Corporación Venezolana de Guayana (CVG) conglomerate, plunged by around 35%. But even as the iron ore production in the country took a hit, the political leadership of Venezuela, with President Hugo Chávez at the helm, had firm control over the country and were on the offensive to stitch international alliances, including with China.

Amidst this, Chinese Development Bank, buoyed by a decisive regime in Venezuela, wired about $1 billion into a Venezuelan bank. The funds were meant for Venezuela to utilise them in improving its iron ore production and the production capacity of the CVG Ferrominera. The plan was to repay the debt with the proceeds from the sale of 42.96 million tonnes of iron ore to Wisco.

But Venezuela bit off more than it could chew in signing a deal with a steep deadline. Right from the beginning, CVG Ferrominera struggled to keep up with its side of the commitment. According to the deal which was signed in October 2009, the Venezuelan company was supposed to deliver the first instalment of 160,000 tonnes of iron ore by the end of the month. Similarly, it was obliged to deliver 160,000 tonnes in November and 140,000 tonnes in December.

The delivery, however, was made but it was delayed. For the year 2010, the agreed quota was much higher—about 29 per cent of Ferrominera’s eventual total production that year which was around $14 million. Though the goal was ambitious, nevertheless it seemed achievable if Venezuelan company had enhanced its capacity as laid down in the Chinese loan.

It soon became evident to the Venezuelan authorities that they had willingly entered into a morass, from which there was no escape. In June 2010, Ferrominera had delivered just 337,250 tonnes of iron ore, less than 10% of the agreed quota. To fulfil its yearly commitment, it had to deliver 3,461,946 tonnes of iron ore, with only six months to go—a seemingly insurmountable task.

A joint Venezuelan delegation warned that the company would soon need to pay China an amount equivalent to the volume not delivered at the agreed price. What it meant for the Venezuelan company was that it had to pay $70 million, along with the transportation cost, cargo loading and unloading charges among other things.

Eventually, it dawned upon the Venezuelan authorities that they had entered a contract with Beijing that was clearly unfavourable to them and one that was incredibly difficult to fulfil. It was no ordinary export deal. China had paid just $1 billion dollars for securing 42.96 million tonnes of iron ore, whose cost according to market rates in 2009 was close to $4 billion. Not only were the Venezuelans short-changed by the Chinese, but the seemingly overwhelming requirements of the deal had a deteriorating effect on the company’s capacity.

A report published in 2010 revealed that far from generating profits for the company, the deal with China proved to be a cost centre for the Venezuelan behemoth, underscoring the company’s logistical and operational inability to match the agreed-upon deal. The report highlighted that the company severely lacked the funds to buy materials and spare parts that would allow it to reach operational capacity in the extraction, processing and transport processes. 

Numerous other setbacks were also faced by the Venezuelan company, making it difficult to sustain the iron ore production. Over the years, the company saw its production fell steeply, partly because its over-ambitious target of achieving Chinese commitments drained it out of cash. Chavez’s successor in 2019 had promised that Ferrominera would return to producing 3 million tonnes of iron ore per year. However, production did not even touch the 2 million tonnes mark in 2020, one-seventh of what it was producing a decade earlier.

China took over Sri Lanka’s Hambantota port after its inability to repay the debt

Although China has been quiet on the Venezuelan crisis and default and so far has not been hostile in clawing back the money it had pumped into the South American nation, if history is anything to go by, Beijing could inflict serious punishment on Venezuela for not meeting its financial commitments.

Back in 2018, a similar crisis befell Sri Lanka, the island-nation along the periphery of India’s south-east coast. After Sri Lanka struggled to make repayments on loans it had borrowed under the regime of Mr Rajapaksa for the development of Hambantota port, after months of negotiation with the Chinese government, the Sri Lankan government handed over the port and 15,000 acres of land around it to Beijing for 99 years.

The case is one of the starkest examples of China’s ambitious use of loans and economic inducements to gain strategic advantages and influence around the world—including its willingness to play hardball to achieve them. With Venezuela reeling under China’s debt-trap, it won’t be surprising if China hashes up a similar agreement with the South American nation and moves to occupy a significant portion of their territory to expand its global hegemony.

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