There IS Too Much Money To Be Made In THe Bolivarian Revolution Part II: The Cadivi Rackets

September 3, 2014


The Cadivi rackets are much harder to quantify. It has a long history of schemes and variety, but each one of them has its peculiarities and details that make it difficult to quantify. There is, of course, the statement made by both former Minister Giordani and the former President of the Venezuelan Central Bank Edmee Betancourt, that in 2012 alone, “briefcase companies” (Compañías de Maletín) had received US$ 20 billion for imports that never materialized in what is in the end the ultimate corruption scam: Get foreign currency at Bs. 6.3 to import stuff that you will not even attempt to bring into the country. Sell enough of the foreign currency at the parallel rate, which is about ten times larger to pay the Bolívars and you keep the rest in foreign currency.

Nice work if you can get it.

But let’s look a little bit at the history of rackets within Cadivi. There are many stages in them. Like so many of the rackets of the Bolivarian revolution, they started small and grew and became even more daring:

-The bring the empty container racket.

This is the earliest racket I remember hearing about. You would get some foreign currency to import something, say barrels of some expensive chemical compound use in some industrial process. Bring a few hundred barrels of the stuff with invoices and bills of lading and the like, but the containers only have water. Or bring containers of empty computer boxes. Something that has value added, so the profit is maximized.

This particular racket required little or no participation of Government authorities at CADIVI. You brought bona fide import permits; you maybe even brought a small fraction of the stuff. You just needed to pay the National Guards and the custom employees when the stuff arrived so that it would no be checked thoroughly (A couple of times mistakes were made, empty containers were discovered).

My favorite anecdote of this was overheard in a business class commercial aircraft leaving Hong Kong by a Venezuelan flying next to some pro-Government importers who had no inkling there was another Venezuelan nearby. One guy explained to the other one how he had imported 400,000 key chains made in China with a Chavez’ figurine, for which he got from Cadivi two dollars a piece. The key chain actually cost only 10 or 15 cents, giving the loudmouth a huge profit. On top of that, he boasted, he gave the key chains to the same military official that helped him get the foreign currency for the racket, to use in Chavez’ 2006 Presidential campaign.

You see, in these earlier rackets, those involved had to basically fake the imports, because the difference between the official rate of exchange and the parallel arte was not huge, thus leaving little room for charging commissions and the like.

These type of racket is very hard to quantify but at some point the Government claim to be investigating some of them in the 100-200 million dollar range. How many were there? Hard to tell. Let’s say only a few, five to six in the US$ 100 million range. Total, less than a billion. Let’s round it off at a billion.

-The pay to get your dollars racket.

This was the second stage racket, when Government officials got involved. It started small time, when differences between the Cadivi rate and the parallel arte were small, but then it grew and grew. By the time that the exchange rate was increased to Bs. 4.3 per US$ and the parallel rate was Bs. 6+, Cadivi officials were asking for Bs. 1 to “ease” your way. Once the swap market disappeared in 2010, Bs.1 or 2 was the norm. Once companies fell in for it and started paying, it was the only way to get their Cadivi dollars.

During the last two years, as the parallel rate soared from around Bs. 10 per US$ to Bs. 80 and counting, the number of Bs. Charged for Cadivi dollars by officials or intermediaries “gestores” simply grew.

It is tough to quantify how big this racket has been. The commissions charged were only a fraction of the parallel dollar, but the dollars affected were in the billions. My guess is that at least US$ 10 billion of the US$ 40 to 60 billion a year in imports from 2009 to 2013 was flowing only if it was grease appropriately. Assume a 10% commission (of the parallel dollar, which set the pace of the size of the commissions) and you are talking at least US$ 1 billion per year from about 2007 to 2013. US$ 6 billion more.

And there were 7 billion…

-The Briefcase companies rip-off (Empresas de maletin)

Note that as CADIVI grew, more and more military officials were sent there. At all levels. Soon, they got more and more involved with it.

As El Nacional has reported in its investigative reporting on Cadivi, soon retired military “friends” with active military starting founding companies to import stuff. Flight by night operations began springing up all over the place. There were two types: a) Those that were created to import stuff for real b) Those that were created to apply for the foreign currency and never bring anything to the country.

In between these two, there were other side business, such as the purchase and sale of companies already registered in RUSAD, a prerequisite for obtaining Cadivi, Sitme and now Sicad 1 dollars. The same with the sale of certificates of no local production, another prerequisite to receiving Cadivi dollars. Just trading these generated a lot of wealth for those involved.

But it was not until Giordani suggested that the fake imports were about US$ 20 billion in 2013 that we got an inkling of the magnitude of the rip-off. (Can´t call it racket, it is so huge). In fact, the only reason one could have thought that something like that was going on at the time, was the fact that despite close to US$ 60 billion in imports, there were shortages of many products. If traditional importers were not getting dollars for say, toilet paper, then someone was getting the foreign currency and not bringing the stuff.

In order to quantify it, is tough to know exactly when it started or the magnitude. Let’s first estimate how long it went on for. My assumption is that this rip-off started when or around the time when Chávez got sick. It built up and had its crowning glory the year Giordani referred to as having US$ 20 billion in fake imports. Thus, this appears to have built up over a year and half. I will assume then that whatever estimate I reach for the year Giordani said was US$ 20 billion, there was about half as much the year before. Half, because Chávez got sick in May 2011 and I imagine they got bolder as time went on.

Well, pro-Government economist Manuel Sutherland has looked at the import numbers and his conclusion is as follows: Up to the beginning of exchange controls, the average price per kilo imported was roughly one dollar, year after year. It never deviated from this empirically. Never mind that the mixture of cars, paper products, automobiles or whatever was, this never changed.

Well, he argues, it started changing in 2005 and by 2013, 17 billion kilos of “stuff” were imported, but instead of costing the canonical US$ 17 billion of the ten years prior to 2004, the cost went up by almost a factor of three to US$ 47 billion. Sutherland (or someone else during his talk) says that there is no justification for the change. The mix of imports has changed little and the prices tend to scale anyway. At most, only 50% of the increase can be attributed to a possible change in the mix, or in the type of things being imported.

Thus, if 50% of the price increase can be attribute to over prices, inflation and the change in the mix, then each kilo would cost at most US$ 1.5. But each kilo cost US$ 2.76. This means that of the US$ 47 billion, around US$ 23 billion could not be justified. (Curiously, Edmee Betancourt’s number was US$ 22 billion). A large fraction of this went “empresas de maletin”.

Thus, if you are generous, want to be conservative in the estimates, if this is all empresas de maletin, we are talking about some US$ 33 billion in the rip-off in 2011 and 2012.

In the interest of underestimating things, I will only add a couple of billion before that, from 2004 to 2011 to fake imports.

Which means that very quickly, we are up to US$ 42 billion.

There are many other rackets around imports that I cannot quantify. Overprices is one. Government imports is another, just from 2003 to 2013, the Government went from importing US$ 3.5 billion to importing US$ 34 billion. This is a factor of ten. Nobody knows in what. There are rackets in there, we do not even understand or imagine. But if I can not assign a number to it, I will just ignore it for our purpose.

US$ 42 billion…US$ 23 billion in 2012 alone, do you think those controlling that want to give up that type of racket?

Think again…

25 Responses to “There IS Too Much Money To Be Made In THe Bolivarian Revolution Part II: The Cadivi Rackets”

  1. moses Says:

    Island Canuck should be able to help with Margarita tips

  2. […] There IS Too Much Money To Be Made In The Bolivarian Revolution Part II: The Cadivi Rackets […]

  3. Ira Says:

    Something’s screwed up with the reply button.

    The above was meant for Canuck only.

  4. N Smith Says:

    The fundamental concepts that make an economy stable and grow in real terms are hidden/disguised (not known/understood) in Miguel´s statements. (Miguel can´t even identify them himself – he is not aware of their existence / he does not care about their existence). I am trying to identify/discover them and nail them down one by one. No-one is really interested in the real facts. I get demonized (I am a troll as per Kepler and all of you) when I look for real facts.

    For example: all that real USD profit made in Cadivi – $23 billion or more – Where is the real value now? Did they eat it? Did they spend it on nice meals in expensive restaurants in Caracas? No? How come it is not maintained in the real economy? Where is it now? Eaten? And then pooped down the toilet? That is a lot of poop, isn´t it?

    How come it all just disappears, because that is exactly what happened? Pooped down the toilet? I don´t believe that??

    You are not interested to find out. You just like being victims – a very normal human condition. A very – unnecessarily – destructive condition.


    • Kepler Says:

      No one is interested in discussing with you here. Why don’t you go somewhere else then if were are “victims in a destructive condition”? Piss off.

    • Dean A Nash Says:

      It’s sitting in suitcases (or was sitting in suitcases), waiting to be safely removed from the country. Miami is probably the prime beneficiary. I’d imagine that a couple of billion was eaten, and pooped, as you so ineloquently described it. In 100 words or less, what’s your point?

      P.S. I’ve read the majority of both your’s and Miguel’s posts. From my perspective, his understanding of economics far surpasses yours. You seem to be stuck on a single issue.

      • N Smith Says:

        Dean A Nash,

        I am not an economist. I am an accountant and my point of view is well known and not wanted here.

        My point of view is well known in your central bank too.

        However, it needs to be known by your accounting authorities. There is unfortunately a language barrier.

  5. Ira Says:

    I love Miguel’s grasp of American idioms:

    “Nice work if you can get it.”

    99% of gringos under 25 wouldn’t understand that all. Maybe under 35, even .

  6. Sometime during the Chavez years I sat in a meeting between PDVSA managers and a couple of guys representing one of those “brieftcase companies”. I was stunned as they laid out their company´s equipment and abilities to fulfill a direct assignment contract to provide drilling rigs for PDVSA. Eventually I pointed out to the PDVSA managers the discussion was breaching PDVSA´s internal controls and regulations. This they took as a sign to leave the conference room and depart.

    Later I found out they had given a contract to a different “briefcase company” which delivered equipment they subcontracted from Russia. That equipment was terrible, it cost an enormity. Thus the “briefcase companies” weren´t all fake, but their contracts were in direct violation of PDVSA´s regulations.

    I don´t want to land people in jail writing in blogs, but some of the people who were fully aware of these goings on were at the very top of the PDVSA feeding chain. Nothing was done.

  7. metodex Says:

    Miguel, i have a question if you will answer it.

    The amount of money these people have stolen just on these well thought and informed estimates….

    do you think it is the largest amount that has ever been stolen (let’s not play with terms,this is straightforward stealing) on the region?…the continent?….most continents?… I can’t say the world,yet.

  8. Yaya Says:

    Is there any scenario where the poor rise up and overthrow the government a la French Revolution? I have a friend who is actually moving back to venezuela because she misses her family and other economic reasons. She says the people making money via maletin are few, the military group is not big and don’t employ Venezuelans. In fact, she says mostly Cubans are being employed in the few ventures that are being built in the countryside. She claims that next to her father’s property (outside of caracas) a huge electrical plant was built by Cubans and cuban labor. Bottom line, she says the rich are few and the poor are many and it is the poor who overthrow governments. I believe the poor are busy trying to find food and standing in line. This is by the cuban play book, keep the masses dull with hunger and other survival issues. My friend is not impress by my belief.

    • metodex Says:

      The poor are too busy cheering Maduro.
      The poor believe this Sacudon will make it all better.
      The poor are too busy watching telenovelas.
      The poor don’t know that it can get better.Misery is all they know, and since they’ve never been anything but miserable and poor, they don’t really care/understand about inflation, exchange rates, corruption, etc.

    • Dean A Nash Says:

      The primary objective of the poor (in choosing Chavismo in the first place), was never to radically improve their lot – rather it was in bringing everyone else down to their level.

      Remember, I’m talking about the already poor; the newly poor is another story, but the smart ones have long since left Venezuela, so that now there are two groups of poor: the always poor and (please forgive my generalizing) the fairly dumb new poor.

      She is crazy to return. She should, at a minimum do her due diligence and visit Cuba first. Tell her to look at how the locals live, and that this is Venezuela’s fast approaching future.

      • Ira Says:

        I like your explanation.

        But you can’t discount the fairly intelligent and VERY intelligent…and not poor…who also voted Hugo in.

        Like my nephew, who will never enjoy a day of peace from me because of this.

        VZ really stands alone in this respect compared to other places. How did Hugo’s promises of Venezuelan greatness and prosperity ring true with THEM? Although his clearly stated and revealed plans to achieve it would surely not work?

        • Dean A Nash Says:

          You’re correct, Ira. And there were many. As to why, it isn’t that complicated. They thought that they could have the benefit of sending the two parties (AD/Copei) a message, and then, when they were properly chastised, be done with Chavez.

          I too was warning my middle class friends to listen carefully to what Chavez was aspiring to (Cuba) and don’t be so clueless as to think that Chavez won’t fight to hold on to power. (Chavistas – people who believe in elections, once.)

          • Dean A Nash Says:

            Miguel, feel free to correct the record.

          • Ira Says:

            That makes total sense. The next time I talk to him, I’m going to explore this further.

            He never properly articulated it to me. Maybe he’s just too embarrassed.

            • Ira Says:

              But as I think about it more after posting the above, we have to remember that we’re talking about a COUP leader here.

              I can understand wanting to send a message to the current parties, but what kind of message was THAT!?

    • Ira Says:

      There is no way that Cubans can build an electrical plant.

      One that actually works, anyway.

  9. Rafael Says:

    waiting for the typical-disheartening-depressing-demoralizing-disturbing post about the changes in the economic cabinet telling how f**** up we are in the near future 😦

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