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U.S. Examines Russia's Grip on Citgo Assets

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05/19/2017 | 03:06am CEST
By Jay Solomon in Washington and Bradley Olson in Houston 

U.S. financial authorities are looking into the Russian government's growing leverage over Citgo Petroleum Corp. amid heightened concern that the Kremlin is seeking to use energy as a political weapon against the U.S., according to U.S. and congressional officials.

Russia's state-owned oil giant PAO Rosneft in recent months has amassed debt that is backed by a near-controlling stake in Citgo, the Houston-based subsidiary of Venezuela's Petróleos de Venezuela SA, or PdVSA. In the event of a default of that debt -- a prospect seen as increasingly likely by U.S. officials and Wall Street -- Rosneft would be in a position to engineer a takeover.

The move has sparked concern inside the Treasury and State departments -- as well as on Capitol Hill -- that Rosneft could seek to eventually gain control of Citgo's vast energy assets inside the U.S., which include three oil refineries, nine pipelines and nearly 50 petroleum platforms, these officials said.

The matter also could further drive a wedge between Washington and Moscow as they continue to squabble over sanctions against Russia and diplomatic efforts to broker a peace deal in Syria.

"This is an issue that I'm aware of," Treasury Secretary Steven Mnuchin told a congressional hearing on Thursday, referring to the concerns about Rosneft. "I can assure you that this, like any other national-security issue, will be reviewed."

The examination of Citgo marks the second time the Trump administration has looked into the operations of Rosneft since taking office in January. The Russian company and its chief executive officer, Igor Sechin, both were sanctioned by the Treasury Department in 2014 in the wake of Moscow's annexation of the Crimea region of Ukraine.

Last month, President Donald Trump personally ruled against an attempt by Exxon Mobil Corp. to renew a joint-venture with Rosneft in the Black Sea. But U.S. lawmakers on Thursday said any issue involving Mr. Trump and Russia will be closely scrutinized on Capitol Hill, due to the intensifying federal and congressional investigations into contacts between his aides and Russian officials during the 2016 presidential campaign and political transition.

The Trump administration and Russian officials have denied any improper contact.

"When I pressed the secretary on this issue at today's Banking Committee hearing, I was pleased to hear him indicate that he and the department were treating the potential takeover of Citgo by Rosneft as a serious national-security threat," Sen. Robert Menendez (D., N.J.) told The Wall Street Journal. "In the event that PdVSA does default on its debt, I expect the secretary to uphold this commitment and thoroughly review the implications this could have for the integrity of our energy infrastructure and national security."

Multiple U.S. companies have claims on Venezuela's assets that date to the country's seizure of billions of dollars worth of business operations, and any fight over Citgo could last years.

Democrats have raised questions about a $500,000 donation made by Citgo Petroleum to Mr. Trump's inauguration earlier this year. It came amid a crippling economic crisis in Venezuela that has forced PdVSA to seek emergency financing from Rosneft and other sources.

Fernando Garay, a Citgo spokesman, said he was looking into the matter and couldn't immediately comment on the U.S. examination.

In recent months, U.S. government officials have engaged in deliberations over how the U.S. might respond if Rosneft did take control of Citgo. Lawmakers recently have pressed the Trump administration over the matter, which is likely to intensify scrutiny of any maneuvers by Rosneft.

In the past year, Venezuela has plunged deeper into a political and financial crisis, struggling under a mountain of debt and soaring inflation that has crippled its ability to provide basic services or feed its population.

Mr. Sechin, Rosneft's CEO, told reporters on Thursday in Berlin that his company had claim to 49.9% of Citgo as collateral from PdVSA for $1.5 billion in loans. The Russian oilman and close aide of Russian President Vladimir Putin, however, denied Rosneft was seeking to directly operate any of Citgo's assets inside the U.S.

"We do not want to operate this network and don't intend to," Mr. Sechin said, according to Russian state media.

Rosneft didn't respond to a request for comment for this article.

Current and former U.S. officials said that, if Rosneft tried to take over Citgo, it could prove to be a difficult problem for the Trump administration to address.

Should Rosneft seek to gain control of Citgo, the Treasury Department technically would be forced to place sanctions on Citgo as well, said these officials. Rosneft currently is barred from securing long-term U.S.-dollar loans as well as from purchasing certain advanced American drilling equipment due to Crimea-related sanctions.

Citgo, however, has such large operations inside the U.S. that the Treasury Department likely would be forced to grant the company special licenses to ensure it continues operating smoothly, these officials said.

Mr. Mnuchin on Thursday said the Committee on Foreign Investment in the U.S., or CFIUS, would need to review the Citgo issue. CFIUS is made up of multiple government agencies, including the State and Treasury departments, and has the power to block foreign acquisitions of U.S. assets on national-security grounds.

CFIUS's ability to roll back a Rosneft takeover isn't clear-cut, however, said these current and former U.S. officials.

The Russian firm's potential claim to Citgo through the debt of parent PdVSA has been amassed outside the U.S. financial system, said these officials. The only transaction that took place inside the U.S., PdVSA's initial takeover of Citgo, traces back to the 1980s.

"It's not a clear case in which CFIUS could rule," said Eric Lorber, a sanctions lawyer who is now a senior adviser at the Foundation for Defense of Democracies, a Washington think tank.

Mr. Lorber and other current and former U.S. officials said they believed Citgo represents another case of the Russian government using energy as a weapon in its foreign affairs. Russia in the past has denied this.

European governments have repeatedly charged that Mr. Putin has used Russia's gas supplies to the Continent as a means to affect policies.

Write to Jay Solomon at [email protected] and Bradley Olson at [email protected]

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