GRZ Gold Reserve Inc

By Julie Wernau and Andrew Scurria 

Venezuela has made a payment to a mining company using government bonds instead of cash, potentially the first time it has done so since U.S. sanctions last year barred similar transactions.

The payment on Tuesday was made as creditors scramble to move in on the remaining assets of a country that is already in widespread default and enmeshed in an economic crisis. Last week a U.S. court ruled that a creditor could seize Venezuela's biggest U.S. asset, Citgo Petroleum Corp., causing alarm among bondholders who fear collection efforts could disadvantage them.

Gold Reserve Inc., a miner incorporated in Canada and headquartered in Spokane, Wash., said in a statement that it had received Venezuelan government bonds with an estimated market value of around $88.5 million. The payment was made as part of a settlement agreement that calls for the Venezuelan government to pay it around $1 billion related to a mining project in the country. Venezuela's government debt is currently trading at between 20 and 30 cents on the dollar.

Short on dollars and facing the sanctions imposed by the U.S. last August, Venezuela has been constrained in efforts to raise cash or pay down debt.

They were put in place after the asset-management arm of Goldman Sachs Group Inc. purchased at a steep discount $2.8 billion in Venezuelan bonds that had been held by the country's central bank. The purchase drew criticism from opposition politicians in Venezuela and some investors for supplying cash to authoritarian President Nicolás Maduro.

"This money belongs to the Venezuelan people," President Donald Trump said in a statement after ratcheting up sanctions he said would prevent Venezuela from conducting "fire sales" that liquidate Venezuelan assets.

Venezuela's National Assembly has similarly barred such transactions, but Mr. Maduro effectively dissolved Congress last year and replaced it with his own government. Investors say it is unclear whether a reinstated Congress under another government would honor bonds Mr. Maduro's regime has put into the market to pay down debts.

The sanctions appeared to keep an estimated $3.5 billion in bonds still owned by Venezuela from making their way to the market -- until the payment of bonds to Gold Reserve.

"This is the first transaction in which the Venezuelan government paid somebody with bonds since the sanctions," said Francisco Rodriguez, chief economist at Torino Capital, a New York-based investment bank.

The U.S. Treasury Department clarified last month that its sanctions aim to block U.S. entities from participating in "corrupt and shortsighted financing schemes" involving Venezuela selling off government assets, including bonds, for less than they are worth.

In the company's statement, President A. Doug Belanger said Gold Reserve was "very pleased with the receipt of bonds" and that it looks forward to working with Venezuela on a large, undeveloped gold-copper project.

Despite the U.S. sanctions, companies can apply for and receive an exemption to a sanction, but such licenses aren't made public.

"The Treasury Department will issue specific licenses allowing collections of past debts that would otherwise be prohibited by sanctions as long as the debt was incurred before that sanction," said Peter Harrell, a consultant on economic sanctions who oversaw Iran sanctions under the Obama administration.

The bonds transferred to Gold Reserve are on a list of bonds the U.S. government has licensed to trade, according to a person familiar with the matter.

Officials at the U.S. Treasury and Global Affairs Canada didn't comment.

Gold Reserve is one of several creditors that have won large arbitration judgments against Venezuela. Defunct Canadian gold miner Crystallex International Corp. won a U.S. court ruling last week authorizing its seizure of Citgo, the U.S. oil refiner owned by Venezuela's state oil company, to satisfy a $1.4 billion award.

Venezuela had reached a settlement with Crystallex last year to end its pursuit of Citgo, according to Canadian court documents. Crystallex was paid at least $25 million in cash before Venezuela lapsed on additional required payments, scuttling the agreement. Citgo's owner, Petróleos de Venezuela SA, has said it would challenge the potential seizure in a U.S. appeals court.

Already hobbled Venezuelan bonds fell to a two-year low following the Citgo ruling. Investors holding defaulted Venezuela bonds have expressed alarm that such rulings or bond payments by Venezuela could disadvantage the country's other creditors.

Venezuela and its various state-controlled entities together have $62 billion of unsecured bonds outstanding, with approximately $5 billion so far in unpaid interest and principal. Analysts estimate that the government has approximately $150 billion total in debt outstanding to creditors around the world.

Write to Julie Wernau at Julie.Wernau@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com

(END) Dow Jones Newswires

August 16, 2018 05:44 ET (09:44 GMT)

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