Exchange controls have always been a source of corruption. Every time the Venezuelan Government has implemented exchange controls, it has eventually become an opportunity for graft and corruption.
This time has been no different, but actually much worse and in magnitudes never seen before in Venezuela’s history. Much worse, because in the previous exchange control regimes, corruption was limited to the office that approved requests for foreign currency and there were checks and balances that would limit the graft. But more importantly, this has been worse, because the Government has been intervening in the parallel market in an extremely non-transparent fashion, creating not only an additional source of corruption, but one that goes completely unchecked.
In the end, because the exchange control office CADIVI is controlled by military and there are no checks and balances, little is known about how big corruption may be in that office. We all know that there are people that will ease your requests for a fee, and that the payment of private debt has been a source of very juicy profits, as local companies have purchased their debts at a huge discount, only to pay it with official dollars at 100% of their face value. But there is no way of estimating the magnitude of these rackets.
In contrast, this blog and newspapers like Tal Cual, have followed closely what developed in the parallel swap market and it has allowed us to establish the multi-billion nature of the racket. Unfortunately, those denouncing this have been few and far between and as I noted in another blog, politicians have failed to talk about this, which makes you wonder about their commitment to fight corruption.
There have been essentially three stages to this, below I summarize them, concentrating on the first and last one:
Act I: The Merentes Era and Argentinean bonds: At some point during Minister’s Merentes last tenure in the Ministry of Finance, Hugo Chavez came up with the idea of helping out Argentina by purchasing that country’s debt. The debt was purchased and soon afterwards, the Minister of Finance, a Mathematician with no finance experience, started gloating that the country was making a nice profit in these transactions.
Everyone was a little surprised that they could get rid of them so fast and at a profit, except the Government was not selling the debt in the international markets. Instead, it was selling it to local brokers at a price higher than the purchase price, but for Bolivars at the official rate of exchange. These brokers would sell them in the international markets at a lower price, but they would get dollars which they could sell in the parallel market and get more Bolivars than they paid for.
Made up example:
Government buys bond for 80 cents on the dollar. That is, it pays 800,000 dollars for a million dollars of the bond. It sells the bond for full value, that is, for one million dollars but at the official rate of exchange. The Government “made” money, because in theory it only recognizes the official rate and it only paid 800,000 dollars, which it values at Bs. 2.15 per dollar, but then it sold it for one million dollars but at the Bs. equivalent to 2.15 million Bolivars. Instant profit.
Let’s look at what the broker does. He buys one million dollars of bonds at Bs. 2.15, or Bs. 2.15 million, it sells the bond and receives only 800,000 dollars in the international markets, but those dollars can be sold in teh parallel market at say Bs. 3 per dollar. Voila! they get Bs. 2.4 million or a profit of 250,000 Bolivars. A 16% plus profit, without doing anything!
Of course, it was more complicated than that, as those “lucky” enough to get the bonds had to pay a 60% (average estimate) kickback on the difference to a bunch of “intermediaries”.
More or less at the same time, Fonden also began buying “structured notes”, which are essentially a security issued by a foreign bank in US$ with certain conditions or instruments under it.
These notes were also sold into the parallel swap market, which conditions like those of the Argentinean bonds, commissions, artificial profits and all of that. Except that more money was made with these, because there were also fees paid to structure the notes and to dissolve them.
I can’t remember the break down of how much was sold under Merentes, but as you will see, the numbers are simply huge.
Act II: Cabezas replaces Merentes: Once Cabezas replaced Merentes, the Government stopped intervening the swap market, supposedly because Cabezas disagreed with it. In the absence of the Government supplying foreign currency to the parallel swap market, the rate soared.
I was actually impressed at the time that Cabezas would stop the corruption associated with the selling of the bonds and structured notes, but as the rate soared, the sales of the notes began again. I guess the realities of the market were stronger than Cabezas’ qualms or ethics and there was periodic intervention of the swap market that managed to slow down the rate of increase of the parallel rate.
Act III. The Isea semester: When Minister Rafael Isea accepted the position, everyone was puzzled. he was Chavez’ choice for Governor of Aragua State in the November election, which implied he had to resign by August. Why become Minister of Finance for only a few months?
Soon after Isea became Minister, the Government, via the development fund Fonden (The one supposed to develop infrastructure and back social programs) began an irresponsible and and massive campaign to lower the parallel swap rate. While some hailed the action, it was a waste of time and money, as they lowered the swap rate from Bs. 6 per dollars to Bs. 3.2. But it was clearly unsustainable and the question was whether Isea wanted to lower the swap rate or this was a way of raising money for his campaign.
In the end, between Acts I and III, the Government sold close to US$ 7 billion in Argentinean bonds and some US$ 8 billion in structured notes, that’s US$ 15 billion, while I know that commissions ran close to 15% for both sides, assume only 10% and you can see that between the “intermediaries” and the brokers, they made a nice piece of change of US$ 1.5 billion.
Just like that, in the open and everyone knowing about it. Including Chavez. Even the names of the intermediaries were out in the open. Ultimas Noticias published them.
Act IV: Ali Rodriguez to Finance, crooks move to PDVSA: Then last June, Ali Rodriguez move to the Ministry of Finance. Interventions suddenly ceased in the market and the swap rate began rising. Clearly, Rodriguez stopped the racket. This means there is some semblance of honesty in him, as he clearly said: not through my Ministry. Problem is, I am sure he knows that the crooks moved to PDVSA.
And in this new and novel phase, PDVSA has been intervening, not with bonds, or notes, just plain, pure simple cash. We can guess as to whether PDVSA intervenes with US$ 100 or 200 million per week, but we can’t monitor any parameters. We don’t know how much the brokers are ebing sold the dollars for, how much they pay, how much they split. We can hear rumors that last Friday PDVSA sold US$ 100 million, or that it is all flowing through an account in Bank of America. But there is so little transparency, that this is in the end the most obscure of all the acts. What economist Orlando Ochoa called yesterday in La Razon: “The Venezuelan economy has fallen into hands of the lack of scruples and immorality”
And Ochoa is right. Because as he says, the official rate is at Bs. 2.15, the swap rate is near Bs. 6 per US$ and PDVSA is selling its cash, in whatever form, using various mechanisms and intermediaries to supply the swap market with dollars at the parallel swap rate.
Which leads you to ask: Does PDVSA receive the lower rate and the difference is simply split among the players? Or is it in between?
What is clear is that there is a 200% arbitrage between the two and in the words of Ochoa:
“This is an open invitation to corruption…how does the Government register these transactions, since it only recognizes the Bs. 2.15 rate? …This is unacceptable”
The problem is that Ochoa dares to say what few do. You don’t read about this in El Nacional or El Universal. You don’t even see it in Globovision, let alone Venevision and obviously not in the Government’s TV stations. You don’t see opposition politicians talking about it either. Why? I have no clue. But fear is my first suspect. Complicity is the second. Maybe we can also have a 60/40 split on that.
Only Petkoff in Tal Cual, Ultimas Noticias a couple of times and Ochoa, and a couple of more economists and some blogs like this one (We were the first ones to talk about the Argentinean bond racket) dare to give details.
And in the meantime, the biggest corruption racket in the western world continues day after day in poor Venezuela, under the cooperative and indolent eyes of the autocrat turned Dictator. We are talking a few billions of dollars. It is said easily: A few billion dollars in commissions stolen from the Venezuelan people under the eyes of the robolution and its leader Hugo Chavez.
Imagine what this could for health, infrastructure, nutrition, housing or whatever. But this criminal corruption is backed by Chavez and his cohorts only because it is part of his control mechanism. The one that he thinks (and it may) allow him to remain in power forever. Those that fed from the cesspool of the corruption of the robolution, will defend the process to death. They would be nothing without it.
It is a tragicomedy in more than four acts.