Everyone In Venezuela Is Into Arbitrage

August 4, 2013


arbiWhen Adam Smith suggested or showed that economic self-interest maximizes economic welfare, I don’t think he had in mind the economic self-interest that is promoted by the arbitrages available under the so called Bolivarian revolution.

These pages have recorded billion dollar arbitrages, some with bonds, others with CADIVI; there was SITME, travel dollars, airline tickets, now Sicad and many more without going into much detail today.

What Chavismo/Madurismo has failed to learn throughout these fourteen years, is that the longer these possibilities of arbitrage become available, the more widespread their exploitation becomes. That is what made SITME eventually so inefficient that it had to be scrapped, what makes CADIVI such a nest of corruption and what is making SICAD unworkable in such a short time. People learn fast and exploit the weaknesses of systems to promote their self interest via arbitrage. Every time the Government announces something, people get ready to see how they an make some money off it.

Whenever I visit Caracas, I talk to people trying to find out more about what their reality is like. I mean, with inflation soaring and noticing how everything has gone up every time I come back, I have to wonder how people, particularly the less well to do, can make ends meet.

This week, it was a parking lot attendant I know. We started talking, he complained about the Government and I started asking questions.

For him, let’s call him Profito, things are ok. They are better, because the parallel dollar is very high. He said he makes a little more than minimum salary in his job, which must mean around Bs. 3,000. He sends his mother in Colombia a US$ 300 a month in a “remesa”, which costs him Bs. 1,890, but he sells half in the black market, which gives him Bs. 4,950, for a net of Bs. 3,060, which doubles his salary just like that.

Things are tough, so he decided to send his son to Colombia, it’s too dangerous here, plus the kid could become a malandro (hoodlum), with the neighbors he has. The advantage is that his expenses went down and he can send the kid another US$ 300, give his mother half and net another Bs. 3,090 in the process.

To round it all off, Profito, has also now entered the export business. When he discovered that “perfumeria” items are so much expensive in Colombia, he started shipping about Bs. 5,000 a month in supplies via MRW (a courier) and he makes “casi” (almost) 100% profit a month from this venture.

Oh yeah, he said, I do go once a year to Colombia and ask for the $2,000 dollars for travel, this year he will get less, there will be no money for the kid, but the black market has increased so much that he will make about the same. (Not quite, he will make more, as the parallel rate has doubled since December, but he will only pay once).

Totaling it all up, Profito makes his Bs. 3,000 from his job and from his arbitrage activities he will make this year an additional Bs. 6,180 a month from “remesas” to the family, about Bs. 5,000 (he claims) from his import/arbitrage and an additional Bs. 2,000 or so from his travel allowance, for a grand total of Bs. 16,180 a month, or at least five times the minimum salary. Not a bad monthly income in Venezuela and he has health care. Except only one of those minimun salaries comes from his job. The rest is all thanks to the promotion of self-interest arbitrage by the distortions of the revolution.

And the Government? Fixing the price of SICAD very low to promote arbitrage even more…

34 Responses to “Everyone In Venezuela Is Into Arbitrage”

  1. 20.11.08

    by MISA
    Have your say:

    Demistifying the “burning money” process.

    [This was published in The Zimbabwean on 20 November 2008, the last day of hyperinflation of 89,700,000,000,000,000,000,000.00 percent per annum.

    This is where Venezuela may be heading. Why be productive if you can multiply your salary six times by simple arbitrage. Top people in Venezuela are getting fabulously rich from arbitrage. They are not going to stop the party. Why have an economy? There is absolutely no logical reason to have a productive economy when you can get fabulously rich from arbitrage.

    This will definitely destroy what is left of the Venezuelan economy.]

    The rates have risen so high that it takes less than US$1 to pay the whole of the civil service. As evidenced by the ever winding cash queues at banks, a good number of Zimbabweans are participating directly or indirectly in the “burning process”.

    Most of the money in circulation comes from the sale of Old Mutual Shares and other dually listed counters. People sell the shares, use the money to buy hard currency and then repurchase shares on the Johannesburg Stock Exchange (JSE) or the London Stock Exchange (LSE). This process can earn one more than 1000 per cent return per week on investment.

    For example, on November 11, 2008 the Old Mutual Implied Rate (OMIR) was at Z$22.39 quadrillion per US dollar, while the Cheque Rate was Z$500 trillion per US dollar.

    This means one US dollar in the hands of a person with an Old Mutual share was worth 44.78 times more than dealers were paying for a dollar “burnt” using the Cheque Rate. In Zimbabwe, a cheque takes up to four days to clear. However, if one has “enough clout” they can request same-day value and the money clears the same day it is deposited.

    Owners of the famed “pots”, who sell shares, can get their money on the same day, allowing them to instantly start writing cheques.

    The whole process fuels itself. After someone “burns” money, they get a lot of quadrillions they can’t use because most people are no longer accepting cheque payments. They then buy shares.

    Most businesses are using money in their banks to buy shares and in turn, ordinary people are not selling shares because they cannot use the proceeds in any way. This creates an

    artificial Bull-run on the Zimbabwe Stock Exchange.

    The whole process creates a very unnatural situation where those trading in the dually listed shares are benefiting while the rest of the country is crying foul.

    Ordinary people who sell foreign currency are also benefiting. If someone sold a dollar on November 11, they would have got Z$500 trillion. The cash rate for the same day was Z$350,000.00 for one US dollar. They only need to go and queue for the Z$500 000 being given by banks, then use the money to buy 1 US dollar on the flourishing parallel


    The whole process is destroying the economy as most of the money in bank accounts is artificial. There is no-longer any incentive to work, because people make more from burning. Companies have money in their accounts that they can no longer use to make payments as the money cannot compete with proceeds from the burning process. Pricing of goods is no longer possible in Zimbabwe dollar terms.

    Can companies rely on the OMIR when billing their clients or converting Financial Statements to US dollars? The OMIR is based on the “No Arbitrage Assumption” that the value of Old Mutual Shares is the same wherever the share trades, and one cannot make a risk-free-profit by buying and selling the share in a different currency. We have shown that this is very possible.

    There are a number of possible solutions:

    * Dollarising the trade in shares of dually listed companies. If these shares are traded in hard currency, this does away with the arbitrage opportunities addressed above.

    * Dollarising the whole economy or using a more stable regional currency such as the rand.

    The Zimbabwean

    [The Governor of the Zimbabwe Reserve Bank closed the Zimbabwe Stock Exchange on that day (20 Novemeber, 2008) which stopped trading in Old Mutual shares which provided the OMIR (Old Mutual Implied Rate) which was the last exchange rate of the Zimbabwe Dollar with the British Pound. No exchange rate ended the value of the Zim Dollar and the economy spontaneously Dollarized.

    Let us wait and see what is going to happen in the Venezuelan economy. We have an excellent example to follow in what happened in Zimbabwe.]

  2. Pedro Says:

    All this is done ON PURPOSE by the government officials. This is a way to keep people thinking they are happy and are actually doing a private enterprise. And they are keeping the people busy at the same time. There is no time for protests if you have to fill all the paperwork and make all the colas to get a piece of the “oil money”. Con que se conforma el pueblo? con migajas? pues demosle migajas!!! Another example of how brilliant some of these government officials are.. They control “el chorro” and who gets what of that “chorro”…It is a sad story with no ending in sight.

  3. Glenn Says:

    Great to see Venezueal thriving. Even the stock market is up 169%!!


    • CARLOS Says:

      Sure… A stock market that moved today 37000 single shares, in only 7 trades and a total of 1.200.000 Bs (less than 40.000 US$)…no volumes, just a dozen of public companies with only a 20-30% stake in the open market…

  4. Wanley Says:

    We have a nation of parasites. No wonder nobody wants to work. How pathetic is that just 20% of his earnings are from productive work. The poor arbitrage Harina Pan, Mavesa, steel rods, cement, etc. Someday when the distorsions are eliminated the awakening is going to be brutal. Your example and many others will have to start living off their work. Imagine that. He will take an 80% earnings cut.

    • Exactly! Something cataclysmic will happen in the future just as the fantasy arbitrage economy in Zimbabwe could not carry on forever and had to be corrected to reality via spontaneous Dollarization on 20 November 2008.

      • Wanley Says:

        No goverment here will dollarize, ever. No politician wants to give up the money printing machine. In Venezuela there are always oil exports, this preventes cataclysmic events from happening, it gets bad but oil money keeps it from getting bad enough to force real change.

        • Wanley, I hope you are right for Venezula´s sake. However, if they let hyperinflation get into the tens of thousand percent and above per annum, then they lose control completely. Zimbabwe dollarized SPONTANEOUSLY: Zimbabeweans stopped accepting pieces of paper with the words 100 Trillion Zimbabwe Dollars printed on them as money when they knew the pieces of paper represented zero value. They would only accept US Dollars, SA Rand, Euros, Botswana Pulas and British Pounds. Zimbabwe is very rich in natural resources, just like Venezuela.

          Venezuela is playing a very dangerous game. The situation seems worse now than towards the end of Chaves´s period as indicated by the increase in hyperinflation and the parallel rate.

          Do not think that a cataclysmic change will result in a change in government. That is what everyone was hoping for in Zimbabwe and the government simply stayed in control.

  5. mike Says:

    So how could a traveller with USD benefit from the current currency situation? Is cash the best way to change money? Is Caracas or the border better?

    • moctavio Says:

      Yes, cash is king for the foreign exchange, hotels give a reasonable rate, friends even better 🙂

    • island canuck Says:

      Yes, just bring cash – preferably bills of $50 or $100.

      You will have no trouble finding people to give you Bs.

  6. The Daily Index HAS to be the DAILY USD parallel rate.

  7. Arbitrage during hyperinflation can be a good thing if coupled to capital investment

    Widespread – generally illegal – arbitrage between an official forex and a parallel rate normally appears spontaneously as a result of the hidden hand of self-interest, especially in hyperinflationary countries. It was widespread in Zimbabwe at the height of severe hyperinflation and it is now becoming widespread in Venezuela.

    Arbitrage is a crude form of quantitative easing during hyperinflation.

    When the wealth created via “buring money” in Zimbabwe or illegal arbitrage currently in Venezuela without an underlying productive process, is simply used for expenses (consumption without production), then it is simply a temporary self-destructive snowball that will eventually consume the economy and may lead to Dollarization and the economic shackles that come with it.

    If the wealth created via the above arbitrage were to be applied as capital investment – for example, in the source capital of new companies – which is then automatically maintained constant in purchasing power with the implementation of Capital Maintenance in Units of Constant Purchasing Power in terms of a daily index (IAS 29 Financial Reporting in Hyperinflationary Ecomies in terms of a Daily Index), the USD parallel rate in the case of Venezuela, then it could over time lead to economic stability and GDP growth.

    The sense of easy money that illegal arbitrage during hyperinflation engenders unfortunately works against developing the economic discipline and good governance required for such capital investment to come about. It did not come about in Zimbabwe and it will not come about in Venezuela.

  8. Andres F Says:

    Adam Smith’s economic welfare was intended for countries with laws. So if Venezuela had real laws (enforced), then arbitrage eventually would lead to economic welfare.

  9. Raul Delgado Sosa Says:

    “You want to make a profit, go to a country in ruins” Adam Smith.

  10. Tom ODonnell Says:

    Miguel, This is an excellent bit of economic ethnography! It really illustrates the creative lengths people often go to to acquire their personal bit of la renta petrolera (is this the “excrement” to which you refer, or is it the hydrocarbon itself? 🙂

    The BRV continues instilling the old sort of state-mediated rents-fed entrepreneurialism.

    Well, as opposed to purely distributional rent-supported populism, this sort of arbitrage-ism promotes certain business skills for even lowly parking vigilantes.

    Unfortunately, it seems to me that these types of import-export, re-sale and exchange schemes have also been deeply ingrained into the Venezuelan business class as well after decades of rents-enhanced dealings mediated by the State.

    One way of another, the rents will get distributed to some social strata(s) or other. The question then, it seems to me, is how to better do it to minimize this midas-minded rents-fetishism emanating from the “Magical State” (from Fernando Coronil’s old book)??? Will the business class be willing ot give it up? Under CAP’s shock,, at least, they weren’t.

    • Kepler Says:

      Bear in mind that a lot of the CADIVI caroussele is not as easy to implement for a Venezuelan poor “de pura cepa”, with no family abroad…and that is the case for most Venezuelans.

      • But Kepler, the point is that there aremany ways to do arbitrage and after a while, each person finds his/her way of doing it or taking advantage of it. Travel s the most common one, the old Bs./dollar bonds was another, Sitme too and now Sicad. People who had never traveled , have done it because of Cadivi, the Caracas Miami route is full.

        Tom: the business class has changed dramatically, my guess is that there are more today that depend on some sort of Government regulation and/or arbitrage. In fact, any adjustment of the exchange rate to minimize arbitrage, would benefit those that actually produce something, a class that has been reduced dramatically over the last decade. And no, I dont think the new or ild oligrachy will tolerate change, I think that is part of te problem, those that benefit from the current status quo, Boligarchs and oligarchs, stronlgy oppose a stronger devaluation ir free exchange.

        • Kepler Says:

          Miguel, I know there are many people into this but the fact most of us know a lot of people doing that one way or the other doesn’t mean most people in Venezuela do it.
          I am thinking about María Pacheco in El Tocuyo and Petronila Rodríguez in Morón…both with 4 children, living in a shanty town, with just a normal bank account – no credit card. Do they do that?
          I doubt it. How many of them are here?
          I wouldn’t see the Colombian guachiman as the best case to represent the typical Venezuelan. In fact: a Venezuelan poor in Colombia is not the typical Venezuelan poor. It’s a different dynamic. Perhaps Pacheco and Rodríguez benefit from the very cheap US chickens and Argentine milk but that is about it for them. They can’t get to CADIVI.

          • moctavio Says:

            Kepler: EVERYONE is doing it, whether it is the chickens that are restricted at the supermarket, the scarce toilet paper and even Galletas Maria, people buy regulated and scarce products and sell them at a premium. Bodegas in teh barrios have all those products and the bodeguero buys them from neighbors. It is the same principle, the fact that they dont have to go to CADIVI is irrelevant, they make money by standing in line to get the scarce product, or knowing someone who knows someone and so on and so forth. That happens in the barios of Caracas, El Tocuyo or Moron. Same wit gasoline in the border states, it is extremely prevalent, people have learned to do it over the years and the more scarcity and restrictions there are the more they do the arbitrage at all levels.

  11. Kepler Says:

    Miguel, puedo traducir este post al español?

  12. TV Says:

    This is very, very bad. It means more and more people are depending on status quo to sustain themselves by ripping off the wealth that could otherwise be used productively. This is exactly what Chavizmo is counting on to survive in power. Barring a massive election upset despite all the cheating it can go on for a long time – until an oil price shock leading to a major uprising at least. If the shock is not too severe and not too long, it can actually survive one.

    After that, it’s either Zimbabwe or Somalia. A ruined country with no hope or future. This is the true legacy of Hugo Chavez. Yay.

  13. When you eventually Dollarize, you will be in eternal austerity and stagnation.

    • Andres F Says:

      That’s precisely why the government refrains from doing it. Why lose the opportunity from a little more arbitrage stealing?

  14. m_astera Says:

    As those at the top of government, and their cronies, have all become enormously wealthy solely due to arbitrage, that and only that, there is no incentive for them to change anything. The higher the ratio goes, the more they stand to gain.

    Keeping the working man’s wages low works to their advantage for the very same reason.

    The only fly in the ointment is inflation, but that only hurts the poor.

  15. Exactly the same was done in Zimbabwe. Everyone was doing it too. They called it “burn” money. They did it during hyperinflation of billions percent per annum.

    Is Venezuela going that way too?

    What is inflation at the moment?

    • island canuck Says:

      By my estimate, if you exclude price controlled items, around 70 to 100%.

      If you include PC items it’s around 50%.
      The government clains it’s around 29% but that’s pura paja.

  16. This is what I see everyday, this is what makes me sick about the country in its actual state. People “make” money by not contributing to society and development of any kind. How smart are we, the venezuelans?

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