Why...And Why Now?
We’ll head Down The Rabbit Hole in a sec but first…It was 2019 and change was in the air. The opposition led by interim President, Juan Guaido, appeared poised to end the suffering of the Venezuelan people under the brutal regime of dictator (he called himself “President”) Nicolas Maduro. A group had already taken one military installation and Maduro was rumored to be headed to the airport. Then, in a few hours, it was over. Juan Guaido was on the run and Maduro was still in Miraflores, the presidential palace.
Fast forward to today…Caracas Chronicles asks the question, “Why Would The US Stop Recognizing Venezuela’s Caretaker Government?” The article was a bit lengthy for the content so let me see if I can give you the Cliffs Notes version. After a few years after the US and 50 other countries recognized Juan Guaido and the opposition as the legitimate government of Venezuela the US is disappointed with interim President, Juan Guaido and his inability to unseat Nicols Maduro. In January, 2023 the US may not reaffirm it’s commitment to Guaido but it probably won’t express support for Nicolas Maduro either…What a mess!
Nicolas Maduro,President of Venezuela after a totally fraudulent election in 2018, says he’s ready to supply oil to the world and the Biden administration desperately needs oil. (Don’t get me started that before Biden took office the US was energy independent and had all the oil and gas it needed) It’s pretty much a win-win for Maduro.
All he has to do is agree to talk to the opposition (as he has agreed to do before) about guarantees for a free and fair presidential election in 2024, make a few cosmetic concessions and promises (just enough to appear they are taking “concrete steps”) and if the opposition doesn’t implode before then, the Chavistas will just forget all that “free and fair elections” stuff and fraudulently steal another election. (Maduro has a 5% approval rating so he can’t win a “free and fair” election) Worst case scenario for Maduro, a few more years go by and he’s right where he is today, inflicting pain and suffering on the Venezuelan people. It’s also possible that the Biden administration will relax sanctions (again) and Maduro will be in a stronger position.
The TFT take…As we’ve been telling you (over and over again) Maduro says he has oil to sell, he doesn’t. Responsible oil analysts, you know…the money guys…and I’ll believe a money guy before I’ll believe a political figure anytime, put Venezuela’s maximum capacity at 850,000 bpd (barrels per day). Current production is about 725,000 bpd. Venezuela needs over 600,000 bpd just for obligations to China, Cuba, and domestic consumption and it will take many years and may billions of dollars to significantly increase production. Biden wants to buy Maduro’s non-existent oil and is just gullible enough to make a deal for political purposes. (He’ll never see a drop of that oil or if he sees anything Maduro will back out of the deal…like he already did with the oil to Europe fiasco) It’s all smoke and mirrors and political BS.
Then we have McClatchy DC telling us that White House officials told McClatchy and the Miami Herald that the Biden administration will not get involved in a Venezuela opposition fight. This comes as a blow to “Interim President”, Juan Guaido, who has been under fire for his inability to remove Nicolas Maduro from power and force a democratic transition. I’m no fan of the Biden administration but I can’t say I blame them on this one…I wouldn’t get involved either…At least not until Maria Corina Machado takes a position.
And we have Peoples Gazette telling us that Nigeria and Venezuela signed an MOU (memorandum of understanding) to exchange programs and practices to protect and promote Human Rights…I feel better already.
Then we have Merco Press reporting that a DC court filed a request with Argentine authorities to confiscate the Emrasur Boeing 747 aircraft sold by Mahan Air (Iran) to Emtrasur’s parent company Conviasa (Venezuela government-owned airline). The plane has been stuck in Argentina for months while the investigation into the Emtrasur “Mystery Flight” proceeded. The US claims Mahan violated US sanctions with the sale. We’ll keep you posted.
Now, lets go Down The Rabbit Hole….
Chapter 5/ continued…
…All business in Venezuela was to be conducted in bolivares and the government would control all conversion of bolivares to dollars. There wasn’t much of a black market for dollars at the time as the rate (notice I said “RATE”) the government used was about the same as the parallel market. The main benefit was the government’s ability to ration the allocation of dollars to the many multinational corporations doing business there.
The airlines were a good example. There were at least 23 (at one time 27) international airlines servicing Venezuela (today there are 7). With all those tickets being converted to bolivares and deposited in Venezuelan banks it was a sizeable amount of money the government could sit on and gradually allow it to be repatriated by the airlines. It was annoying to the airlines but they were willing to put up with the delays in the re-conversion process because they were making a good profit.
Without getting into the specifics at each stage of the Chavez/Maduro years lets look at the overall structure of the currency controls. There had been 6 different configurations of currency controls and 4 different auction mechanisms (more today). Think about that for a second. If you are considering doing business in a country or visiting a country in most of the world you have a pretty good idea what the rules are regarding currency conversion. In Venezuela they have overhauled their currency policy, on average, every three years or so under Chavismo.Generally the changes involved some new way for the government or well-connected Chavistas to profit from the system. Here’s one example that will blow you away, at least if you’re not Venezuelan ( they’re used to this Chavista corruption madness).
In June, 2014 this was the scenario:
Official exchange rate – 6.3 bolivares/dollar
Black market rate – 71 bolivares/dollar
Note: The black market rate fluctuated daily while the government rate remained unchanged for over a year which is a bit suspect when the inflation rate was 100% (that was the “good old days”…the inflation rate would reach over 1,000,000%)
The government rationed conversion of bolivares to dollars through a byzantine regime of authorizations so only the well-connected were able to get approval to exchange their bolivares for the 6.3 rate leaving ordinary citizens and businesses to fend for themselves on the black market. Arbitraging between rates became a Chavista obsession and produced many Chavista millionaires. Here’s how it worked.
Take 6.3 bolivares and buy a dollar. Sell that dollar on the black market for 71 bolivares. Take that 71 bolivares and buy $11.27. Sell that $11.27 on the black market for 800 bolivares. Take that 800 bolivares and buy $127. In a few simple steps you have just turned EVERY DOLLAR INVESTED INTO $127 !!!!!
The world is awash in bank accounts of Chavista millionaires created doing this and siphoning dollars out of the government’s accounts and into their own. If they didn’t take all their money out of the country they took their bolivares and bought hard assets to preserve their capital.
With the fall in oil prices and their depressed state for the next few years the government had to be more judicious with allocating dollars for bolivares. Their version of restraint was no money for non-connected individuals, no money for businesses, no money for importing food and medicine, and forget about money for the electric grid, PDVSA infrastructure, or pretty much anything else. The one area where they did act somewhat responsibly was in continuing to make their bond payments. This was out of self-preservation as they were still borrowing billions and lenders take a dim view of bond defaults.
As they wound their way through the changes in controls over the next few years one thing was clear. They were not going to do much that would hurt arbitrage opportunities for Chavistas even though the supply of dollars was much tighter. From the 6.3 rate in 2014 they only adjusted the lower rate up to 10 bolivares/dollar. That increased the distortion from an 11 to 1 arbitrage margin to 2,379 to 1. The really crazy part of this is that in 2014 Economic Minister, Rafael Ramirez, gave a speech saying that the exchange system was not functioning properly. With the collapse in oil prices causing tight revenues, high inflation (if he only knew what was coming) and shortages of food and medicine, reforms needed to be made or the distortions would cause more problems. A few months passed and the only change was a new Economic Minister. Ramirez was reassigned to the United Nations.
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