After the U.S. dropped a broad array of sanctions against Venezuela in October, it warned that it could reimpose all of them, except one. The White House admitted that its ban on buying Venezuelan bonds was a failure that had potentially benefited enemies of the U.S.
Behind the scenes, a group of powerful Wall Street investors had been feeding Washington a stream of evidence that showed Venezuelan bonds were being traded by investors with ties to Russia. They said Moscow was hoping to gain influence in the U.S.’s backyard.
The Biden administration said dropping the debt-trading ban “would have the positive effect of displacing nefarious players in this market.” It was the first time the U.S. publicly acknowledged that banning U.S. investors from buying debt of a sanctioned country could backfire.
The investors stood to benefit from the end of the ban, because prices of Venezuela’s bonds were expected to rise. They did, giving the investors a windfall of hundreds of millions of dollars.
The U.S. has ramped up its use of sanctions in the past two decades. In response, countries such as Russia, Iran and North Korea have become increasingly adept at moving cash and goods across their borders. Debt-buying bans, which have also been imposed on Russia and Belarus, are now seen as giving foreign buyers a chance to profit and potentially influence debt restructurings while making it harder to track the trades.
The Trump-era sanctions on the government of Venezuela’s authoritarian leader, Nicolás Maduro, were meant to hammer the regime. The White House made it illegal for American investors to extend new loans to Caracas, and it barred investors from buying any of the government’s outstanding bonds. Venezuela at times stashed outstanding bonds in domestic financial institutions or offshore and sold them when it needed cash.
U.S. firms held bonds valued at about $50 billion, which typically were issued by the national government or the country’s state-owned oil company, Petróleos de Venezuela. Investors liked them because they offered high yields and were backed by hard-currency cash flows from the sale of oil. U.S. investors sold about half of those bonds.
A group of creditors to the Venezuelan government, including Fidelity Investments, T. Rowe Price, and Greylock Capital, didn’t sell and fought the ban. Some members of that group gave State Department officials transaction records of billions of dollars in Venezuelan bond purchases by investors from Qatar, the United Arab Emirates and Cyprus, people familiar with the situation said. All of those places are well-known conduits for Russian money.
“Nobody in the U.S. government seemed to understand what market participants told them were the obvious consequences of the policy,” said Hans Humes, chief investment officer at Greylock Capital and co-chairman of the Venezuelan creditors group that lobbied to end the sanctions.
Fidelity and T. Rowe Price each held more than $1 billion of Venezuelan bonds while Greylock had about $1.5 billion of bonds, people familiar with the matter said.
When the ban was lifted, Venezuelan bond prices surged from 13 cents to around 20 cents on the dollar. Some investors expect Venezuelan bonds to be added back to JP Morgan’s closely tracked emerging-markets bond index as soon as next month, potentially giving prices another boost.
The bondholders told U.S. officials that they believed there was a strong risk that investors in the Middle East and Cyprus were frontmen for Moscow. And they provided Washington with records and images of trade tickets showing how the same buyers based in Qatar, the U.A.E. and Cyprus who had purchased Venezuelan bonds in 2022 and 2023 had also been active buyers of Russia’s own bonds after Washington slapped on similar sanctions against Moscow after it invaded Ukraine in 2022.
They told officials in the State Department that they believed Russia was accumulating a position in Venezuelan debt and could pursue a deal for Venezuela to sell assets to Russia in exchange for writing off the debt, according to a copy of a memo from the creditors’ group sent to the U.S. government in 2023.
“Venezuela is Russia’s most respected partner in Latin America,” Kremlin spokesman Dmitry Peskov said in an email. But he noted that, because of sanctions, his government’s cooperation with Caracas is piecemeal.
A U.S. State Department spokesperson said, “We take seriously attempts by external actors such as Russia to expand their influence in Venezuela and take action as appropriate.”
While the investors didn’t have a smoking gun linking Moscow to the trades, the State Department’s Venezuela Affairs Unit included bondholders’ concerns in a classified and previously unreported cable sent in early 2023. The unit’s analysts viewed the bond-trading ban as counterproductive.
The State Department later warned in the diplomatic cable that the U.S. could be cut out of any talks to restructure Venezuela’s debt, potentially providing Russia or other countries more influence, according to people with knowledge of the cable.
Their case was bolstered last April by the appearance of a large Russian delegation in Caracas. Russian Foreign Minister Sergei Lavrov warned that Venezuela shouldn’t succumb to Western financial pressure.
The National Security Council, which has led the rapprochement efforts with Maduro, declined to discuss intelligence that it reviewed before deciding to drop the sanctions.
“We ultimately concluded that the sanctions were bad for the United States and good for our adversaries,” a senior U.S. official said. “They had created openings for China and Iran and Russia to be able to expand a strategic foothold in Venezuela.”
Unlike the other sanctions that the U.S. government reversed last fall, the debt-trading ban has been permanently removed. Washington, citing the Maduro regime’s arrest of political opponents and banning some from running in elections, has reimposed one of the sanctions and another is expected to come back in April.
Marshall Billingslea, who was a senior Treasury Department official under former President Donald Trump, defended the sanctions against Maduro’s regime, which he said weren’t enforced strictly enough.
Concerns over Russian meddling, Billingslea added, were part of a fearmongering campaign by critics.