To understand Venezuela's future, look to the bond market, not politics and protests

Despite some of the world's worst inflation and an economic crisis so severe that 2.3 million people have fled the country, Venezuelan President Nicolas Maduro isn't currently facing majorstreet protests and hispolitical opposition remains fractured.

Venezuela has the world's largest proven oil reserves, but shortages of food, medicine and electricity continue to ravage the country. The International Monetary Fundpredicts inflation could reach one million per cent by year's end.

These conditions should be ripe for political unrest.

But the demonstrations, which last year brought hundreds of thousands into the streets, have largely fizzled, and the socialist government's political opposition has weakened in the past year.

• PHOTOS | Venezuela's spiralling economy has reached a 'crisis moment'

Political change over the next 18 months is unlikely as Maduro'sUnited Socialist Party tightens its gripon the economy, the courts and the press, said Raul Gallegos, aBogota-based associate director with Control Risks, a security analysis firm.

Rather than young activists protesting in public squares, some analysts believe the most likely force to spur serious political change in Venezuela comes from spreadsheet-wielding bond traders and well-heeled sovereign debt lawyers as they move to seize state-ownedenergy assets to recoup money owed.

Venezuela's government maintains it will pay all of its debts and is working to reform its economy by cutting fuel subsidies and changing how its currency is managed all aimed at fighting what it calls an "economic war" being waged against the country by the U.S., neighbouring Colombia and domestic business owners.

Uniquely vulnerable to asset seizures

Analysts, however, don't believe the government's economic measures will work and foresee creditors launching additionalcourt actionover outstanding debt.

"We are going to see the dam break," said Duke University law professor Mitu Gulati, who specializes in internationalarbitration and bankruptcy. "It's astounding how bad things are for a country that is so rich this has to crash soon.

Venezuela owes about $65 billion US in outstanding bonds, according to Caracas Capital, a financial advisory firm based in the country's capital. That's in addition to other debts owed by the government and state companiesan estimated total of about $150 billion US.

Holders of that debt include some of the biggest names in U.S. finance, such asBlackRock, T. Rowe Price, Northern Trustand the U.K.-basedAshmore Group, Reuters reported in April.Venezuela also owes tens of billions of dollarsto Russia and China, after borrowing heavily from the two countriesin recent years, largely through oil-for-loan deals.

With oil accounting for about 98 per cent of Venezuela's export earnings, the country is uniquely vulnerable to a debt default, Gulati said.That would allow creditors to seize oil shipments or refining infrastructure in the U.S. and the Caribbean, where much of Venezuela's oil is stored and refined before being sold oninternational markets.

These seizures are already starting to happen and are expected to intensify through September, Gulati added.

Court showdowns

In August, a judge in the U.S. state of Delaware authorized the seizure of assets owned by Citgo, an affiliate of Venezuela's state oil company, to satisfy debts owed by Venezuela to Canadian mining company Crystallex.

Venezuelan-linked assets in the U.S. could be worth as much as $10 billion US, Gulatisaid.

The U.S. court action followed a similar move in Curacao, a small Dutch Caribbean island, where more than 15 per cent of Venezuela's crude exports were stored and refined before being sold to international customers.

In May, ConocoPhillips, a U.S. oil producer whose assets were expropriated by Venezuela's government in 2007, won an international arbitration action against Venezuela's state oil company, PDVSA. This allowed Conoco to start seizing Venezuelan oil in Curacao and other Dutch Caribbean islands in a bid to recoup $2 billion US.

"These oil seizures are a fundamental challenge to the government it's a huge deal for them," said David Smilde, a senior fellow at the Washington Office on Latin America, who specializes in Venezuela.

"If [Venezuela's]defaults and different economic commitments get to a point where their facilities abroad get confiscated, that will make oil sales difficult."

Even in default, Venezuela should still be able to sell some oil by loading it directly onto customer-owned ships at domestic ports to avoid seizures, Smilde added, although this would significantly reduce the government's already sputtering revenue stream.

China is the largest holder of Venezuelan government debt;the world's most populous country has lent the oil producer about $62 billion US over the past decade, according to the Washington-based think-tankCentre for Strategic and International Studies.

With Venezuela unable to pony up the cash to pay, Chinahas been receivinginterest payments in the form of oil.This arrangement didn't stop at least one major Chinese oil company,Sinopec,from launching a lawsuitagainst Venezuela'sPDVSAin a U.S. court last December for not fulfilling a contract. (It has since been settled.)

U.S. legal leverage

Following the May arbitrationdecision that led to asset seizures in the Caribbean, Venezuelaagreed to pay Conoco $2 billion US over 4years in a settlement, and Conoco has suspended its confiscation campaign.

The case, however, has made other companiesowed money by Venezuela take notice, Gulatisaid. Lawyers across the U.S. are busy preparing claims against Venezuela on behalf of creditors, he said, fearing they will end up at the back of the line for getting paid if they don't move quickly.

Despite frosty relations between Washington and Caracas, the U.S. remains the largest buyer of Venezuelan crude, purchasing more than 30 per cent of its total exports, according to recent data from Bloomberg. This gives U.S. companies and other creditors significant leverage to sue Venezuela in domestic courts.

"Once litigation starts, it's going to make it infinitely harder for the [Venezuelan] government to do anything," Gulati said.

Domestic production decline

These moves to seize the country's assets are intensifying as Venezuela's oil productionthe lifeblood of its economy and government treasuryhits a 50-year low, according to theCentre for Strategic and International Studies.

Mismanagement of oil facilities and an exodus of skilled workers have been blamed for the collapse in production.

Long dependent on imports for food, medicine and industrial equipment, reduced oil production and mismanagement of the country's currency, means the state which sets prices for basic goods and controls most of the economy has cut back on buying necessities for domestic consumers.

In essence, Smilde said, bond investorsin New York or Moscow are profiting from Venezuela's oil wealththat should be spent on food and medicine for average people.

Government blames 'economic war'

The government, for its part, contends Venezuela's problems are the result of sanctions imposed by the U.S., Canada, and the European Union andan "economic war" waged by domestic business elites. The country's economic problems have beencompounded byspeculation, the hoarding of basic products and sabotage targetingoil facilities, the government has said.

It has offered new measures, including pegging the country's inflation-ravaged currency, the bolivar, to a new cryptocurrency, the petro, which is allegedly backed by the country's untapped oil reserves.

"We are moving from speculative capitalismchaotic and criminaltoward an equilibrium economy," Maduro tweeted recently. "We will recover the course of sustained and sustainable growth, to give our people supreme happiness."

According to Venezuelan authorities, U.S. sanctions long imposed in response to human rights violations and corruption make it more difficult for the government to negotiateits debt load or restructure its payments to creditors.

'When the money runs out'

Meanwhile, the exodus of Venezuelanscontinues as many see no hope of living a decent life in their home country. The UN's migration agency has warned that the human flood is building toward a "crisis moment" comparable to the migrant-crossings inthe Mediterranean Sea.

As the country's debts mount, oil production falls and pressure builds, analysts expect a bare-knuckle legal brawl through the end of 2018 between creditors over who gets what's left of Venezuela's once-prized assets. Venezuelan government debt is trading at less than 30 cents on the U.S. dollar, meaning investors believe a full-blown default is likely.

"We are going to see an active and conflictive disorderly default as it advances," said Gallegos, the risk consultant. "Bondholders can [then] seize assets owned by the Venezuelan government or any product owned by the Venezuelan government sitting in storage overseas.

"When money runs out, the government threatens people within its folds including bureaucrats and the military."

With files from Reuters