Sunday, February 22, 2015

Why the regime has/has-not "devaluated" the currency

WARNING! entry plagued with "quotation marks" for reasons that will become apparent.

One of the surprising things that this blog has been wondering out loud for the last year and a half is "how come that the regime knowing full well that disaster looms imminent is apparently unable to take any, ANY corrective measures"? The very latest entry on this was "the fiscal problem" last January. And yet, the change in currency rules over a week ago was, well, a mountain birthing a mouse.

Yes, there was a devaluation of the currency.

The visible one was the disappearance of SICAD2 and the creation of the SIMAD. For those late into this game allow me to remind you that Venezuela has possibly the most complex system of currency control in the world with 4 exchange rates, for a dollar, depending how you are connected: you may pay 6.3, 12, 51, or 180. The first three were "legal" the last one the black market one and thus the one closest to the truth.

Thus "technically" the true devaluation was the elimination of SICAD 2 which became a "free" convertibility system called SEMADI which started its first day at 170 and when right there to 174 dollars US. That is a depreciation of (170-51)/170=70%, give or take.

In theory this rather hefty devaluation (I "temper" my words) would only touch 20% of the currency of Venezuela since in "theory" 6.3 and 12 remain for the bulk as the black market rate is supposedly nonexistent.

There is a problem here: unless you are well connected with people inside the regime, or you do import stuff that is related to food and medicine (and some of us only!) you have no access to those dollars. In short, it is expected that within months the bulk of foreign currency exchange will be SIMAD, assuming that the regime can scour somewhere enough billions to offer through SIMADI, something yet to happen.

In other words what is happening, "in theory", is a dollarization of the economy as little by little all imports will shift to a "convertible" currency. The other problem here is that the SIMADI is a fake "free convertible currency". Loaded with many regulations and controls there is only so much that you can exchange in a calendar year (Miguel explains this here).

No, there was no devaluation (just a blackmarket "legalization").

What happened with SIMADI is of a very different nature, something for the record books of mafia "financial" engineering.

Fortunes, colossal ones even, have been built on arbitration which meant that if you are well connected you can get dollars at 6.3 to resell them at the black market. It has been years that the black market is more then twice the official value (today it is way over 20 fold more). Thus with any amount you bought and resold at once not only you paid off the initial purchase but you got enough to buy again in a way that, well, it was all free to you.

This business was of course in the hands of "connected" people who either served as front-men for military and politicians, until they accumulated enough on their own that they could go solo (the Derwick boys for example who apparently were helped by Diosdado at first until now when they can buy castles in Spain).

Now that the military are the ones directing the country it is to be supposed that they are the main beneficiaries of this arbitration system and it is certainly not the drop in oil prices and the economic crisis that is going to make then give up such a rag to riches scheme. However there is a problem: the obscene amounts of money gained that way need to be laundered now. Many foreign agencies are in the know that arbitration is also used, in addition to speculation and robbery, to launder really dirty stuff. By creating SIMADI the regime is merely offering a tool to launder some of that cash. See, black-market prices were not recognized by the regime tax accounting procedures. In fact when you buy at 170 to resell in your shop the tax office only recognizes 6.3 and thus considers the difference as profit. But now people desperate enough for dollars and willing to pay 170 will get receipts that will protect them against Venezuelan tax collectors but that will also give an official receipt to money launderers.

So that is why I say there is no "immediate" devaluation, just a legalization of the black market through SIMADI. The devaluation will come later and be progressive as importers will slowly be forced to shift their import cost from 6.3 or 12 to 170. With the hyperinflation that looms behind.

The problem is that this "devaluation" is done for political purposes, for the army to protect itself from foreign observers that have tried to arrest Carvajal, that are now after Cabello. What they seek is a way to retain their stolen dollars by returning part of it in bolivares so that they can buy lot's of real estate here, away from the inquiries of European or American tax officers. In addition of major potential economic problems that this may cause it is also part of a theory of economic final control that will be the subject of a coming post.


  1. I'm convinced the 6.3 rate only exist for arbitrage. A dear friend worked for a pharmaceutical company which pulled out of Venezuela because they were not able to repatriate dollars (much like many industries). Another works for a different pharma which is subject to the 6.3 but has hundreds of millions trapped in Venezuela. So.......does 6.3 exist for medicines if no one gets paid?

    1. As I wrote: 6.3 exists for a "blessed" few.

  2. Charly7:53 PM

    Good thing sharia law does not exist in Venezuela. Would be difficult for some people to salute.

  3. Anonymous8:02 PM

    It occured to me that this system makes perfect sense if you are laundering profits from the drug trade. Actually, that's the only light in which this system makes perfect sense.

  4. Anonymous12:34 PM

    You have to compare to the original rate. The devaluation was (170-51) / 51 = 233 %

    1. Wrong. A currency cannot lose more than its value otherwise if you had 100 Bs in the bank you would OWE 133 after devaluation. One speak properly of currency depreciation, or you can say starting from the new currency that the was a 2.3 fold variation, but not a percentage.

      In other words 100% is an implicit limit that cannot go beyond. You cannot have more than 100% loss because at 100% you already lost everything.

    2. You are both right, just not describing it correctly.
      You are right Daniel that a currency cannot lose more than 100% of its value, but can lose more than 100% of its value AGAINST another currency.
      Example: If one euro is worth two dollars and those positions switch, then the value of the dollar is now improved by its own full value, or 100%. The euro's value will have decreased by its full value, or 100%. Now if the euro were to lose even more value (i.e. its value goes below its full value relative to the dollar it was originally compared to) it can be expressed as 100% plus whatever additional percentage (110% for example).

      So Anonymous was right to say that the devaluation was 233% of the old SICAD.


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