Working Against Themselves
We’ll head Down The Rabbit Hole in a bit but first…La Prensa Latina had the headline “Venezuela’s Efforts To Contain Dollarization Spark Increased Bolivar Use”. According to consulting firm Ecoanalitica, in 10 of the country’s main cities dollar transactions represent 45% of the total, down from 66% in 2021.
FYI, the bolivar (local currency) to the dollar exchange rates (yes, there’s more than one) are 24.6 bolivares/dollar (government rate) and 26 bolivares/ dollar (black market). It’s worth noting that at one time the government had two rates as well as the black market (the real rate) and the disparity was hundreds of percentage points so a couple of points difference, for Venezuela, isn’t too bad although in most countries there is only one rate.
So, what do these numbers mean, the drop in percentage use of the dollar? Well, the first thing to consider is that the minimum wage is 130 bolivares a month which equates to about five dollars A MONTH! To the Venezuelan people this means that for much of the country it doesn’t matter whether they pay in bolivares or dollars, they can’t afford to buy much of anything.
Second is that the use of the dollar in 2021 was a major factor in getting hyperinflation under control. The exchange rate for the bolivar changed so rapidly that prices listed in bolivars changed almost daily so people used the dollar for a reference point, at first, then began using the dollar for the transactions as well. By sidestepping the bolivar prices stabilized and Venezuela was able to get out of the hyperinflation spiral it was in four over 4 years, the second longest period on record. The duration of hyperinflation is usually less than a year.
Third, it appears that the Maduro regime’s 3% tax on foreign currency/ cryptocurrency transactions (called, for some reason, IGTF, Tax on Large Financial Transactions) is having the desired effect of keeping bolivar usage alive. This is important to the Maduro regime as they need to be able to create money out of thin air, which they can’t do with the dollar, to fund any of the “special bonuses” the government periodically dishes out to keep unrest in check and to pay for minimum wage increases.
The problem is that using the more unstable bolivar opens the door to inflation again so, while it’s good for the government, it’s working against the buying power of the people. If the government were concerned about the people they wouldn’t be working against them to promote the bolivar. If the government is supposed to serve the people they are working against themselves.
Case in point, in the last year, with the increased bolivar usage and the government no longer able to create artificial demand on the currency exchanges by buying bolivars with their dollar reserves (they’re running out of dollar reserves) the exchange rate has moved up rapidly and the bolivar has lost 82% of it’s value. It’s hurting many Venezuelans who don’t have access to dollars but for the Chavistas an 82% devaluation is almost an accomplishment. They’ve devalued the bolivar by 14 zeros since taking power in 1999.
Then we have Reuters telling us that Venezuela is in the process of shipping fuel to Cuba utilizing a tanker blacklisted by the US government. Is anybody surprised?
And we have Jurist telling us about a story that’s been widely reported. Hundreds of Venezuelan migrants failed in an attempt to cross the US border from Mexico en masse at El Paso, Texas. CBP (Customs and Border Patrol) officials say the situation was caused by social media and the Biden administration’s App, CBP One, which has not streamlined the asylum process as it was purported to do.
Now, let’s go Down The Rabbit Hole…
Chapter 3 continued…
…In the first couple of years of his tenure Hugo Chavez allowed PDVSA to continue operating, more or less, autonomously and although he was getting the expropriation train rolling in various sectors he hadn’t yet cranked it into high gear and PDVSA was still prospering, as was the government. As we saw in the discussion of the hospitals, there was plenty of revenue to address many inequities in a balanced and sustainable manner. In 2002 all that ended and in his third year in power Chavez went off the rails.
In 2002 PDVSA workers, as well as others in Venezuela, went on strike. Chavez used this as an opportunity to fire a lot of people. Estimates vary from 13,000 to 19,000 but regardless, with a workforce of 40,000, it was a huge number of employees. Then came the really big news. Chavez boisterously announced, “PDVSA will be red!” (the color of Chavismo) In no uncertain terms, the priority was, first and foremost, party loyalty which translates to loyalty to Chavez. Business acumen and expertise would be secondary.
The fired employees left Venezuela for greener pastures in the US, Canada, and around the world, a harbinger of things to come, not just in PDVSA but in all sectors of the economy and society in Venezuela. The good news was there was a wealth of talent at PDVSA and the upper management was still primarily in the hands of experienced professionals. The bad news was that Chavez went on an expropriations binge in all areas of the Venezuelan economy and PDVSA was no exception. Over the Chavez years Ecuador, also a socialist country, expropriated just over a hundred companies. In roughly the same time frame Chavez expropriated more than 1,200.
Important strategic partnerships with large multinational companies like Exxon Mobil and Conoco Phillips went by the wayside. The lawsuits surrounding these expropriations and others would go on for years and continue to this day. This was another opportunity for Chavez to fill the ranks with party (Chavez) loyalists and over a period of years tripled the payroll to about 120,000. Normally that might put a strain on cash flow but as this was happening oil prices went on an historic run reaching all-time highs and remaining elevated for years.
It’s important to understand a couple of things about the oil business in general and Venezuela in particular. Oil is a rigorously capital-intensive business. It costs a lot of money to keep those existing well maintained and pumping. It costs even more to keep exploring for sites for new wells and getting them operational once the site is determined. Depending on a number of factors related to accessibility it can take five to ten years to get a new well online. In keeping with our good news/ bad news presentation, while it’s expensive and time consuming the oil business is also very lucrative, especially in a rising oil price environment.
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