|The end of the interim presidency and the crisis of the Venezuelan external debt
José Ignacio Hernández G. / 07-02-2023
On January 3, 2023, the 2015 National Assembly approved a reform of the Democratic Statute to eliminate the Interim Presidency that, since January 23, 2019, was recognized as the exclusive legal representative of the Government of Venezuela. This change creates doubts about what policy can exert that representation in the U.S., particularly regarding Venezuela’s external debt claims. Although the lawyers appointed by the now defuncted Interim Presidency’s Special Attorney will remain in the pending cases before the courts, and the OFAC recently excluded the National Assembly from the sanction regulation, the U.S. Government must make a clear decision about what policy will be recognized as the de jure Government of Venezuela, to advance in practical solutions for the most urgent debt problems.
The legal representation of the Government of Venezuela by the Interim Presidency (2019-2023)
The default of Venezuela’s financial debt began in November 2017, when the Government of Maduro decided to unilaterally suspend the debt repayment, calling for a debt restructuring process that was never implemented. With an approximately outstanding USD 58 billion in defaulted bonds issued by the Republic and PDVSA, the litigation in the U.S. against the Government of Venezuela began to increase. In addition, the non-financial debt -including promissory notes and the expropriation compensations owned to foreign investors- resulted in tens of lawsuits, particularly in the District Court of Delaware, due to the attempt of some creditors to seize the shares of PdVSA in PDV Holding, Inc.
In January 2019, the U.S. policy towards Venezuela changed when the U.S. Government recognized the speaker of the National Assembly as Interim President, based on Art. 233 of the Venezuelan Constitution. As a result, the legal representation of the Government of Venezuela in the U.S. shifted from Maduro’s Government to the Interim President. Particularly, the Interim Presidency represented PdVSA as the final shareholder of Citgo through an ad-hoc board. Also, the Interim Presidency -through the Office of the Special Attorney General- exerted the exclusive representation of Venezuela in the U.S. Courts, particularly regarding the creditors’ claims. Simultaneously, U.S. Government incremented its sanction policies, with the determination of PdVSA as a sanctioned subject. Consequently, PDVSA, under Maduro’s control, was barred from operating in the U.S., while their properties were also blocked. Among other consequences, those sanctions prevented any asset seizure by legacy creditors that do not have a license.
A few mont laters, on July 2019, the Office of the Special Attorney General published the guidelines for the debt renegotiation that should start once the political crisis in Venezuela was solved and the sanctions were lifted. Those guidelines recognized the legacy debt of Chávez and Maduro and established four basic principles: (i) the renegotiation of all the claims, including the non-financial debt; (ii) the reconciliation of the debtors’ claims; (iii) the equal treatment of all the reconciled claims and (iv) the necessity to follow a debt sustainability analysis conducted by the IMF. A Venezuelan bondholder committee broadly endorsed those guidelines. The Interim Presidency created a presidential commission to advance the debt restructuring plan.
However, the domestic political support for the Interim Presidency started to vanish, among other reasons, because Maduro was able to preserve power. Gradually, the debt strategy slowed until January 2022, when the Interim President suppressed the debt commission. Although the Interim Presidency exerted the exclusive representation of the Government of Venezuela in the U.S., particularly regarding the financial debt, the opposition decided to abandon the strategy regarding the legacy debt.
Because only the Interim Presidency was recognized as the de jure Government of Venezuela in the U.S., Maduro’s Government could not represent the Republic and PdVSA regarding the legacy debt, not even after Maduro proposed, in 2021, to sign tolling agreements to prevent the prescription of any debt right. It should be noted that the 2019 guidelines published by the Special Attorney General declared the intention to “entertain proposals to extend the relevant limitations period to permit the debt renegotiation to proceed”. However, as was explained, the National Assembly and the Interim Presidency abandoned the debt strategy.
After years of default, with tens of litigation pending in the U.S. courts, and without any strategy, at the end of 2022, the Venezuelan debt entered into a perfect storm. And then, the National Assembly decided to eliminate the Interim Presidency, creating doubts about the Government of Venezuela that could be recognized as such in the U.S., particularly to represent the Republic and PdVSA before the legacy debt.
According to the new Statute, the National Assembly extended its mandate until January 5, 2024. Also, it abolished the Interim Presidency and created a political committee (the Assets Protection and Management Council) to (i) exert property rights over external assets; (ii) appoint and control the ad-hoc board of PdVSA and the BCV, and (iii) to appoint lawyers to represent Venezuela before foreign courts (Art. 9). The Office of the Special Attorney General, created in the 2019 Statute to coordinate the judicial representation of the Government of Venezuela, was also abolished.
The elimination of the Interim Presidency and the legal doubts about the Government of Venezuela’s representation in the U.S.
From a legal perspective, the first constraint that prevents Nicolás Maduro from renegotiating the debt in the U.S. is the lack of legal representation over the Republic and PdVSA because, until January 3, 2023, that representation was exclusively vested in the Interim Presidency. Sanctions, indeed, create other constraints that could be lifted with licenses. But licenses cannot modify the recognition policy, that in U.S. Law, is an exclusive authority of the President.
Beyond the failed transition strategy adopted in 2019, the Interim Presidency was still recognized in the U.S. as the exclusive representative of the Government of Venezuela, particularly regarding debt claims. Considering that legal capacity, on November 2022, the Unitary Platform signed a social agreement with Maduro’s Government to “unfreeze” external assets to provide humanitarian relief.
However, the legal representation of Venezuela in the U.S. by the Interim Presidency ceased on January 3, 2023. That day the State Department declared its political support to the 2015 National Assembly “as the last remaining democratic institution in Venezuela, and we welcome the agreement reached to extend its authority”. The statement did not mention the recognition of the Interim Presidency -unlike, for instance, the statement issued on January 4, 2022. The State Department spokesperson, on January 3, 2023, avoided answering who will be the Government of Venezuela recognized as such -although he recalled that the sanction policy, which grants some level of protection over assets, is still in place.
From the legal perspective, what matters are not political manifestations of support but the explicit decision of the U.S. Presidency about the polity that is accepted as the de jure Government of Venezuela. Until now, that express determination has not been issued. It is unclear if the political support to the 2015 National Assembly means that this Assembly or the Asset Council is the recognized Government of Venezuela.
Therefore, since January 3, 2023, there has been a legal vacuum about who can legally represent the Government of Venezuela in the U.S. Particularly, it is not clear who can represent Venezuela and PdVSA before the legacy creditors, including the tens of claims pending in the courts.
One of the law firms appointed by the now defuncted Interim Presidency’s Special Attorney requested stays in pending litigation related to the Venezuelan debt because it was not clear who has the legal authority to represent the Government of Venezuela. This demonstrates why the disbandment of the Interim Presidency creates legal doubts about who can legally represent the Government of Venezuela, increasing the risks of the Venezuelan defaulted debt.
The doubts regarding the Government of Venezuela’s legal representation in the U.S. pose further challenges to the possibility of signing tolling agreements to avoid the prescription of the defaulted debt claims, based on the six-year Statute of limitation in the N.Y. Law.
Amidst this legal uncertainty, creditors have been resuming their strategist to protect their rights. Some have continued litigation, while distressed-debt traders have decided to buy Venezuelan debt. More recently, creditors have insisted on lifting the trading ban imposed by the U.S. Government. The closer the November 2023 date gets, the greater the pressure on creditors to protect their rights.
A path forward
Despite the political turmoil in Venezuela’s opposition, the external debt’s legal problems in the U.S. cannot wait. There are pending litigations before the Delaware District Court regarding the auction sale of PDVSA’s shares in PDV Holding, Inc. The PDVSA 2020 Note litigation is currently pending at the N.Y. Court of Appeal. And there are tens of other claims related to the Venezuelan external debt in several U.S. Courts. Another practical and urgent problem that should be addressed is the prescription of debt rights based on the six-year period that could expire in November 2023. If creditors cannot sign an agreement to avoid that prescription, they may be forced to litigate their rights.
One pragmatic and partial solution was implemented by OFAC, with the new license n° 31B, issued on January 9, 2023, to authorize the 2015 National Assembly to conduct prohibited transitions. Initially, the license was also issued in favor of the Interim Presidency. Still, it is unclear if, under this license, the 2015 National Assembly is now legally recognized as the jure Presidency of Venezuela.
But this is just a limited solution. The Government of Venezuela needs a legal representative in the U.S., particularly to deal with the Republic and PdVSA defaulted debt and avoid the risks of the statute of limitation. As explained, the decision of what policy is deemed as the Government of Venezuela is vested in the U.S. Presidency. For that purpose, it is necessary to make a clear statement to restore the legal representation of the Government of Venezuela. Without that, there could be a major force event that will prevent Venezuela from appearing before courts and, even more importantly, finding negotiated solutions regarding the debt claims.
Nor does the fact that the debt problem has been omitted in the negotiations in Mexico help this new crisis. A group of creditors declared that they would not try to attach the funds needed to create the social fund that Maduro and the Unitary Platform decided to develop on November 2022. But to adequately address the debt problem, it is necessary to expand the negotiations to external asset control and external debt. Mainly because that debt -estimated at least USD 140.000 billion- far exceeds the value of those assets.
To reduce this uncertainty, there are three suggested actions in the short term:
a The U.S. Government, sooner or later, will have to clarify who can exert the legal representation of the Government of Venezuela, particularly regarding the debt claims. For that purpose, the 2015 National Assembly must clarify the legal framework applicable to the parliamentary government created in January 2023.
b If Mexico talks are resumed, they should include the debt problem in the discussions regarding external assets.
c Once the Government of Venezuela’s legal representation is clarified, it will be possible to advance in pragmatic solutions that, focused on the complex humanitarian emergency, provides solutions for the most imminent problems, such as the statute of limitation and the trading ban.