We’ll head Down The Rabbit Hole in a sec but first…Do you remember a few months ago we told you about the talks between the new leftist government of Colombia’s recently elected Marxist President, Gustavo Petro, and the government of Venezuela’s Marxist President (Dictator), Nicolas Maduro, to import natural gas from fields in Venezuela utilizing an idle pipeline? We cautioned Colombia at the time to be wary of getting involved in any deal with the Chavistas as they are a group of corrupt, inept criminals that have screwed basically everyone on basically every deal they’ve ever done.

 Well, BN Americas tells us that negotiations between Colombian firm Integral Energy Plus and Caracas-based Prodata Energy have been halted after the arrest of Prodata associate, Bernardo Aresio, on corruption charges.

 Integral Energy Plus said in a public statement “Although it is true that Bernardo Aresio does not have any participation in Integral Energy Plus , his status as a partner of Prodata Energy…makes it unfeasible to go ahead with the project”.

 While the utilization of the 224 km pipeline that’s been idle for almost a decade would have had a positive impact for Colombia they might consider themselves lucky. They’ve been able to extricate themselves from a deal with the Maduro regime before they got too heavily invested in the project.

 Remember, in last week’s Venezuela : Down The Rabbit Hole segment we told you about the Chavista’s incredible ineptitude (or corruption…or fraud…or whatever term you care to apply to their criminality) whereby $50 billion was ” invested” in power generation in Venezuela that resulted in the production of zero, yes ZERO kilowatts.

 Now, let’s go Down The Rabbit Hole…

 Chapter 5 continued…

 …With the fall in oil prices and their depressed state for the next few years the government had to be more judicious with their allocation of dollars for bolivares. Their version of restraint was no money for non-connected individuals, no money for businesses, no money for importing food or 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 of dollars and lenders tend to 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 bolivares/ dollar rate in 2014 they only adjusted the lower rate up to 10 bolivares/ dollar. With the increase in the black market rate that increased the distortion from 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 stating that the exchange rate 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 distortion would cause more problems. A few months passed and the only reform made was a new Economic Minister. Rafael Ramirez was assigned to the United Nations.

 In 2016 a new exchange system was announced although it wouldn’t be functioning until 2017. The new DICOM system would solve everything! Hmm…isn’t that what they said about the three systems before DICOM? Anyway…one thing that was different was a higher exchange rate while still maintaining the 10 bolivares/ dollar rate for priority usage called DIPRO.

 So now we have DICOM, DIPRO, and the black market. Since DICOM and DIPRO required that the government spend some of their much-coveted dollars there wasn’t much volume in these two exchanges. DIPRO was almost non-existent and DICOM only sold $32 million from inception until mid- 2019. In the world of foreign exchange that is almost nothing so, as before, businesses and non-connected individuals had to rely on the black market. Here’s an example of the breakdown from 2018 :

 DIPRO- 10 bolivares/ dollar

 DICOM- 3,345 bolivares/ dollar

 Black market- 240,000 bolivares/ dollar

 At the same time this was happening the government was printing money at an astounding rate. They kept increasing the minimum wage between 4-5 times per year and funding it by creating money out of thin air. The money supply increased 3,000% in 2018 alone. The hyperinflation genie was out of the bottle.

 The earlier example of the breakdown for the three exchange rates was from January, 2018. By April, 2018 here’s what it looked like :

 DIPRO- 10 bolivares/dollar

 DICOM- 60,000 bolivares/dollar

 Black market- 880,000 bolivares/dollar

 At this point the minimum wage was 1,800,000 bolivares/month or just over two bucks. here’s a snapshot of a few prices from April, 2018 :

 Vegetable oil – 748,367 bsf (bolivares fuertes, after Chavez lopped three zeros off the currency)

 Cheese – 2,160,950 bsf (non-imported)

 Chicken – 2,299,500 bsf

 Toilet paper – 400,000 bsf (two rolls)

 Ground beef – 1,150,000 bsf

 Pair of shoes – 6,000,000 (approximate price of non-designer brand)

 As you can see, food was becoming a luxury and having to work more than three months to buy a pair of shoes isn’t really doable. Over the next several months it would get much worse. The monthly minimum wage would reach a low , when converted on the black market (the only real rate), of just 60 cents A MONTH! Prices were so out of control that stores were weighing cash instead of counting it. Financial institutions were having difficulty because their systems weren’t able to process numbers in the trillions and beyond so they were amending statements with a note that figures represented them having dropped decimal places. Something had to give and Maduro had already shown he wouldn’t listen to anyone’s counsel on economic matters. He even blew off recommendations from Russia and China, his two primary creditors.

 More tomorrow….