Venezuela has turned to Wall Street to help it secure US dollar funding through its large gold reserves as it battles with an economic crisis that has left it struggling to pay for food, medicine and even toilet paper.

According to people familiar with the deal, the central bank has swapped gold for $1bn in cash through a complex agreement with Citigroup.

The deal will provide foreign currency for the socialist government of President Nicolás Maduro as it grapples with soaring inflation, chronic shortages of everyday items and an economy that is shrinking because of falling oil prices.

Interest-bearing deal to combat soaring inflation is a coup for Citigroup

US President Barack Obama called the Latin American country a national security threat in March, restricting travel and freezing the assets of some Venezuelans, after Venezuela ordered Washington to slash its diplomatic staff.

The structure of the deal is unclear but, according to media reports, Caracas has pledged 1.4m troy ounces of gold — equivalent to 3,500 gold bars, or 14pc of the UK’s gold reserves — for about $1bn in cash, on which Venezuela will pay interest.

At current prices, the bullion is worth almost $1.7bn, providing Citi with a cushion should prices fall. Gold has fallen 36pc since a peak in 2011 but is up 1.8pc so far this year to about $1,200 a troy ounce. Citi declined to comment on the deal.

Venezuela has the world’s largest oil reserves but its economy is forecast to shrink 7pc this year. It has printed money to fund a fiscal deficit estimated at 20pc of gross domestic product, fuelling inflation that is expected to top 150pc.

Its international currency reserves hit an 11-year low of $19bn in April. About $14bn of that is held in gold, most of it stored at the central bank in Caracas.

Venezuela has almost $8bn to repay in principal and interest payments this year, according to Alejandro Arreaza, Barclays economist.

US President Barack Obama called the Latin American country a national security threat in March, restricting travel and freezing the assets of some Venezuelans, after Venezuela ordered Washington to slash its diplomatic staff

Although it has so far made good on debt payments, Caracas is rated by Moody’s Analytics the most likely country to default after Ukraine.

Its gold reserves, at almost 377 tonnes, are the world’s 16th biggest, according to the World Gold Council.

Hugo Chávez, the late president who was a longtime US critic, said he would free Venezuela from the ‘dictatorship of the dollar’.

He directed the central bank to ditch greenbacks and amass gold instead. Four years ago, as a safeguard against market instability, he repatriated most of the gold stored overseas.

The Venezuela deal is a coup for Citi, which has been expanding its commodities business as rivals including Barclays, Credit Suisse and Deutsche Bank have retreated from the sector because of increased regulation.

Citi has been using its global lending franchise and trade finance business to pitch and win deals. It has been involved in Mexico’s oil-hedging programme — the largest of its kind — and entered into derivative contracts with the Moroccan government to hedge the cost of imported fuel.

Published in Dawn, Economic & Business, May 4th, 2015

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