The Devil's Excrement

(The picture above is for illustration purposes only, it only has a vague relationship to the post and is placed here simply to provide an image of the topic for the contents of the post)

In the upside down country that Venezuela has become, rather than investigate water quality in Monagas and Valencia, the Government had a Court issue an injunction telling the media to act “responsibly”. So far, there has been no similar order for the Government to use “extreme responsibility” and prove that the water is safe to drink. Here is our report which complies with the order:

After the oil spill into Rio Guarapiche on Feb. 4th. XXXXXXXX remain XXXXX, despite the fact that Government officials say XXXXXX. The Governor of the State XXXXXX said that XXXXXX, creating a crisis after the Minister of the Environment said that XXXXX. This has been contradicted by XXXXX, who said that XXXXX. The Government is not investigating whether the charges are true.

Separately, an ecological movement (link withdrawn) said that the waters in lake Valencia present XXXXXXXXX and it reptresnts a time XXXX and it represents a XXXXXX and XXXXXX crisis. The Government denied :lake Valencia was XXXXX and said it would accuse the Governor of Carabobo for XXXXXXX XXXXX in the population. The National Assembly will wait a month before looking at the problem.

There you have it, a fully complaint post on water problems in Venezuela. Enjoy our democracy!

When you thought I was done talking about pet obsession Fonden, an eager reader sends me this intriguing document above, the report by the “Comisario” as of June 30th. 2011 for the fund. The “Comisario” is an independent overseer in Venezuelan companies, which acts independently of the Board and has to report annually on what the Board and the auditors say about the company or institution. Typically, these are fairly lame reports as “Comisarios” are paid by the Board, so they don’t want to give away the annual payment they get.

This report is sort of strange, it basically seems to take snippets from the auditors report and comments on them. What is even weirder is that it has material about stuff that did not happen in the period covered, which I don’t quite understand. Here is a summary of what it says:

-The first thing that is different, is that despite having used “official sources” for contributions to Fonden, including the Central bank and PDVSA, for some years my “OLD” table in this post, had errors of as much as one billion dollars, small change for the revolution. Here is the summary from the report above (page 4) and the comparison. Totals and differences are in red:

Of course, my “OLD” table only included up to 2010, this includes up to June 2011. Note the size of the errors, a billion there, a billion here. That is how the revolution works, it is a perverse dance of billions.

-We then find out that the development fund Fonden, seems to have as one of its main purposes, contributing to other funds.  Indeed, the Fondo Simon Bolivar is funded by the returns of Fonden (page 5)

But more interestingly, in the circular world of Chavismo and the Bolivarian revolution, there were two 2 billion dollar contributions to the China Fund and US$ 2 billion in projects that also came from Fonden (page 6) One was in 2008, the second one for US$ 1.955 billion in 2008 but it appears the “projects” were transferred, then in 2009, another US$ 2 billion was transferred to Bandes for the Chinese Fund.

Note that this is in part how Chavez becomes like Jesus Christ in multiplying the fish and the bread, each one of these is an announcement (or many), but in the end it is the same billion here or there, it just gets recirculated around in the dance of billions.

-We then come to investments:

In point 1) The “Comisarios” note that Fonden has money in Commerzbank, Barclays, Deutsche Bank and Emerald Capital.

Hello? Emerald Capital? WTF?

All I could find about this company in such distinguished company was a report by Businessweek that textually says: “does not have significant operations. The company is searching for assets and businesses to purchase that would provide significant shareholder value.”

Jeez, aren’t we all? I guess they found some assets and someone made some juicy commissions. Emerlad’s business plan seems to be starting to work at Fonden’s expense.

But it gets better, in point 2) (page 9) Fonden purchased US$ 86 million of Republic of Bolivia Bonds, a country that has not issued bonds to public markets, according to Bloomberg, since the 1920’s. Nothing like being a pioneer investor.

But it gets even better: In point 4, Fonden purchased some Republic of Honduras bonds, which somehow wanted to exchange later. I guess Zelaya left and they no longer were interested.

Now it really gets cool and capitalistic with Fonden investments. Remember this is the money to be invested for the country’s future. But in point 6) page 9, you can read all about how Fonden had US$ 876 million in none other than your friendly neighbor financial organization, Lehman Brothers, which just happened to go bankrupt in 2008. It says here that somehow, Fonden managed to exchange this for a Note backed by Venezuelan instruments and Fonden made US$ 5 million. There are no details of who was the fool who did such a transaction, but somehow, I think there were Bolivars involved in the middle.

To cap the investment track record of Fonden, the fund invested in Ecuador bonds (point 8) These are the same Ecuadorian bonds that country defaulted on (Shucks, you can’t trust the comrades) Somehow Fonden, exchanged those defaulted bonds and somehow in the end supposedly made a gain on some part of it. Lots of commission in the middle. I guess someone was truly “developing” his or her future with all these deals. But not much happening in Venezuela.

Finally, (page 11) Fonden “invested” US$ 366 million in buying 49.99998779% of Russian bank Eurofinance Mosnarbank, another giant step in Venezuela’s economic development.

-Where it gets interesting is here: The document tells us how Fonden distributed the money. Remember the missing US$ 29 billion? (Plus or minus a billion, to use revolutionary nomenclature). Well. it turns out that they just did not want to show that the money was not “invested” in projects, but just recirculated around.

Quico sent me his spreadsheet (Thanks!) in which he added all of the projects Ministry by Ministry of what Giordani told Deputy Ramos had been assigned to projects. Below find the original table, corrected with the new data (You can click on it to see it better):

It is very interesting, the largest share of the “missing” money is in the Ministry of Finance, a difference of “only” US$ 10.8 billion dollars. Clearly, since that Ministry does not execute projects, that money was used as needed, sort of a billion dollar petty cash fund, whenever Giordani, who not only runs Fonden, but is the Minister of Finance and Planning, needed a billion or two, here and there.

After that, there is a US$ 6 billion difference with Energy and Oil, once again, PDVSA gives money to Fonden, which Fonden sends right back, as needed, in a sort of vicious and virtuous circle at the same time. Add Agriculture and Transport and Communications and you have already found US$ 23 billion of the “missing” money.

In fact, “differences add up to US$ 34 billion, more than we thought was missing, because this includes the 2011 (first half) contributions, which were not part of our accounting.

Ironic, that in this merengue of billions, the number one problem in the country, crime, gets a puny or miniscule US$ 25 million via the Ministry of the Interior and Justice. That is roughly 0.034% of all the money spent by Fonden. Amazing!

-Finally, it appears that (page 13) Fonden has lots of things in Banco del Tesoro, but that bank failed to provide proof of the instruments, but these are numbers in the range of a billion or so, fairly uninteresting by Fonden standards.

There you have it. Please, if you have access to additional information we would be delighted to receive it, analyze it, mutilate it and process it. It’s simply priceless to read how these people are destroying value and moving billions like there is no tomorrow.

Maybe there isn’t…for them…

You have to wonder whether the perversity by the revolution was on purpose or just coincidencal. Last week, on International Women’s Day 2012, there were two separate judicial decisions in Venezuela: In the first one, Judge Maria Affiuni’s appeal against the extension for two more years of her detention, was denied by Appeals Court. In the second one, Edmundo Chirinos, who was sentenced to twenty years in jail for the murder of 18 year old patient Roxana Vargas, was given by the Appeals Court the benefit of serving his sentence at home.

The difference? Judge Affiuni should be tried in freedom according to the law, as she has been in jail for more than two years without a trail Despite this, the Appeals Court extends her jailing for two more years, which she is spending at home because she is ill. Of course, she can’t even get treatment in Venezuela, as she is not allowed to be visited by a Doctor or to go to a Doctor.

Giving Chirinos the benefit of serving his sentence at home is perfectly legal, such a benefit is contemplated by the law for people over 70 years old. He is 77.

However, Chirinos told reporter Ibeyise Pacheco, that he only turned himself in because he thought his connections to Chavismo would save him and if he were given the benefit of serving his sentence at home, he would escape.

Curiously, Affiuni is in jail for freeing an enemy of the Government who had also been in jail for two years without a trial. She applied the law and Chavez suggested she should be jailed. Which she was. The Prosecutor has never been able to show that there was any irregularity.

Meanwhile, Chirinos was given the 20 year sentence explicitly at the Yare II  jail. He can now go home and even try to escape thanks to the appeals Court.

Happy Perverse Revolutionary Women’s Day!

During the last few weeks, Venezuela and PDVSA bonds have rallied sharply, as investors see increased probability of not only a possible political change in the country, but more importantly, change in the way Venezuela’s public finances are managed.

The rally has been stupendous as seen in the graph below, which shows the price of PDVSA’s 2022 bond, which carries a 12.75% coupon and which was issued in February of 2011:

The bond above has shown three distinct periods over the last year which I have noted with red boxes. First, there was rally last June, when President Chavez became sick. This rally was stopped (second red box) from August to November as the European crisis unfolded. Then, the last and powerful leg this year is shown in the third box and it began in January, as optimism all around the world first drove markets up, which was followed by a move up upon the successful opposition primaries, which received another powerful push up with the news that Chavez’s cancer had returned and the President had to be operated.

Chavismo has called the rally perverse. But in the end, the rally is a bet not on President Chavez’ demise, but the fact that if Chavez played a smaller role in the future of Venezuelan politics, the role of Minister of Finance and Planning Jorge Giordani would also be diminished. Because Giordani was, after all, ranked as the worst economic Minister of Latin America recently.

And ever since Giordani took charge of of Planning and ltaer Finance, Venezuela’s financing costs had been increasing and refused to drop. This can be seen in the next graph, where I show the Global 2027 bond from the year 2000 to last week. As you can see this bond has been at much higher prices (lower yields) than it is today during Chavez’ tenure, despite the fact that oil prices are near an all time high today.

From 2003 to 2007, this bond rose sharply, as oil prices increased. Venezuela had a relatively small debt and new issues were coming to market slowly and in a manner fairly well understood by the markets. Then came the financial crisis of 2008-2009, oil prices dropped and debt prices went down. During this time, Venezuela and PDVSA began offering ever increasing amounts of debt to sustain the exchange rate at an artificially low level. Even worse, the attitude towards the same investors that buy this debt has been unfriendly, surprising the market and issuing large size bonds that flooded the market with paper.

Thus, after the yield in the Global 2027, shown below, hit near 20% during the financial crisis, it had been unable to drop below the ~13% level until last summer.

The rally has been impressive. The PDVSA 2022, issued in February 2011, which traded at 75% in its first day, closed yesterday at 100%. That is a 33% return on capital to those that bought the first day, to which you have to add 17% return in interest, or 50% in little over twelve months.

The question everyone asks, is whether this can continue.

Well, as long as there is the possibility of change in the way the country is managed, the rally can certainly go on. While yields may not go down to the levels of 2006-2007, because the country’s debt has increased dramatically over these years, oil prices are higher and Venezuela could be in better shape than other countries yielding 2% to 3% below Venezuela’s yield. It is, in the end, all relative.

But the ride is likely to be bumpy, as the sell-off yesterday shows, after the violence on Sunday during Capriles’ rally. Investors can scare easily, even if the potential returns can be very attractive. But investors like the yield and this provides some cushion in this bumpy ride.

As usual with investments, it is when to sell that is the toughest to decide.

I very seldom publish posts in Spanish, but since the local traditional press has given no coverage to the agreements signed by Chavez with the Chinese which allow Citic to sell stock in parts of PDVSA, Quico and I collaborated on this post in Spanish which will be published in Caracas Chronicles, here and in El Excremento del Diablo. Please distribute!

¡Fin de Mundo!: La revolución quiere privatizar parte de PDVSA

La alergia con la privatización ha sido, desde el primer día, uno de los nortes ideológicos del chavismo. Por eso sorprende tanto el acuerdo hecho público recientemente a través del cual PDVSA no solo le vendería a la empresa de inversión China Citic el 10% de la empresa de la Faja Petropiar, sino que autorizaría a Citic a colocar parte o todas las acciones de Petropiar de su propiedad en la Bolsa de Hong Kong y al mismo acordaba asesorarse con Citic Securities para la posible colocación de las acciones de la propia PDVSA en este proyecto.

Este cambio en la política oficial representa la negación de gran parte del contenido petronacionalista de la revolución bolivariana. En efecto, el gobierno quiere privatizar un pedacito de PDVSA: ¡Fin de Mundo!

La prensa criolla no ha reaccionado ante todo esto. Aún cuando la noticia ha sido ampliamente difundida en inglés, tanto por las agencias Dow Jones y Bloomberg como por los blogs de Setty (1,2), Caracas Chronicles (1,2), el blog de Foreign Policy y el Devil’s Excrement (1,2), nuestros periodistas no parecen haberse percatado del asunto. El gobierno privatiza a PDVSA…¡no es cuento!

Este golpe brusco al timón no es difícil de explicar: PDVSA necesita financiamiento para poder desarrollar los nuevos campos de la Faja Petrolífera del Orinoco. En estas nuevas asociaciones, PDVSA posee el 60% y sus socios extranjeros el otro 40%. PDVSA ha tratado de que los socios extranjeros le financien sus inversiones, pero la mayoría de los socios, incluyendo a los chinos, no ha querido hacerlo, ya que su propio financiamiento representa ya un compromiso significativo.

Y es aquí donde los muy capitalistas asesores de Citic probablemente sugirieron la posibilidad de usar la Bolsa de Hong Kong como fuente de financiamiento, usando a Petropiar, un campo ya maduro, como prototipo de lo que se puede hacer. La primera fase es muy sencilla y aparentemente ya ocurrió:

PDVSA le vendió el 10% de Petropiar a Citic a cambio de una cantidad, que no ha sido revelada, de dinero.

En la segunda operación en un futuro, Citic, colocaría las acciones en la Bolsa de Hong Kong:

De esta manera, Citic recuperaría su inversión y posible obtendría una ganancia importante, mientras miles de inversionistas de cualquier parte del mundo serían ahora los propietarios de las acciones de Petropiar.

Pero aun mas importante, el Mercado establecería el precio del 10% de Petropiar, que produce 180,000 barriles de crudo mejorado de 24 API. Esto establecería un valor de referencia para los proyectos maduros de la faja, así como para los que se están comenzando a desarrollar hoy.

De lograrse esto, Citic realizaría una ganancia que podría reinvertir en otros proyectos, maduros o no, de la Faja. Para el Gobierno venezolano esto es ideal, PDVSA pierde ingresos, que ahora pertenecen a los accionistas y deberán ser pagados en dividendos, pero el Gobierno venezolano continua recibiendo, royalties, impuestos e el impuesto a la ganancia súbita por cada barril producido, que es donde esta el grueso del dinero. Para los chinos, no solo recuperaron su dinero, sino que esa inversión probablemente les garantiza que el petróleo de estos campos sea enviado exclusivamente a China, que es lo que a ellos al final, les interesa.

Pero fíjense que ahora el Gobierno puede vender de la misma forma, hasta la mitad de Petroanzoategui, (antiguamente Petrozuata), o hasta 33.3% de Petromonagas (antiguamente Cerro Negro) y hasta 10% de PetroCedeño, antes Sincor, recibiendo a cambio dinero de Citic, que a su vez se voltearía y colocaría las acciones en la Bolsa de Hong Kong, generando nuevos fondos que ahora podrán ser invertidos en los nuevos proyectos de la Faja.

El proceso es básicamente ilimitado, mientras haya apetito por petróleo y mientras haya campos por desarrollar en la Faja Petrolífera del Orinoco. Este tipo de operación se podrá repetir una y otra vez, aumentando la producción de petróleo venezolana, limitando la inversión de China en Venezuela, pero garantizándoles el crudo que produzcan los proyectos.

Por supuesto, en un mundo normal y no revolucionario, los chinos no harían falta para todo esto. PDVSA podría ir directamente a los mercados, incluso a la Bolsa de Caracas, sin necesidad de intermediarios. Pero la necesidad de esconder la verdadera naturaleza de las operaciones, en la cual el socialismo, mas que nunca, vive y depende del capitalismo, requiere de un intermediario remoto.

La estrategia tiene toda la lógica del mundo. Venezuela necesita financiamiento para desarrollar los recursos de la Faja. Acudir a los mercados de acciones o bonos es indispensable para obtenerlos. Aunque la idea haya venido de Citic Securities, el que PDVSA y el Gobierno la hayan aceptado, aunque sea por realismo, representa un desarrollo muy positivo para el país y para el futuro de la producción petrolera venezolana.

Ahora bien, nada de esto ocurrirá en el futuro inmediato por tres razones. Primero, el Gobierno revolucionario no quiere que esto se convierta en un tema de la campaña electoral, aunque recluye el atacar a la oposición por querer privatizar a PDVSA. Segundo, el Gobierno no quiere valorar el 10% de Petropiar mientras continua el proceso de arbitraje en el Banco Mundial, ya que esto podría establecer un precio aun mayor al que aspira a pagar PDVSA.

Finalmente, es probable que este plan esta concebido como un plan post electoral, ya con un Chávez con un mandato adicional de seis años, implementando este plan netamente capitalista y privatizador, con el único fin de obtener cantidades aun mayores para financiar su populismo. En última instancia, el gobierno terminaría con una política mixta que consiste en nacionalizar cuanta empresa consigue que de pérdidas, mientras va privatizando las que dan ganancias: buenísimo, ¿no?