Pending Explosion contd.
We’ll go Down The Rabbit Hole shortly but first we have our wrap of “Pending Explosion” from yesterday regarding Venezuela’s public debt…The article looks at all the problems associated with Venezuela’s public debt and possible solutions but, as you might expect, there’s a complication. Almost any solution to restructuring Venezuela’s debt will involve resuming the negotiations between the Maduro regime and Venezuela’s opposition in Mexico and Maduro has stated they (the Chavistas) won’t participate in the talks until the sanctions against them are lifted.
Oh, FYI, the Maduro regime previously demanded that Alex Saab (Remember him? The architect of Maduro’s totally fraudulent government food program, CLAP, and other schemes is awaiting trial in the US on money laundering charges.) be freed by the US government as a condition to resuming the Mexico talks. Before that the Chavistas demanded the return of the Emtrasur 747 cargo plane, currently being held in Argentina due to an ongoing investigation and a seizure claim by the US government related to sanctions violations, as a condition of further negotiations with the opposition. (They also followed the same MO in four or five previous attempts at dialog with the opposition)
None of this is likely to happen any time soon so there is no solution to Venezuela’s debt crisis on the horizon. It’s not like the Maduro regime has shown any sense of urgency regarding dealing with their debt. When they defaulted on their bonds in 2017 (The first time in Venezuela’s history) the guy Maduro put in charge of restructuring the debt, Tareck El Aissami, (You know, the guy with all the drug trafficking and terrorist ties, currently under indictment in the US) was (is) prohibited by sanctions from talking to the bondholders. Not exactly a sign of willingness to negotiate in good faith.
The clock is ticking…”It’s just a matter of time. Either there is a sound and pragmatic plan or the debt problems will finally explode all at once.” Which outcome do you think is more likely?
Then we have Yahoo News telling us that Valero Energy Corp, the 2nd largest US oil refiner, is seeking Washington’s permission to import Venezuela crude oil hoping for a repeat of Chevron’s approval. Valero has no operations in Venezuela like Chevron’s so granting Velero permission to import oil to the US would be a de facto lifting of sanctions.
Now let’s head Down The Rabbit Hole…
Chapter 5 continued…
…So now you have fewer products available and consumers are forced to settle for inferior quality. Then the populace was put in the untenable position of not being able to afford many of these due to currency devaluation, inflation, and then hyperinflation. The average Venezuelan could only afford subsidized products and even those were in short supply. People waited in line for hours when word circulated that a delivery was scheduled. After hours in the hundred-degree heat they would have to be content with a couple of packages of rice, flour, or pasta as it had to be rationed. That said, you better not be too far back in the line or they would run out. After some rioting and looting the military had to oversee deliveries.
Over time availability would get a little better but still today almost nothing is affordable for the average Venezuelan on their $6 (or less) monthly minimum wage. On average, the monthly minimum wage would buy 3 and 1/2 kilos of flour… FOR THE MONTH! Quite a fall from the $200 a month minimum wage pre- Chavismo (which we thought was low at the time but…). As with so many things Chavismo- related the minimum wage debacle deserves a detailed conversation so let’s just say that the price controls did nothing but hurt the Venezuelan people. So, what about currency controls?
Well, it’s broken record time again and I’m apologizing in advance for the tedious nature of the content. These Chavistas make even the simplest thing complicated but what you’re about to see is ridiculous. Hang in there. It will blow your mind. Oh, and imagine trying to manage your finances through all of this…
In 2003 when Chavez instituted currency controls it was primarily to prevent dollars from leaving the country. It was intended as a temporary measure but controls weren’t relaxed until 2021. Remember, in the US, income tax was supposed to be temporary. The bolivar had long been accepted only in Venezuela and a few border areas due to it’s unstable nature so having and retaining dollars was necessary to conduct business both by the government and individuals.
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 at the time as the rate (notice, I said RATE) the government used was about the same as the parallel (black) market. The main benefit was the government’s ability to ration the allocation of dollars to the many multinational corporations doing business in Venezuela.
The airlines are a good example. There were 23 international airlines servicing Venezuela (That number would drop to as few as 5). 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 to their home countries. 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 during the Chavez/Maduro years let’s just look at the overall structure of the currency controls. There have been (as of 2019) six different configurations of currency controls in general and four different auction mechanisms. 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 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 inflation at the time was 100% (that was the good old days before hyperinflation when it reached 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. Arbitrage 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 in Venezuela to preserve their capital. All that money and all those hard assets rightfully belong to the people of Venezuela, not a bunch of corrupt Chavistas.
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