The Devil's Excrement

(To my friend: Yes, we can!)

Everyone worries about how a new Government would function financially  if there was to be a political transition in 2012. Personally, I think this is the least of our worries. Things like dealing with unions and personnel in PDVSA and nationalized companies will be orders or magnitude more difficult than dealing with “money”.

Here is why:

We are paying about US$ 6.5 billion for 30,000 Cuban doctors. Divide those two and you get about US$ 216,000 per doctor per year. Renegotiate this to Venezuelan doctor salaries and you have saved US$ 6 billion a year, about half of what the country and PDVSA issue in debt every year.

Then, there is Petrocaribe, sending oil to “country’s in need” and giving them easy credit conditions, like pay 50% now, two years grace period a less than 5% a year for the next like 25 years. The math is hard, there is barrels sent to Cuba, barrels sent to Petrocaribe and so on. But there is an easy way to quantify this: Last year, according to the Venezuelan Central Bank, accounts receivable with “friendly countries” reached US$ 23.088 billion. As of September 2011, this number had reached US$ 32.7 billion, a difference of, give and tale half a billion of US$ 9 billion in nine month or US$ 1 billion per month.

Yeap! This is the crazy revolution, borrow at 12% abroad and lend at 2-3% per year to your buddies, while your country goes hungry, enjoys shortages, malnutrition and the like. It is indeed a strange revolution.

But add the US$ 12 billion from these “friendly countries” and you are already up to US$ 18.5 billion a year in “savings”

Few countries in the world can find money so easily to balance the budget.

The Chavez Government has refused to do anything about gas prices. Gas is basically free today in Venezuela. We are talking about 700,000 barrels of oil a day given away (literally). At US$ 100 per barrel (it is more for the refined products we use) this is 700,000 x 365 x 100, some US$ 25.5 billion A YEAR in this subsidy. It is actually more, because producing this oil/gas is not free. Let’s say you decide to cover PDVSA’s cost, nothing more. That’s about (back of the envelope) about US$ 30 per barrel or US$ 7.65 billion a year. Say US$ 7 billion.

We are up to about to US$ 25.5 billion in “savings”

Now, the new President call him Leopoldo or Maria Corina, can call the IMF, the World Bank and/or CAF and from all of them extract without conditions, say US% 15 billion. With conditions you may get this up to US$ 30 billion, but politically, the conditions will be tough. So, we take the cheaper route.

We are up to US$ 40 billion, give or take half a billion. Nice war chest to remove exchange controls, no?

You could go bolder. Tell the Chinese you are sorry, but the law says you can’t pledge oil for loans and this will have to be renegotiated. Some US$ 10 billion in savings, as you will pay it slowly, let’s say at half the rate, 200,000 barrels a day, not 400,000.

We are up to US$ 50 billion.

Remove exchange controls. Buy back debt. Say you will not issue new debt. Change debt at 12% for multilateral debt at 5%.

Money will flow back into the country and you have yet to say you will privatize all those Government owned enterprises which are in intensive care.

Crazy?

Do the math, it is as simple as 1+1, the hard part will be dealing with real people…

While I was on vacation, I wrote a post based on a document a reader had sent me, in which the Minister of Energy and Oil and President of PDVSA, Rafael Ramirez, asked Chavez for the excess money in the Chinese Funds to be returned to PDVSA.

Since I was on vacation, I concentrated on the numbers given there for Venezuela’s oil production, which contradict official numbers. What I fail to understand or  comprehend, is that the document is a huge indictment for the illegality of the Chinese Funds, which the Government has been using to finance its activities and bypass the structure of the State.

In fact, as I will show, the whole mechanism is not only illegal, but it represents a perverse scheme for the Government to spend without the usual oversight, while simultaneously severely damaging PDVSA’s finances. For completeness, here is that document again:

Between jet lag and catching up, I had not gone back to the document, even if I meant to. But two things made me look back: One, the interview in today’s papers (El Universal here, El Nacional, by subscription) with Deputy Miguel Angel Rodriguez and a simple question: What is Venezuela’s US$ debt service per year.

In the interview, Rodriguez says: “The truth is that crude is advanced, but money is returned”. This piqued my interest, together with the fact that I calculated that 430,000 barrels of oil a day, at US$ 100 per barrel for a full year, corresponds, to the staggering amount of US$ 15.7 billion dollars a year. Since the official document above clearly states (page 6) that the total debt of the Chinese Funds is US$ 20.8 billion, how could it be that it takes US$ 15.7 billion to service that debt per year?

Clearly, something did not add up and it was time to go back to the document and really study it!

The whole thing is perverse, incredible and totally illegal, here is how the whole thing works, as clearly explained in the document by the Minister of Energy and Oil and President of PDVSA:

1) PDVSA sells the oil to the China National Oil Corporation (CNOOC)

2) CNOOC pays the oil into a Bandes account at the Chinese Development Bank (CDB), which is the lender to the Republic of Venezuela.

3) CDB subtracts from the amounts debt service, both capital and interest.

4) If there is an excess, PDVSA asks CDB that the money be transferred to pay royalties to the Government, taxes to the Government and cover some of the production and refining costs.

Except that starting on Jan 2010, as the document clearly states, PDVSA stopped even getting that. It got zilch, the Funds got it all!

So, let’s make it really simple: The Republic borrows US$ 20.8 billion from the Chinese. PDVSA “pays” for this loan to the tune of US$ 15.7 billion per year, clearly an inordinate amount of money for the loan received. The Chinese collect interest and capital and any “excess”, of which there is a lot, returns to the Government, not to PDVSA, via parallel funds, which bypass the controls and approvals of Venezuelan Laws.

This is absolutely illegal for a number of reasons: First of all, as Deputy Rodriguez says in the interview,the Organic Law for the Financial management of the Public Sector says in its Art. 93 that no credit operation can be guaranteed with income or assets of the Republic. This is exactly what the Chavez Government has been doing by guaranteeing it with oil. Second, there is a clear intent here to bypass the laws of Venezuela, spending the money outside of the budget and controls of both the National Assembly and the Comptroller in the interest of “expediency”, but the law was clearly established to guarantee the money is well spent and this represents a way to circumvent  both the spirit and the letter of the law. But the worst crime is that the Republic is making use of PDVSA funds to pay for its debts, a clear violation of the law, but in the process, Chavez and his Government are weakening the finances of the company, as stated by Minister Ramirez in the memo to the President.

When Richard Nixon was President, in the midst of the Watergate affair, there was a big scandal with comic strip Doonesbury, which presented a cartoon indicting one of Nixon’s collaborators, by saying “Guilty, Guilty, Guilty”. Most of you can’t even remember this, but here is that strip:

Some newspapers did not run this, the Washington Post even ran an Editorial on it criticizing the cartoon for “reaching a verdict” on the Watergate affair in such fashion.

Well, today much like then, Hugo Chavez is ‘Guilty, guilty, guilty” of creating a mechanism to bypass the controls of the State, not only in violation of the law, but in order to spend the money at his discretion. The Chinese may one day have to face up to these illegalities and its consequences, but Chavez and his collaborators, if they lose power, will have to answer to Venezuela’s Courts.

Guilty, Guilty, Guilty!

Today Alek Boyd presented some documents showing that the Venezuelan Central Bank transferred US$ 2 billion in bonds for humanitarian projects to be executed by a company Kellmar Limited run by Anthony Caplin, a former Chief Operating Officer of the UK’s Conservative Party.

I believe these documents are fake due to a number of inconsistencies. Among them:

– The bond supposedly transferred was a Global 2028 and in the nominal amount of US$ 2 billion. The Global 2028 bond was issued in May 2008 and sold to local investors in Venezuela in the amount of US$ 2 billion paired up with a Global 2023 bond in the same amount. There is no record of additional issuance of a Global 2028 and the numbers that identify the bond shown are identical to the ones issued in May 2008 and no bond could be transferred electronically, like these papers claim, if there was no registration of the issuance. As shown below, owners of this bond are multiple, topped by Fidelity Investments which holds 3.46% of the issue, thus the Venezuelan Central Bank could not have transferred the amount claimed.

-The documents contain a series of inconsistencies as to Venezuelan laws and institutions. For example, it says the bonds are registered with the Comision Nacional de Valores (page 3 in Alek’s document, shown below). Venezuelan Sovereign bonds are not subject to the regulation of the Securities regulator, as per Art. 1 of the old and the new law, nor do they trade in the Caracas Stock Exchange as it says in the document purportedly written by the Venezuelan Central Bank. Moreover, the Comision Nacional de Valores no longer existed in May 2011 when this letter was written, it’s name was changed to Superintendence of Securities in September 2010.

-The documents always refer to the Ministry of Finance, which in May 2011 was actually called Ministry of Finance and Planning.

-The suggestion by the BCV that the good relations of Kellmar Inc with the Vatican and the Sisters of Charity does not sound at all as something coming from the Chavista Government.

-There is a letter of compliance by the BCV. Why would this be needed at all? If the bonds were coming from the BCV, that alone certifies the origin of funds and adequate provenance.

-Page 5 of the document is supposed to be a SWIFT transfer of the bonds. As far as I know and have been able to determine today, SWIFT is a system for the transfer of money, not securities. Securities are transferred either via Euroclear or via Clearstream. The SWIFT document also contains unnecessary explanations of why the bonds are being transferred.

So, I am of the opinion that these documents are fake, that the Venezuelan Central Bank has never made such a transfer, nor the Venezuelan Government wants to support projects by Kellmar and Mr. Caplin like those described.

Then, what is going on here?

My suspicion is that this is either an elaborate scheme to scam other philanthropic organizations to contribute to these projects by suggesting they already have a good “seed” funding provided by the Government of Venezuela or an attempt to create a cloud around Mr. Caplin or damage him politically. I would lean towards the first, but have no idea of how such an elaborate scheme would or could possibly work.

I am not sure what to make of AD’s backing of Pablo Perez as its Presidential candidate. The much-desired endorsement could work both ways, it could be the push Perez needs to get closer to Henrique Capriles or simply the kiss of death of his campaign.

As the party of the opposition with most militants and votes in recent regional elections, having AD’s endorsement will be very helpful come primary day, as AD’s voters will certainly go to the polls and express their opinion. The problem is that primary day is still 100 days away and Pablo Perez’ candidacy so far does not seem to have taken off. Given the fact that most Venezuelans, particularly those in the middle, those of the Ni-Ni variety, are so party-phobic these days, AD’s backing may hurt Perez in the polls and his candidacy may simply run out of gas before the AD party faith full can go help in February.

Thus, I don’t feel sorry for the losers in the “get AD’s backing race” Antonio Ledezma and Maria Corina Machado. The first one has proven to be very good at campaigning, but AD’s backing would have had the same effect and he runs far in the polls. As to Maria Corina, if she was truly trying to get that endorsement, it simply does not fit, as she is the least JuanBimbaesque candidate of them all.

Thus, in the end this endorsement is important because it will help decant the race. Once candidates register, I expect no more than two or three of them to have  significant support in the polls, at which point I will tell you what I think.  My intuition at this points says that yesterday may have been Pablo Perez’ high point of the campaign.

But what do I know? I think Chavez’ popularity should be less than half of what it is, but it ain’t…