It Is All About Arbitrage in Venezuela

November 10, 2013

While it is clear that the Maduro Government is worried about inflation, there are many things about going after appliance stores that just does not jive. The attack on them was too vicious, particularly against Daka, which was singled out among all and likely had gigantic losses. And I say it is not easy to understand the viciousness against this sector, because appliance inflation has gone up 65% this year, comparable to the inflation rate and certainly less than the huge rise in that other unimportant exchange rate called the black market rate.

But over the years, I have learned that when you don’t understand what makes Chavismo act and it has to do with exchange rates and finance, all yo have to do is think about the arbitrage between the official and the parallel rate. I still recall when I could not understand where all the dollars were coming from into the swap market, when I realized that the Government was selling Argentinean bonds into the market. It was all about arbitrage. And when the Chavista bankers got wealthy, it was all about arbitraging the Government. The Government changed the rules and they changed how they did it. In both cases, the Government got tired and went after its buddies.

And I suspect that it is the same in this case. Yes, Maduro wants to scare the private sector to hold prices in line, but in the end, it is going after groups considered to have some form of affinity to the Government. My feeling is that this is all about arbitrage.

You see, when exchange controls were imposed in 2003, initially there were relatively small differences between the official rate and the parallel rate, which was established by the swap market until 2010 and by the black market since then. Differences were initially 20-30%, which gave some groups some incentives to do business arbitraging the official rate with the parallel rate. By 2010, the difference got as large as 100%, where you can really make a lot of money if somehow you can obtain official dollars, import or make something and then sell it at a price set by you.

You see, when you buy anything in Venezuela, seldom do you know whether the dollars for the product or some of its components came from, either from the official rate or the parallel rate. Since ordinary people have little access to official dollars, their reference price is the parallel rate. If something seems cheap as measured by the parallel rate, then it’s ok. But the guy at the other end may be making a mint, because the difference between the two (taken from the data in one of the banned sites) has soared over the last year and a little bit, as shown in this graph:


As you can see, a little over a year ago the percentage difference between the unmentionable rate and the official rate exceeded 100% and has now soared to over 800% (I believe this is a first in the world’s economic history). What this means is that if you somehow can get your hands on official dollars or officially bought products, then you can make a lot of money if you can sell your goods somewhere in between, particularly if because of the restrictions in foreign currency, most goods are in short supply. Supply and demand are the biggest enemies of Chavista policies.

There are basically three ways to obtain dollars: Cadivi, Sitme/Sicad or the parallel exchange rate. Cadivi (Bs. 6.3 per dollar) only works for certain items on a list that has become shorter over time. Sitme/Sicad has varied over time. In Sitme (Which was Bs. 5.3 when the official rate was 4.3 per dollar) there were fewer rules than Cadivi, you just needed to be lucky and know someone in the bank to get some dollars. In Sicad, you can obtain dollars at about Bs. 11 per dollars, but each “auction” has different rules and target sectors.

Let’s assume you are a bicycle importer. You got some Sicad dollars and bring 50 bikes which cost retail in the US, say one thousand dollars, with Sicad dollars at Bs. 11. Because there are few one thousand dollar bikes in the market, you can probably charge anywhere from Bs. 20,000 (cheap!) to Bs. 50,000 (not so cheap!) for it. To the buyer, who knows how much the bike costs in dollars abroad, even the Bs. 50,000 sounds reasonable. To the seller, it is just a matter of gauging interest. If bikes in that range are in short supply he can go the Bs. 50,000 route. Nobody knows whether he got dollars at Bs. 6.3 or at the unmentionable rate. At Bs. 50,000, he is making close to 400% profit, but to the buyer, the price is reasonable.

That is how screwed up the whole system is now in Venezuela.

But there is an additional way to get things at the official price for a dollar. You see, ordinary people and companies have to go through Cadivi, but the Government does not. And Government imports keep increasing. Last year, they were US$ 34 billion, versus US$ 26 billion for the private sector. (Giordani’s goal is zero for the private sector) And the Central Bank reported that Govt. imports went up 20% in the first half of this year. But the Government does not have the distribution capacity or the point of sale capacity to deliver all this “stuff” (some of it does not exist) to the consumer. It hires the private sector to both distribute and sell some of it. And there are huge arbitrage opportunities there, for the simple fact that the consumer has no clue as to whether the stuff was bought at the official rate or the parallel rate.

Which brings me to my punchline. My suspicion is that the viciousness against Daka was largely due to the company either receiving goods from Government imports (My main bet!) or receiving some Cadivi dollars for the stuff they sell. Daka was simply taking advantage of the arbitrage the Government was handing it over on a silver plate and the Government found out about it and got mad.

My reason for thinking this, is that all these appliance retailers have been close to the Government in the past. Daka received almost half a billion dollars from Cadivi over the nine years covered by the Cadivi data and some of the other retailers inspected received similar amounts. Another reason: Where are the owners defending their business?

In fact, I have always wondered how some business thrived in Venezuela which made no sense. Like computer makers. But after seeing that they received half a billion dollars also in nine years, then it is clear that the business was more arbitrage related than a real business.

Government dollars are obtained and used at the discretion of any Minister. (Think Minister for Sports!) The Government also got into the appliance importing business, using the Yuan from the Chinese loans, but nobody knows what they import or not. Given the closeness of some of these retailers and the Government, I would bet that the retailers were caught padding margins obscenely and Maduro (or the VP?) knew exactly at what price the goods or the dollars were obtained, leading to the events of Friday night.

In fact, Daka or Pablo Electronics charge prices which are in many cases better than those in Government stores like Bicentenario. The question is then: Who is making the money in the arbitrage from that case? Yesterday someone twitted the picture of a price tag for a 32 inch TV at Bicentenario, which clearly showed the model number. The price was Bs. 10,500 (US$ 1,666 at the official rate), I found it at a US retailer for $345 or Bs. 2,173, a 383% difference. The stuff costs some money to bring, but not that much. Who is pocketing the difference?

In Venezuela these days, it is all about the arbitrage both in the private and the public sector.

Maduro also wants to outlaw the laws of supply and demand in which too many people around him benefit from. He wouldn’t be able to.

63 Responses to “It Is All About Arbitrage in Venezuela”

  1. Tom ODonnell Says:

    Thanks for all this Moctavio. It is VERY enlightening.

    Just wondering if you know of any other countries that have experienced this widespread arbitrage phenomena without a national foreign exchange income based on rents? (I mean “rents” in the simple sense of unearned income over and above the expected/normal rate of return of an ‘average’ industry on the capital that has been invested in producing oil or other natural resources/agriculture …)

    The question of how to ‘fairly’ distribute oil rents is actually a debate about how to distribute something which is fundamentally unearned. This is a contencious-enough issue for those involved in ordinary capitalist production (Labor, Capital, the State, etc.), but at least there is a certain rationale to the claims of each group for a certain percentage based on their necessary role in the process of production and exchange, etc.

    One thing: the Venezuelan/chavista system of generalized corruption in the form of arbitrage (open to rich and poor alike — each in their own way) allows the party-in-power to escape most of the usual howls about being ‘unfair’ and corrupt. Corruption is open to all!

    The other is that this appears to be a further perfection of populist clientialism: a generalized system of social bribery that doesn’t require much functioning bureaucracy.

    • moctavio Says:

      I don’t know of any precedent to this anywhere in the world.

      On the bureaucracy though, there is a huge bureaucracy which administers the rule in ver inefficient fashion, but not the distribution.

  2. m_astera Says:

    Where are the Cubans in this? And where is the gold Chavez had returned to Venezuela?

  3. Today I heard of transactiosn at 80, I dont think they would dollarize this.

  4. Lobo Says:

    GBV seems to be thinking of a parallel market for critical industries, ie oil and travel. Would reduce the cost for foriegn investment (currently $0.10 per USD ) and provide relief to the air ticket issue. Also provide more USD in circulation. This was a big topic at this week’s Faja Seminar in Caracas. Any thoughts on this Miguel? Can they dollarize some ofbthe critical industries and safe face?

  5. Ira Says:

    “In this photo provided by Miraflores Presidential Press Office, Venezuela’s President Nicolas Maduro holds up fist in solidarity at a transport workers rally in Caracas, Venezuela, Tuesday, Nov. 12, 2013. Maduro says he’ll present evidence in the coming hours showing how the U.S. Embassy in Caracas is plotting to destabilize the South American nation. ”

    Did he ever provide this evidence?

  6. Ron Says:

    The Daka store belonges to the President of Congress Diosdado Cabello and its the result of internal fights among chavistas

  7. […] Regarding the looted appliance store Daka, Miguel Octavio points out that It Is All About Arbitrage in Venezuela My suspicion is that the viciousness against Daka was largely due to the company either receiving […]

  8. Roy Says:

    What is ultimately devastating to Venezuela as a country and as a society, is that due to currency controls and the resulting arbitrage opportunities, an entire generation has come of age in an economic model in which making products or providing services is for suckers. The only way to be successful in Venezuela, now and for the last twenty years, is to engage in arbitrage or crime. Even if/when the economic model changes it will take a long time for Venezuelans to realize that long-term success does not come “por ser vivo.”

  9. Willy Says:

    This regime is now going into business with Samsung? A joint venture? what a business model. I guess all the other electronic manufacturers can kiss Venezuela goodbye. Who can compete against the regime in bed with Samsung.

  10. Willy Says:

    The problem with this regime is they don’t try very hard. They cannot even maintain appearances for a few days. But the press is also guilty of being lazy ass complacent and compliant. Not all of course

  11. Willy Says:

    Samsung has been in Panama forever. Big operations, zona franca that distributes regionally. Suddenly some Venezuelan Yahoos open DAKA in Panama with the Samsung manger gushing while their Venezuelan operations burn?

  12. Willy Says:

    I meant white goods. Venezuelans don’t just take over Panama with Samsung. Panama was the gift. Venezuela the deal

  13. Willy Says:

    This whole DAKA thing smells fishy. This is a false flag operation. Is Samsung now going into a joint venture with the regime to assemble white appliances in-country and import electronics? This a coup by Samsung

  14. VJ Says:

    Las Armas de Coronel…….
    Este mensaje viene de Panamá.
    Dice así:
    “Lo cierto es que los dueños de DAKA viven en Panamá desde hace un tiempo ya, portan pasaporte diplomático (que otorga el régimen venezolano) y hace poco abrieron en ese país una mega tienda con productos de última generación en electrodomésticos y comunicación, hecho público y comunicacional pues la reseña apareció en la prensa panameña…
    Lo interesante de esta historia es que estos personajes son tan cercanos al régimen, que lo que ayer Maduro denominó Empresas de maletín a través de las cuales se obtuvieron millones en divisas para importar los productos, fueron constituidas a nombre de terceros, todos chavistas enchufados con la plana mayor del régimen lo cual les permitió no solo que montar la súper cadena de tiendas de electrodomésticos que todos conocemos, sino que como premio a estos terceros nominales de las empresas de maletín, las comisiones por dólares obtenidos a través de CADIVI, eran astronómicas, amén de los dividendos logrados por la reventa a precios de dólar paralelo.
    El meollo del asunto es que hubo una negociación entre el régimen y los dueños de DAKA en la que agentes de Maduro concertaron un precio por la liquidación del inventario de las tiendas que existen en el país y que desde hace meses no se renovaba, todo esto para poder llevar a cabo esta ola de saqueos. Liquidación de inventario que se pagó con dineros de la nación.”

  15. CARLOS Says:

    You know Miguel the arbitrage model is screwing up all around the country.
    Do you know why? Because now all of the venezuelan people is playing some kind of arbitrage game. The big ones playing CADIVI importation, some others on the SICAD, the midclass buying cars and 1000cc bikes, subsidized and “made in Venezuela”, all the CADIVI travelers and raspacupos, the huge numbers of Amazon customers buying with 400$ CADIVI and selling AMAZON gift cards, many foreign neighbors sending CADIVI family support payments to half a dozen of kids, the buhoneros buying subsidized oil, rice, sugar, flour, etc etc..and now the appliance new arbitrage.. It is the buy the cheap and sell it later… Bolivar is no longer a currency, is just unbacked paper, crap, etc and even the maid that cleans my house buy dollars, cheap commodities, etc… It is no longer a game played by high and top mid class and smart guys. Everybody now in Venezuela is a smart arbitrage trader and this means that there will be never enough dollars, food, appliances, etc etc for all those players.
    BTW..I saw buhoneros carrying 4-6 italian imported PANETTONE… It costs 8 -10 dollars in the US.. here 100 Bs.. as stock will end, they will be sold in December at 300 in the free open market

    • It has been like that for a while, I told the story of the Colombian sending his kid there to get 300 bucks from Cadivi, half gets sent back to Venezuela, which at the current rate is three times minimun salary. I also know maids sending beauty products via MRW to Colombia, to arbitrage, it is everywhere and this Government does not realize it.

      • VJ Says:

        More arbitrage….
        “Hay un fenómeno de viajeros que vienen del extranjero, cambian dólares en el paralelo y compran otros boletos. Le estamos subsidiando a personas que no viven en Venezuela”, señaló hace unas semanas el presidente del instituto de control de precios (Indepabis), Eduardo Samán.

        • CARLOS Says:

          Mostly these travelers are venezuelan citizens living in the US or Panama, Colombia, etc that buy tickets in Venezuela using a relative or friend living here. However this is a very small %.. Actually tickets from abroad to Caracas are very expensive (and you must pay in real dollars) and there are not so many cheap flight connections in bolivares available.

          • Frank Says:

            Tickets are very expensive, even for foreigners, completely booked out, and on my flights between Caracas and Bogotá last week I really didn’t notice many foreigners, I think I was pretty much the lone foreigner.

  16. Viper Says:

    OT: A 1995 Bombardier CL-600-2B16 C/N 5189 registration N54VS just went off the runway at Charavalle:

    This is aircraft is registered in Delaware under a corporation created for the unique registration of this pariticular aircraft. Their are no other aircraft registered to this company. As per request by aircraft owner(s), Flightaware (and others) are not tracking this aircraft. In other words, the owners wish to remain anonymous. Boliburgueses can and do register their aircraft in Delaware in this way.

  17. JJ Says:

    Don’t know the Venezuelan reality, and I have a doubt after reading this excelent post and comments. An doubt about the private vs government stores and their prices. If a government store sells imported goods at an official/state USD rate, and an private store sells imported goods at a parallel rate, the private of course don’t sell anything, because the difference between prices will be massive. Therefore, everyone logically end up selling as the highest price (parallel USD rate). No? Or am I oversimplifying, and there are many other factors?

    • moctavio Says:

      Thats the way it should be, but isn’t. First the difference is not as huge as it should be, that is the Government imports at Bs. 6.3 for its stores, but they have expenses, including 50% inflation in salaries, transportation, taxes. They should be able to sell much cheaper, but they dont. But the second problem is that inventory at Government stores is low. Only buddies get the stuff many times. The whole thing is so distorted and corrupt it is hard even for us to understand everything that is going on.

      In the link I placed above:

      the Government store is selling the TV at 4 times the dollar price at the official rate. I can’t understand how that happens.

      • JJ Says:

        Thanks Miguel, it’s difficult to understand some things. Hopefully one day you all be able to get rid of this mess, Venezuela has everything to be a successful nation in the future. Best regards.

      • Fernando Says:

        If they sell at the price implied by the official exchange rate there would be a large flow of TV sets and other goods heading towards Colombia. And Chavistas themselves would smuggle iPads aboard air France flights.

  18. Viper Says:

    disregard the location… Palo Negro or El Libertador… whatever. They won’t send the Sukhois wonder why.

    • JJ Says:

      BTW, how are going the Sukhoi Su-30 that Venezuela purchased?

      • Viper Says:

        They got a bad deal. High price tag. Lots of downtime. High maintenance. Lack of parts. Lack of qualified ground personnel and pilots. Rusting airframes. The big shots from Sukhoi where in Venezuela last year addressing this. Will it get fixed? I doubt it. These are very complex high maintenance Russian weapon systems. They barely made it ten years while the American F5s, F16s and the French Mirages lasted thirty years and still going. They have to repace engines in the Sukhois at twice the rate of the F-16s. They can’t fly them

  19. Viper Says:

    correction they are based in Base Aérea El Libertador

  20. Viper Says:

    OT: A historical picture. First time the United States Air Force and Aviación Militar Bolivariana Venezolana fly together in over a decade. This union has been in the works for many years. Last year they met for the first time without the aircraft. This year they fly together. The theme is “Partnership Building.” The Brasilian military and the American military have a better relationship than the diplomats and the executives. The USAF is mending the relationship with Brasil. Venezuela’s participation is unexplainable but it’s a good thing. Note AMBV sent the venerable Fighting Falcons from Grupo Aéreo de Caza No.16
    Dragones located in Palo Alto.

    CRUZEX Flight 2013

    CRUZEX Flight 2013

    • Roy Says:

      From the photos, it appears that Venezuela sent one fighter jet.

      • Viper Says:

        They sent five F-16 to Brasil, an accomplishment. The last time they flew together was 17 years ago in 1996 for Red Flag. Prior to that 1992 Red Flag in Nevada. In 1991, eight USAF F-15Es visited BAEL and they flew together. And prior to that in 1987 when the aircraft carrier Eisenhower visited and US Navy F-14D Tomcats flew with them. They have only flown together five times in twenty five years. My head is going to explode

      • Viper Says:

        Roy, there’s a nice write-up here

  21. Noel Says:

    In an economy as dislocated as that of Venezuela, clearly there is ample room for arbitrage for the well connected. As to the true cost for the dealer, it may be difficult to assess as he may have imported his inventory with dollars bought at fx rates..

    Finally, regarding the orchestration by the government of targeted ransackings, I wonder if they will be able to retain control over the mobs of people whom they encourage to rampage at one moment and toe the line at another. Perhaps these movements are very concentrated in a few areas of Caracas and will not spread. Has there been reports of similar sacking elsewhere in the country?

  22. ZHenry Fuchs Says:

    Well now I have a simple question Who sets the price for the parallel dollar? Because if you read dolartoday it says cucuta and if you go to cucuta they say they follow the parallel from venezuela! While we act like a bunch of smart people in cucuta they’re having party…please give me a bulletproof explanation with facts…

    • ErneX Says:

      Here’s the explanation according to “dolartoday”

      • JJ Says:

        @Ernex If we convert bitcoins in this site “”, 1USD= 59,6, about 9.4X the official rate. So the rate is very similar to that site.

    • In Cucuta there are a large number of daily transactions which are small and represent an informal market that is probably the best real price between bid and ask. In my experience the webpages are typically below the actual price you find when you want to buy or sell. My guess is that right now the rate is a little bit ahead of itself, but people are jumping now, before the Government increases M2 by 20% before the end of the year, which will put further pressure on the black rate.

      • Fernando Says:

        I usually inquire from various sources before I buy to send to relatives. It as a wide range and the best price is about 2% below the Cucuta price.

  23. VJ Says:

    CADENA, VLT 10:14 pm.
    Nicolas looks pathetic….!!! All ministers are sleepy and bored..!

  24. geronl Says:

    Do you have a link or any corroboration that prices at government-owned stores were higher or just as high? Not that it would change anything in my mind that this was pure looting and theft.

  25. Susan Says:

    Meanwhile, Congradulations to Miss Universe from Venezuela !!
    We wonder who paid for the trip to Moscow. S

  26. notiven Says:

    Javier Here:

    All this with Daka made me go in to an Apple Store this afternoon in Barquisimeto. I asked for the price of the IpadMini and the regular IPad and the prices were 28 and 32.000,oo Bs. If they got their Bs at the official rate at an average of Bs. 11 / $ then at market price a regular IPAd at an average of $ 800 it would have cost them Bs.8.000,oo and being sold for Bs. 32 K which is four times the cost, and even considering reposition costs as Daniel mentions it sounds kind of high.

    So how can Apple explain its selling the IPad for four times its cost ? its usury by government standars, but Apple cant say they bought dollars in the black market to justify their prices ether because that market is illegal.. So to stores like Apple ,its a loose loose situation and I would say they will probably leave the Country before they get punished, because that is bad PR

  27. VJ Says:

    Devil…. Excellent analysis !
    I was surprised to see that some of the appliances retailers initially targetted (DAKA, IVOO, Corp. Mundo Samira) belong to members of the venezuelan-arab community that as you know in Venezuela always has been very pro Chavez militant .
    This community actually has many bureaucrats in the chavista government that exercise real power. To name a few: governor Tarek El Aissami, minister Haiman El Troudi , Indepabis director Eduardo Saman Namel, deputy Abdel El Zabayar (just came from fighting in Syria) former governor Tarek William Saab, and etc.etc. And don´t forget notoriuos cocaine drug capo and good friend of judge Aponte Aponte: Walid Makled.
    The case of xxx(redacted) stores chain is interesting. xxxxxxxxx (redacted), an islamic fundamentalist is the owner of xxx (redacted) stores and also president of xxxx(redacted), a venezuelan computer maker that has received extensive credits from the government and special support from the former minister of science and technology and now VP Jorge Arreaza.

    So as you said in your article, why the viciousness of the attack against the appliances sector, where many of its members are of arab origin and loyal to Chavez ?.

  28. Tomate Says:

    It drives me crazy that no real measures are applied to contain the inflation…
    On the contrary, their are doing all this faramaya for political reasons. What is going to happen is that hyperinflation will knock on our doors pretty soon. Maybe we get to see the day that Bolivares are replaced by Dollars or Yuans.

    • moctavio Says:

      Tomate: People think they can not be that ignorant, but recently, the current Minister of Finance and former President of BCV told a visiting analyst: I have seen no evidence that increased monetary liquidity has anything to do with inflation, or something like that. They have been “breaking the back and pulverizing” the black rate since it was Bs. 20.

    • “What is going to happen is that hyperinflation will knock on our doors pretty soon.”

      Hyperinflation is 100% cumulative inflation over three years (generally accepted IASB definition). Venezuela has been in hyperinflation since Novemer 2009.

      “Maybe we get to see the day that Bolivares are replaced by Dollars”

      Zimbabwe dollarized spontaneously: the population refused to accept the hyperinflationary ZimDollar at billions and billions percent hyperinflation per annum.

      So, it is the people, not the government, who decide to dollarize spontaneously. This may happen in Venezuela in the future. Chavez was a true patriot who mismanaged the economy. Maduro is simply clueless per se. The parallel rate taking off since Maduro took over clearly indicates that.

      Hyperinflation only destroys the real value of the Bolivar – a monetary item – over time. Historical Cost Accounting, more specifically the stable measuring unit assumption, is destroying Venezuela´s constant real value non-monetary economy, e.g. salaries, wages, rents, interest, capital, etc.

      Daily indexing – like Brazil used – would stabilize the non-monetary economy. It would do nothing to hyperinflation in Venezuela in the short term.

      • When you daily index monetary items – like Brazil did to many monetary loans and bonds – there is NO EFFECT of hyperinflation (during hyperinflation). Daily indexing thus solves the destruction of real value in monetary and constant real value non-monetary items.

        The above is the solution for those who would be interested in stabilizing the Venezuelan economy.

  29. Glenn Says:

    Your Bicentario comment is especially telling and supports the fact that businesses charge what people will pay and no more than that.

  30. Daniel Says:

    All this is fine and dandy Miguel but you forget, as a former stock broker, that probably the main reason to fix a price in Venezuela is “costo de reposición”, that is, how much will it cost me to restock my warehouse. Arbitrage is all good and fine when you resell imported stuff straight, like Daka. But when you also need to manufacture or redistribute locally manufactured items (groceries store, for example) the restocking cost is actually your major concern. And in a country that now seems to apply routinely retroactive devaluation……….

    • moctavio Says:

      That is a different problem, what I am explaining is why the reaction was so violent and another example of the arbitrage in the dirty politics of Venezuela. I am not talking about honest to goodness manufacturers trying to survive, but arbitrage making some people very rich. How do you explain these people getting billions of dollars? In the pharmaceutical business, I know nobody that got so much money.

      As to former, when did I retire…?

      • Well, from the Venezuelan stock market when they retired everybody 🙂

        I do know, by the way of arbitrage being used the way you explain it in manufacturers.

        What I tried to say and may not have been as clear as hoped for is that we are all forced into some speculative arbitrage, not to make indecent amounts of money but to ensure that we will not lose our shirt at the next devaluation.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: