In a deal accused of abetting hunger and dictatorship, Goldman Sachs’ recent purchase of $2.8 billion worth of Venezuelan government debt shows how wealthy and powerful financial firms continue to exploit fragile states for profit.
The global investment bank has arguably afforded the oppressive and growingly unpopular reign of President Nicolás Maduro a small but significant lifeline. Human rights abuses, the silencing of critics, an arbitrary rule of law, and a humanitarian crisis are among the manifold casualties of his rule, according to nongovernmental organizations.
While the troubled South American nation is cash-strapped, Julio Borges, head of Venezuela’s opposition-led Congress, said—in a letter to Goldman Sachs boss Lloyd Blankfein—that the deal would only support the ruling administration’s authoritarian streak and drive to avoid elections. “Goldman Sachs decided to make a quick buck off the suffering of the Venezuelan people,” he wrote.
Low oil prices and an inefficient state-led economic model have shrunk the oil-dependent nation’s finances. While four years of recession have tested Venezuelans’ patience. But Maduro has been stubborn—entrenching his power and defending his power violently. The last few months alone have seen the deaths of over 60 anti-state protestors, as civilians amp-up the pressure on his rule.
With state coffers depleted and Maduro desperate to fund his patronage networks in order to ward off threats to his power, the leader has become dependent on international financial deals. “I’m looking around the world for money, for businesses, for investors...” he said in a televised broadcast in May.
Fortunately for Venezuelan debt holders, keen to avoid spiraling debt piles, Maduro has largely kept up with payments on bond deals, which have given him some temporary respite. Yet it comes at the expense of dwindling imports of food, medicine, and other basic amenities. Malnutrition is rising, and the infant mortality rate has increased dramatically, The Washington Post reported. And so, it’s little surprise the financial product is being dubbed a “Hunger bond.”
Goldman’s dealers clearly saw it as good business—an attractive financial opportunity amid despair. The bank reportedly purchased the bonds at $865mn, a 70 percent discount. It will receive over $700mn in interest payments until the bonds mature in 2022, at which stage they would be valued at $2.8bn. (The debt was issued in 2014 by Venezuela’s nationalized oil company PDVSA—and held by the country’s central bank.)
With investors perhaps wagering that Venezuela would avoid bankruptcy, and escape political turmoil, the strongly discounted purchase—given the nation’s economic woes—is a lucrative investment. In fact, Nomura Securities, a Japanese investment bank, were also lured in with an investment worth $100mn in the bonds, at the same rate.
Responding to the fierce disapproval of their deal—including protests outside their New York headquarters—a statement from the bank said the transaction happened via brokers and not directly with the Venezuelan government. That hardly makes it excusable, particularly as the bank has a dubious ethical track record, including recent investigations into its alleged ties with the corrupt 1MDB Malaysian state fund, and its exploitation of the Greek debt crisis.
The deal also evaded the review of the bank’s senior executives and standards committee, raising concerns over how easily such trades can be made. And, it was not the first time the investment bank had been approached by the Maduro government for a bail-out either, according to Reuters. Compliance staff at Goldman are reportedly now reviewing the deal.
The problem is systemic, and goes beyond Goldman. Other creditors of Venezuela include major asset management firms like Fidelity, Pimco, and BlackRock, according to the Financial Times, and individuals can make similar investments on a daily basis through emerging market fund offerings. And so, clearly, trading in the debt of poorly governed emerging market nations needs stricter control.
Oppressive regimes know they can exploit the greed of the global banking system in order to gain funding. International banks can in turn inadvertently take advantage of desperate situations, to extend profit margins. This, in the case of Venezuela, means propping up an autocracy, while incentivizing national austerity in order to service bond payments—all at the expense of hungry citizens.
The whole process undermines the benefits of well-targeted aid, and the actions of civil society, which fight repression and promote development. The question is, what can be done? Emerging nations need access to capital markets for growth, and are never totally innocent when it comes to governance. But, either way, guidelines are necessary and the biggest abusers must be off investor limits. While more monitoring, tighter laws, investigations, and sanctions are also required.
But activists can also play a key role. The Venezuelan opposition has already threatened to renege on any debt obligations should they come to power, and have also called on U.S. authorities to investigate the matter. Meanwhile old-fashioned shaming—which raises reputational costs for banks— through protest, might just discourage further investment in Venezuela, hasten the decline of the regime, and punish investors at the same time.
After all, Goldman are now left in the tarnishing position of rooting for Maduro to remain in power, in order to receive its bond payments. And so, whatever way events pan out, as Borges said, the Wall Street giant will struggle to “put lipstick on this pig.”
Tej Parikh is a global policy analyst and journalist. He received his master’s degree from Yale University, with a focus on international development. His worked is archived at The Global Prism. He Tweets @tejparikh90.