Archive for the 'Uncategorized' Category

About Vacuums And Announcements

December 16, 2014

About ten and even more years ago I met a group of very smart young people who embraced blogging in 2003-2006 and later many of them migrated to Twitter. They seemed very young, bright and energetic to me. Today most of these people have become opinion makers, reporters, professors, broadcasters and most are still very active. Now, rather than seeing them as young, I see them as wise beyond their years, hardened and weathered by the “revolution”. Among them Naky Soto and her husband Luis Carlos Díaz, do a periodic “hangout” in which they do political analysis which should put some experts to shame. Naky also still has a blog, called “El Zaperoco de Naky” (Naky’s Mess?). Yesterday she posted this and I liked her description of Maduro’s Sunday interview, combined with yesterday’s march and the bizarre Maduro oath so much, that I asked if I could translate it and post here. Enjoy!

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My father in law complained to me that yesterday I did not do a summary of the economic announcements by Nicolas. I could not do it, because he said nothing. All the sumptuousness of the setting chosen in the Miraflores Palace for the interview conducted by José Vicente Rangel, made the poor performance less comprehensible. Imprecise and erratic as ever, Nicolas made an effort to maintain an idea over the polished floor: he knows and controls everything that happens in the country and just because of that he affirmed that people buy things because they have money (explaining scarcity), that there are errors to correct in Cencoex errors (the same as with CADIVI); and because he had no way of explaining our foreign exchange system exchange system, he opted to assure us that Sicad II will be adjusted.  He added that bureaucracy (as if it was a subject) is the clumsy one in the process, that increasing the price gasoline is not urgent, and to our relief, that we have no debt with China. Of course, with great conviction he said that he will come out victorious in the economic war in 2015. Despite lower oil prices, he repeated that the budget for 2015 has its  resources guaranteed.

Today’s march originally was to celebrate la bicha” that Constitution approved only by 30% of the voters 15 years ago; in the midst of the  Vargas tragedy. But the announcement by the US Congress on potential sanctions against Venezuelan officials who have violated human rights intervened. The anti-imperialist binder was a gift that he could not fail to open. This crossing of reasons facilitated the “arroz con mango”* of Nicolas’ speech, fiercely shouting for the sovereignty that nobody will threaten as long as he is alive, but happy because of the fifteen years of “la bicha”. The deceased one was frank to call it that, there’s no better motto for a Constitution that is humiliated daily by its editors.

With very tight shots, the official nationwide broadcast tried to conceal the failure of the summons, the vacuum in Avenida Bolívar. Nicolas began with a long story about the history of the deceased, that one we all know. Given the notable boredom of the audience, Nicolas was kindled by mixing it with his enemies: the monster of Ramo Verde (Leopoldo López), the pelucón (long haired) (Lorenzo Mendoza, president of Polar), the one nobody loves (Henrique Capriles), Aznar (who he called a murderer several times), the right, the bureaucracy, etc. This is a very tedious loop.

In response to the Yankee attack, he proposed creating a committee of Human Rights jurists to bring to justice those gringos for their war crimes. He mixed up the Grinch with Gremlins, and supported his ravings with the chants of the cheerleaders event: PSUV’s youth who contributed more slogans than people. He announced without any stupor that he would delegate his presidential responsibilities on Arreaza, Jaua and Hector Rodriguez, to devote himself exclusively to defeat the economic war.

But the closing was the saddest part. Not even Diosdado was able to hide his displeasure, looking at Nicholas as if he was a militant of Primero Justicia. Holding up a replica of the Bolivar’s sword, Nicholas began improvising this disastrous oath:

“I swear by the immortal spirit of the Indians, of Guaicapuro, by the immortal spirit of the indigenous resistance. I swear by the people of African descent, for Andresote, by José Leonardo Chirinos. I swear by Negro Primero. I swear by the  liberators, by José Félix Ribas, Urdaneta , Sucre, Ezequiel Zamora, by the martyrs, by Alberto Lovera, by Jorge Rodríguez, by Robert Serra I swear before the immortal sword of Simon Bolivar, who will not give peace to our souls, nor rest in our struggle to see emerge in Venezuela a homeland of peace. I swear by the example of “comandante eterno” that I will work for the unity of the people, for the military-civic union and that we will achieve with the greatest commitment that this oath is transformed into the great victory of 2015, 2019 . So I swear. “

….
The Constitution states in its Article 29 states: The State is obliged to investigate and legally punish offenses against human rights committed by its authorities Actions to punish crimes against humanity, serious violations of human rights and war crimes. are barred. The human rights violations and crimes against humanity are investigated and tried by ordinary courts. Such offenses are excluded from the benefits that may result from punishment, including pardons and amnesty. “

There are now 50 dead Uribana. In the 3 years of managing Iris Varela 1463 are dead prisoners. The minister has not faced any investigation.

And they dare claim that they honor the Constitution.

Rangel-grande*Arroz con Mango, literally “Rice with mango” means a strange mixture, something that does not go well with each other.

Maduro Keeps Sending The Wrong Messages

December 14, 2014

I have been trying to write other posts, but the news are such that I have to set them aside and write more about very current events. One of my biggest complaints about the Maduro Government (and Chávez before him) is that while they carefully plan what they say to the Venezuelan “people”, they don’t apply the same analysis to what they tell (or not!) to foreign investors. Very simple messages, or simply informative messages would go a long way towards improving the outlook of Venezuela’s debt, mor so in the face of the recent drop in oil prices.

When I heard that José Vicente Rangel was going to have Maduro today in his program in Televen, I thought this would be an effort to do just that. Instead, the opposite was done. The interview did exactly the opposite. Clearly, the interview was going to be friendly, on tape (Maduro was not even in Venezuela today, so that this was not live) and a perfect chance to assure invetsors that he was in control. Instead, Maduro sent the wrong message (s). Start with gas prices:

He suggests that most people agree gas should be increased, but he says the time is not right, it would be like adding fuel to the fire and he has to wait until “speculative forces” in the economy subside.  He also states that there is no rush, even with the fall in oil prices, there is no rush to to do it and he has the funds to do things and the price of gas could be increased in 2015 or 2016. He has to wait until inflation is controlled. #FAIL

Maduro also said that he would “modify” the Sicad 2 market, something that would help, but is only a small problem in the scheme of things. He did not say the Bs. 6.3 rate would be modified (he ratified it would remain), nor Sicad 1, only that Sicad 2 would be modified.

Maduro repeated in the interview his phrase from four months ago: “The money form China is not debt, it is financing” (El dinero de China no es endeudamiento, es financiamiento). Oh yeah, how I would love to get financing that is not debt for myself!

He also said that sometimes he feels he should just break relations with the US, as if relations were normal. The two countries do not have Ambassadors, but worse, does Maduro understand what this could imply? Maybe he should look to Nigeria, a country that used to export one million barrels a day to the US in 2010, but now sends not a single barrel to a country with which it has friendly and normal diplomatic relations.

Nor did this sentence, said earlier helped much:

“There is no possibility that Venezuela will declare a default, unless we decided not to keep paying the debt”

Oh, I see. It’s like me saying I promise to  keep writing this blog, unless I decide to stop. I guess the only positive was that he did say that is what Chávez wanted, to keep paying debt. But the first part certainly was not very reassuring.

Just  another day of Maduro sending the wrong messages to markets and investors, let’s hope that oil does not continue hurting bond prices, as it is, they have been slaughtered in the last week and Maduro seems intent on not helping.

Maduro’s New Script

December 9, 2014

PDVSA22

PDVSA 2022 bond in the last three months. It was losing 14% of its value today, with a yield to maturity of 31.4%

As Venezuela and PDVSA bonds were tumbling today (see graph above) on their worst day in memory, people were taking Maduro’s words about the country’s inability to borrow in jest. But think again.

For the past four or five days, Maduro has been following what is clearly a new script. He began by attacking the US Embassy, saying he would reconsider the relations between the two countries, as the local Embassy was a constant source of conspiracies against Venezuela. He followed up by insulting the Head of the IMF, Christine Largarde, saying she had spaghetti in her head and finished with saying rating agencies were conspiring to push Venezuela into default by giving the country a credit rating below what it deserved.

Last night, Maduro went back to the narrative, blaming credit agencies and saying that Venezuela was suffering from an economic blockade for political reasons that made it such that the country no longer had access to international loans or financing.

You may laugh all you want at what he says, but I don’t. He is making a very specific narrative out of all this and I am not sure where it is heading. It may be that he just wants to blame  the US for the intensification of the crisis in the next few months or simply, that he is preparing the ground in case there is no money to pay international investors. There is a one billion Euro payment in March, which looks doable, but there are much larger maturities in October 2015. But investors have so far believed that Venezuela had a “willingness” to pay, and the action in the markets today indicated some people were losing faith.

It did not help that Bloomberg reported today on a meeting with investors at a New York law firm, which actually took place like ten days ago. This meeting actually ended in a somewhat positive note, as many suggested that Venezuela and PDVSA could not get away with a restructuring below current prices for most bonds, as the oil cash flow would not justify it.

Meanwhile, the adjustment continues, very few things are being imported and long lines have begun appearing at gas stations, a suggestion that PDVSA may be importing less and gasoline is being selectively distributed.

gasolinera

But I would take Maduro’s words seriously, he is following the script, wherever he wants to take it…

 

 

A Short Note On My Hyperinflated Arepa Index

December 7, 2014

cpi

Two weeks ago, as I left Caracas on Nov. 22nd. to be precise, I wrote about the cost of a breakfast which I found expensive for Venezuelans, which included cheese arepas. As I returned to Caracas two short weeks later, I went to have a single cheese arepa at the same place. Imagine my surprise when I found that the Bs. 120 cheese arepa of fifteen days ago, now costs Bs. 156.

That is a 30% increase in two weeks. A year ago I would eat two for Bs. 120.

Thus, I will keep reporting on the hyperinflated arepa in the future.

BTW, they are still delicious…

 

Will The Minister Come Back Empty Handed From China?

December 1, 2014

manitos

It seems as if President Maduro really believed that OPEC would cut production after he sent Ramirez to visit a few countries, including Russia, who happens not to be a member of OPEC. But as most analysts expected, OPEC did not cut production and scheduled the next meeting for next June, bringing a lot of people back to reality, including Maduro. It was only after Ramirez reportedly left the meeting “red faced”, that it sunk in that maybe Plan A was not going to work. Thus, Maduro switched to Plans B and C. Plan B is to “hope” that oil prices bounce back and plan C was to send Minister of Finance Marco Torres to Beijing to see if he can get some money there. Plan D was to name a commission to cut salaries and luxurious expenses. Yeah, sure!

I have been arguing with a bunch of friends about the probability that Torres will come back with a significant loan, which I peg to be around 0.00001, but they seem to think it is somewhat higher. You see, they actually believe that Venezuela has something to offer the Chinese, like oil or oil fields. But the reality is that Venezuela has little to offer at this time and the Chinese know it, so that Minister Torres is very likely to come back empty handed.

Let’s look at the reasons why I believe this is so:

-What the Chinese are most interested in is oil. Venezuela already sends a few hundred thousand of barrels a day of oil to China, but as we saw earlier, the terms of the Chinese fund had to be changed for the simple reason that Venezuela was not sending the required number of barrels a day to China. Thus, the specific number of barrels to be sent were changed to a number “to be determined by Diplomatic channels” a euphemism for “we will try to work it out so we can collect from the Venezuelans”

Thus, Venezuela can not ship more oil to China, because it needs the cash flow from selling it internationally, let laone pay the Chinese on time. Thus, the possibility of getting a loan for oil is extremely difficult and remote. The Chinese will renew current agreements, but that is it.

-The next option, which is where Venezuelans think there is some value, is that The Government will simply give the Chinese an oil field in exchange for money. This, in fact, has been tried before, except that Chávez, in his minimal wisdom, created new laws that restrict the control of the foreign partners over the joint ventures. Thus, PDVSA has to contribute part of the money to the JV’s, unless the partner lends the money to PDVSA. Except that the Chinese have not been very amenable to this. They want “joint” to mean joint, not I put up all the money and you control. Some companies have accepted this, but not the Chinese, who, in fact did not participate in one of the Carabobo oil fields, precisely because they were told they had to put up all the money.

-The next important problem is the size of the amount of money needed. A US$ 4 billion loam solves very little, when the shortfall, at about US$ 700 million per dollar of oil drop, has now become around US$ 20 billion. Thus, the Chinese would be willing to lend the country US$ 4 billion if it would stabilize the country’s finances, but it would be throwing good money after bad money.

-There is also the problem of who is going to China. Ramirez, with much more experience and, at least an ability to say the right things, could not get a new loan from the Chinese last December or in June, only an extension of currently paid up loans. Marco Torres, a much more limited representative is unlikely to strike the right cord with Chinese authorities. He will get nothing.

-But more importantly, is the history of the Chinese-Venezuela relationship. Most people don’t do their research and ask lots of questions about the Chinese loans, but the papers about them are out there to see, I discovered them and they seem to be rediscovered periodically, the last time by good friend Bodzin. But even I forget about their content, so one should redo the research, as a good friend noted to me today that in one of those documents, the Chinese placed, in 2010, a limit on how much they would lend Venezuela.

Indeed, among all the documents, there is one in particular, that tells the whole story. In it, Asdrubal Chávez, the former President’s cousin, reports on his trip between Februay 2nd and 4d. 2010 to Beijing. The document is remarkable alone, as Chávez’ proposal is that the Chinese lend Venezuela in 2010 all of US$ 40 billion, while asking for the insignificant sum of US$ 116 billion in ten years. How they had planned to pay for this with oil is beyond me, but it is there and very clearly specified.

The Chinese simply did not bite, they very diplomatically said like the Beatles, well, you know, we all want to change the worldd, but we can only lend you US$ 10 billion in dollars and about US$ 10 billion in Yuan (Or Reminbi). Any higher amount, according to the memo would require “very rigorous procedures on the part of the Chinese Council of State”

Which simply says: “I can approve up to this amount on my own, but if you want more, it would take months, lots of discussions, due diligence and involve people, all the way up to the Premier, who may not even know where Venezuela is”

This all happened in 2010, when checks and balances were lighter and before the corruption crusade of Premier Jinping, who wants to personally oversee and check all outflows, loans, etc..making it even more difficult for Venezuela to obtain a loan now that it was in 2010.

All of which leads me to believe that Minister Torres will indeed come back empty handed from China, at which point Maduro will have to implement Plan E: Change the Minister of Finance to someone that knows something about Economics, like he has been told ever since he became President.

Sorry Marco…

IVIC: A Very Personal Story

November 27, 2014

Ivic(Here in Spanish)

I wasn’t born at IVIC (Instituto Venezolano de Investigaciones Cientifícas, the Venezuelan Institute for Scientifc Research), but for a large fraction of my existence, I actually felt almost like I was. (Which was actually possible, since IVIC has housing for researchers, except it did not exist the year I was born). Thus, it is actually quite painful to see how the fake revolution wants to erase its past, turn it into something different than it should be and simply destroy in the revolution’s ignorance what that institution has meant for Venezuela.

For those that don’t know what is going on, the Venezuelan National Assembly approved in its first discussion a project to change IVIC’s bylaws, including changing its name, its objectives, how it is run, essentially erasing the proud history of an institution that contributed quite a bit to the scientific, educational, academic and technological institutionality in the country. The project was supposedly promoted and written by PSUV Deputy Guido Ochoa, a Ph.D. in Forest Science, with a fairly unimpressive publication list, but who apparently believes he knows what is good and best for Venezuelan science.

Reportedly, not even the authorities of IVIC, mostly pro-revolution, knew of the Bill, approved in its first discussion and the project was not consulted with any of the scientific community of IVIC, so much for the much ballyhooed “participatory” democracy of Chavismo. Among other pearls, the Bill replaces the researchers Assembly, which approves such things as promotions to tenure and policy, by an all-employee Assembly, where to decide such important matters, any employee who has been at IVIC for one year will participate and all students will be part of it. IVIC’s name is changed to IVECIT (Instituto Venezolano de Ciencia, Tecnología e Innovación) and the changes are made so that “science will no longer be shut in in the laboratories, which will allow “el pueblo” and the communities to permanently build technological elements for the transformation of the country”

What a bunch of inflated and supercharged BS, which only shows the ignorance of those that promoted it and wrote it. They are simply unqualified to even be involved in scientific and technological planning in Venezuela.

The project goes on to spew similar BS about the relationship of the new Institution with the community so that the Institute can protect the” habitat, the integral health, the economic and social institutions, culture, uses, customs and values”

Unadulterated, empty and ignorant words if you ask me. A Government that gets rid of the Ministry of the Environment, disregards all of the terrible environmental disasters in the country (Maracaibo, Guayana, air via cheap gas and the like) now wants to impose these criteria on an institution that has been a pioneer on this subject. (When I was at IVIC, too many years ago, there was an Environmental Engineering Department, which I see survives to date, under the name of “Atmospheric Chemistry Laboratory” with Eugenio Sanhueza still leading it)

And just as you think that this stuff can’t be written by anyone with some intelligence, the IVIC project, as approved by the Assembly, also states that the new Bill will allow IVIC to respect the identity, the languages and religions, the “cosmovisons” (Whatever that means), the spirituality and sacred and worship places. Equally, it will respect “the collective intellectual rights of knowledge, technology and innovations of all communities and the exchange of wisdom, according to constitutional principles.”

Yes, it is really hard to make this stuff up.

Many years ago, in the late sixties, I showed up at IVIC to inquire about the possibilities of working in the labs of the Physics Department. I had just finished my Freshman year, didn’t really know much Physics, but knew what I wanted to do (I thought!) with the rest of my life: Experimental Physics. I was told to come back with certain information about me, grades and the like, and take an aptitude test. I did, and a few weeks later I was called and told that I had been accepted for a summer internship. When I showed up, I was told I would get Bs. 300 per month (All of US$ 70 per month at the time) and a food card that would give me lunch daily at the Institute’s restaurant. I could not believe my good luck.

My first day at IVIC, I was told to go meet my adviser, Roberto Callarotti, who turned out to be a much (like very much) younger  guy that I imagined, who welcomed me with enthusiasm and introduced me to a very funny maracucho who had a poster of a naked guy at a beach with an umbrella and a sign attached to it that said “Experimental Hydrologist at work”. He was hydrologist Ignacio Rodriguez Iturbe,  now a Distinguished University Professor at Princenton, a Venezuelan so distinguished that I will let you judge him by his CV.

It was a very auspicious beginning, even if I did not know or grasped it. Roberto would become my mentor, supporter and friend.

From then on, IVIC played a huge role in my life. I spent three summers as an intern. Then IVIC gave me a felllowship to go get a Ph.D. abroad, with a contract that said I had to come back when I finished. How could I not? Good people, my country, lots of opportunity. After four and a half years I came back at the tender age of 28, IVIC was an exciting place to be, lots of interesting and smart people, you got the feeling Venezuela was going somewhere, in science and everything else. My life was research, my life became IVIC. I took on students, found money for research and got support from lots of people. We did good work, published papers, sent more students abroad, even started an engineering research institute.

I had some wonderful colleagues at IVIC, some have passed away, other have moved on, and some were pushed out by the revolution even if they were still doing world quality research after their retirement age. The revolution does not tolerate excellence and competence.

Not everything was ideal. Soon I learned that politics, not science, played too important a role at IVIC. At one of my first Assembly of Researchers, I was given the very impressive CV of a biologist who was up for tenure. To my surprise, 15 people, out of about 100, voted against, just because of politics. (Years later I would be very proud that I did not get a single vote against me in the same process). But the toughest part came after the 1983 devaluation. Budgets were decimated, the work I did was expensive (Experimental low temperature physics) and a roller coaster of budgets  and devaluations that has existed to this day began.

But I still thought at the time that I would spend my life at IVIC.

In 1992, there was a strike by the workers, they wanted more privileges without doing all that researchers did. I was even Sub-Director of IVIC for 21 days after the strike. (A story on its own) At that point I realized that it would be difficult to do first class research work in my field with the low budgets and all the difficulties, I began thinking that I should leave the country if I wanted to continue doing Physics. Instead, I was lucky enough to find an exciting job in finance, where I still am today.

But I spent more of my life at IVIC that at any institution so far in my life.

The revolution has not been kind to IVIC, it bypassed its bylaws to name Directors, it brought people in for ideological reasons. I am glad I was no longer there. But many people remained, working hard, truly devoted, trying to continue doing world quality research against all odds and with limited resources, teaching courses, supervising research thesis in a fairly adverse atmosphere.

And with the proposed new law of IVIC, the discussion seems to be going back to what I thought were very byzantine discussions thirty years ago: Trying to justify IVIC’s existence. IVIC began with basic science, the job it has done has been outstanding. With a budget that has oscillated between US$ 10 and 20 million per year it has been a bargain. Rounding errors in the inefficiency and waste of Venezuela’s budgets. And with this meager budgets, IVIC not only did world class research, it helped institutionalize research in Venezuela, trained thousands of undergraduate and graduate students. That would have been enough, but IVIC also helped create other institutions, such as Intevep, the oil institute destroyed by Chávez in 2003, the Institute for Engineering, IDEA and the blood processing company Quimbiotec. IVIC also helped populate Venezuelan universities with high level academics who did research in all fields, while developing technologies and doing consulting and services, a natural byproduct of basic scientific research.That’s the natural evolution of every basic research system in the world, some stay doing research for the rest of their lives, others let their drive and dreams take them elsewhere, whether it is technology, innovation or development work in the private sector.

And now some embittered and failed Chavista scientist wants to impose his ignorant vision on IVIC, wants to erase history, wants to wipe out its distinguished history to replace it with a new institution with little link to its successful past. And note that with all the ruckus of the last week after the new Bill was approved, the Government is supposedly now willing to “discuss” the Bill, not withdraw it. A sure sign that Chavismo is not going to back down, but simply entrap the IVIC community into a discussion to later approve the current monstrous Bill and say it was approved thanks to the oxymoronic Chavista participative democracy. But the end result will not be that different than what has already been approved.

This is a Government that thinks that science and technology involves buying US$ 400 million Chinese satellites (Yes, two of them!), rather than developing its own. A government that has total contempt for excellence and  expertise. A Government that does not like discussing ideas, or tolerate people that think differently. A Government that has proven to be clueless as to what science is or where it should go and has named very limited  and non-scientific characters to preside over the science sector, including the current President of the Central Bank, the current Vice-President and the current President of Corpoelec. All of them promoted to those positions temporarily to give them a perk while another position awaited for them, but who had not clue as to what science is or where it should go. But men loyal to the process, to the revolution and its destructive ambitions. None of them will raise a finger to save IVIC at this junction.

It is a wonder that they bother with something with a small significance in the scale of the huge the problems the country faces. But small men, fight small battles. They react to their resentments, hates and picayune ambitions and goals. That is all this is.

It is simply another step in the ability of Chavismo to destroy without creating reasonable or decent alternatives. Anyone that thinks they will back down from this, should think again. Chavismo likes control, not open discussion, democracy or technological progress. The “people” will be used and abused only in name, only in that they will be mentioned until Chavismo has its trophy: The destruction of a distinguished, honorable and efficient institution and what its memory entails.

An Example Of The Absurd Subsidies And Distortions Present In Venezuela

November 23, 2014

desayuno

As you all know, I go to Venezuela regularly. In fact, I just came back from there. Yesterday, right before going to the airport I had breakfast and, of course, I had to go to my friendly neighborhood arepera to enjoy the true flavor of nice local cheese and arepas, something I do at least once every single time I go. In my travels, it is incredible how I notice inflation from trip to trip. Even the chocolates I buy at the duty free store at the airport were up this time, a full 50%. They are no longer as cheap as they used to seem.

But going back to the breakfast, the picture above shows the menu I had: Two cheese arepas, a jugo de patilla and a cafe con leche grande. I was surprised at the cost, Bs. 402 for such a simple breakfast. Here is the breakdown:

Each arepa was Bs. 120

The juice was Bs. 80

The coffee was Bs. 39

Now, to get the right perspective one could calculate this at various rates. At the official rate of Bs. 6.3, it would be a scandalous US$ 63.8. At the Sicad I rate it would be a still expensive US$ 33.5, at the Sicad 2 rate it would be a still not cheap US$ 8, while at the parallel rate, it would be an very cheap US$ 3.24. Using a different perspective, the Bs. 402 represent 8.2% of the new monthly minimum salary, a clear outrage, as this is just one meal, breakfast, and there are 89 other meals every month. Which clearly show the absurdities of the Venezuelan economy.

But as I sat there reading El Nacional, the only daily left that can be purchased and has some true to what it says, I was amazed to read that Samsung had begun selling appliances, TV’s and the like, purchased at the Sicad I rate on Thursday and that people made long lines and even slept at the stores to get them.

Think about it, while people pay Bs. 402 for a simple breakfast, which is outrageous at the Sicad 1 rate, others benefit from the subsidy (and the luck!) of being able to buy appliances at that same rate. Note that this is simple populism, very few people actually benefit from the subsidy, but the image that the Government is doing something good for the people makes good headlines and many can only hope or dream that they can get their hands on one of these subsidized items. In fact, the Government makes headlines about this many times: when it calls for the auction, when it assigns the foreign currency and when the stuff finally arrives and gets sold.

Let’s try to put it into perspective, the clothes washer that El Nacional says was for sale at the JVG store, cost the equivalent of 31 breakfasts like the one above. That is, for a family of four, it is the equivalent of seven breakfasts. Cheap, no?

Which simply shows how screwed up the system is. Arbitrage is the rule of the day in Venezuela, you have to wonder how much of the stuff that arrived in Venezuela or is waiting in 243 containers at the port, will be sold and resold (or reexported to Colombia or Brazil) by those that are lucky enough to get their hands on one of these appliances.

Because in the end when you go to the store in Venezuela, you have little clue as to at what price something was imported. At Bs. 12,600, that clothes washer would be worth US$. 1,050 at the Sicad 1 rate (not cheap!), US$ 252 at the Sicad 2 rate (cheap) or US$ 101 ( a steal) at the parallel exchange rate. Thus, if anyone purchased this at the lower rate and tried to sell it for twice or three times at much in Bolivars, it would seem like a good deal and it would be the intermediary that was making most of the profit.

But the absurdity and the distortion is that the Government gives out money for this, which in the end is a “luxury”, in a country where there is poverty (and increasing) and people are having a hard times making ends meet.

Picture added from comments, sent by Ira, the Arepa Lady from Barinas at Walmart:

HarinaPanGirl

 

All The Wrong Things About Minister Jaua’s “Nanny” Affair

November 9, 2014

Elías-Jaua-AFP

The Elias Jaua ¨Nanny case¨ has so many edges, that I have been trying to establish a hierarchy of the many things wrong with this case. For those who have been living in the Artic Circle, here are the basic facts of the case: Jaua, a former Venezuelan Foreign Minister, now Minister for Communes, went to Brazil, on an official/unofficial trip, reportedly on a private trip, as he needed to have his wife treated at the Syrian-Lebanese Oncology Hospital in that city. Reportedly, he then had his mother in law flown in, with the family Nanny, in a PDVSA jet and on a special flight. As they went through customs on Sao Paulo, a gun was found in the Nanny’s briefcase and she was detained. Later, the Government of Brazil protested, via its Foreign Minister, for Jaua’s “unofficial” trip, which included the signing of agreements with various Government (City of Curitiba) and non-Government groups (Movimiento Los Sin Tierra). The Nanny has been released, but awaits trial. Jaua argues his trip was perfectly valid and he told the Nanny to remove the gun from his briefcase, which contained documents which had little to do with his trip to Brazil. The National Assembly refuses to investigate the affair. Nobody in Government really wants to investigate Jaua.

How many things are wrong with this picture?

Too many in my opinion. Just too many:

-The one a lot of people have focused on, has been the fact that Jaua used a PDVSA jet for his personal use, or at most an unofficial use. This is clearly corruption, but this has become normal during the years of Chavismo. PDVSA has a fleet of planes that has been ready to fly anyone from Antonini, to General Carvajal, to Cuban officials anywhere they want, upon demand. Yes, it is illegal, it is corruption, but in the end, nothing new there, La Carlota airport has been closed to private traffic for 11 years, but you see the planes (PDVSA and Government) take off and land daily from it.

-How about that gun in Jaua’s briefcase?  To me, this is more interesting, a Government that claims to be disarming the population, because it is concerned with violence, but then a Minister carries a gun in his briefcase and it is hard to believe the Nanny, “forgot” or could not find the revolver in the briefcase. Hard to believe. What does this say about the mental and emotional state of these Ministers that not only go around surrounded by armies of bodyguards, but are also carrying? What for? What are they afraid of? Does Jaua know how to use the gun? Does he have a permit? Does he think nothing of bringing it to another country?

-The unannounced visit. This is also quite interesting. The trip became an “official¨visit, only after the Nanny was caught with the gun and jailed. Except that the Brazilian Government knew nothing of the trip and complained after that fact via diplomatic channels and publicly. Jaua apparently met with groups and signed agreements, but reportedly this was an excuse brought up afterwards to justify the “Nanny’s” trip. Jaua has said little of what ails his wife, but he has also said little of what the agreements have to do with his Ministry or his responsibilities in Venezuela. He probably never expected the friendly Roussef Government to complain about his trip.

-The Nanny. Some Venezuelans justify Jaua having a Nanny. Why should not he have one if it is so common in the country? Well, to begin with, it is not as common as it used to be, because it is no longer as cheap and only wealthy people can afford to do it. But more importantly, Minister Jaua is not a wealthy bourgeois oligarch ( Or is he?), but a supposed leader of a radical “revolutionary” process. He is a self-confessed “Tira Piedra” (Stone Thrower) who has become more radical with time. But wait. the “Nanny” is not a recent addition to the family. She has been with the family for about ten years, when Minister Jaua was barely beginning his revolutionary career (He was actually doing a Masters Degree at the time). But more importantly, the “Nanny” goes everywhere. She is not stay at home Nanny, but a frequent flyer Nanny, needed wherever the family may be.It makes life easier for everyone.

Because in the end, the new revolutionaries are as bad as the old ones. Jaua may have become more radical with time, according to his own words, but more of an oligarch and bourgeois as time went by. In fact, his kids go to a well known private school in Caracas, where they mingle with the upper classes and since it is a “foreign school” they also befriend the children of diplomats and expats. Thus, Mr. Jaua’s radicalism and revolutionary spirit seems to end at the door to his home. Like so many others in the Chavista Government he hires his wife. That gives them a double salary hosuehold and I guess in their mind justifies the need for a Nanny. Nepotism is not a word used by Chavismo.

And while Mr. Jaua keeps accusing Miranda Governor Henrique Capriles of neglecting his duties, he goes around the world promoting the Bolivarian revolution and not doing his job. This is nothing new, Argentina once refused to accept him as Ambassador, because he seemed to be interested only in promoting the Bolivarian revolution.It seems this is his life, holding positions, but always just dong politics and promoting the revolution. As Minister of Agiculture, Jaua did nothing more than expropriate, but little to promote the use of the lands he took over.

And the briefcase had little of interest to Brazil or the Venezuelan Government. Most documents were about how to win next years election, revolutionary processes, the Government’s political agenda in Venezuela and how to stay in power. I guess Jaua really worries about losing his status as an oligarch. But never mind, his kids are now fluent in another language and he can always send the Nanny to accompany them if necessary.

But the deeper question is how these guys mutate from revolutionaries to oligarchs so fast. At which point did Jaua start betraying those radical ideas that took him to such important positions? Shouldn’t the kids of a revolutionary go to public school with el “pueblo”. How did he get away with sending his kids to this foreign school, while the same institutions were under fire from the revolutionary Government? How do his kids (now adolescents) perceive the world and their father in this potpourri of conflicting ideas? How many nannies does the Jaua family have?

There is something profoundly wrong about this sordid affair. These are the “radicals”, the tira piedras, the encapuchados of the revolution. Their revolution has the consistency of tapioca and their world is a an incredible farce in which they have become the new oligarchs.

And they know it.

Venezuela: Is Default Truly A Four Letter Word?

October 22, 2014

default

Whenever people mention the possibility of default for Venezuela, they talk about the dire consequences of such a possibility. Among other concerns, people always mention that trade finance shuts down, access to new borrowing in the international credit markets simply ceases to exist, assets abroad can be attached, there are long lasting effects on economic growth and default usually is followed by a period of political instability, including coups, if the population believes that defaulting will be a negative for them.

But how much of this is true and how much of it would apply to Venezuela if it defaulted? I have been looking at this question for a while and I will give you my conclusion right off the bat and later tell you why: Default does not appear to have in most cases the dire effects predicted, it does not appear to be the four letter word that most think it is. Not only are the effects of defaults varied, but in the case of Venezuela, after so many years of exchange controls the impact on trade may be much more limited. Unfortunately, the positive effects on exports that defaults have should largely be absent in the Venezuelan case.

Let’s look at each of these:

Assets Abroad

Let’s start with the most important factor that Venezuela would face if it defaulted: assets abroad. With PDVSA owning Citgo, refineries and tankers , it would be too risky for PDVSA (or even Venezuela) to default and not have investors go after Citgo’s assets in the US. Judges would be very sympathetic to the attachment of these assets which likely represent near half the recovery value of PDVSA bonds. This is perhaps the biggest obstacle to Venezuelan authorities even considering even the possibility of a default. It is also the reason why investors have been concerned over the possible sale of Citgo or parts of Citgo, as it likely eliminates the most significant factor why Venezuela would not consider a default. Thus, it is my view that PDVSA will not even think of a default until, when and if, these assets are sold, a process which could take at least a year to be completed. And it is likely that Venezuela would not consider it either, as Venezuela, being the sole owner of PDVSA, would also risk the attachment of PDVSA’s assets, or at least, extended legal action abroad over them. It would not be difficult to show that there is little difference these days between PDVSA and Venezuela.

No access to international markets

The second most important reason why Venezuela or PDVSA would not want to default, is because it would lose access to international markets. It could go the way of Argentina, and issue “local” law bonds, but this has proven to be very expensive. Venezuela already has to pay high interest rates, imagine what it would be like if it defaulted. So far, Venezuela has avoided paying huge coupons, using the perverse mechanism of issuing bonds in exchange for Bolivars at the official rate of exchange with a low coupon, which would trade at a low price in US$. Perverse, because in the end future generations have to pay the capital, while the bonds are issued to support an absurd foreign exchange system. Venezuela issues dollar denominated bonds to be sold at an artificial rate of exchange, but the country or PDVSA get no dollars  for the issuance, but rather create a liability down the line in foreign currency.

But while everyone thinks of Argentina in 2001, when gauging the impact on access to international markets, people seem to forget that most countries have become serial “defaulters” and returned to markets. Russia defaulted in August 1998, but between Aug. 1999 and Feb 2000 it had restructured all its debt and has been back borrowing in international markets since then. The Ukraine defaulted in 1998, then again in 2000, with most bondholders accepting terms. The Dominican Republic defaulted in 2005, but restructured bonds with the same terms, but a five year extension, which bondholders welcomed.

The problem is that not all defaults are created equal. Some countries have liquidity problems, others know they can’t keep paying long term and finally, some countries simply decide they “can’t” pay. The last one, is political decision and it is a matter of whether they can or not survive with it. Some argue, that there is such a thing as an excusable default, whereby both the creditors and debtors need to renegotiate because it is the optimum solution for both. In Argentina’s case, that country managed to restructure its debts almost forcefully, appearing to gain a victory, but years later, it is still fighting that result.

But in the case of Venezuela, the biggest reason for not defaulting may be that its biggest creditor is China. And that country, or its banks, have expressed in no uncertain terms, that Venezuela should not default, can not default. China is willing to be flexible, but it repudiates default. In some sense, the decree on Oct. 10 th. changing the terms of the agreements with China, whereby Venezuela sends oil to China to pay for loans, represents the acceptance by that country that Venezuela is having problems paying the loans with oils. It wants to help, but it prefers to change the terms that even give the impression that Venezuela has defaulted with China in the sense of Hausmann and Santos. Politically, this may be the strongest reason for Venezuela not to default, but faced with a liquidity crisis, what would the Maduro Government do? Or any other one, for that matter?

Default creates immense barriers for trade

This is one of the dire consequences that is most noted when talking about the possibility of default, be it Venezuela or any other country. Except that things in Venezuela are unlike any other country in the world. In the “old” days, to import, you needed letters of credit issued or backed by local banks. But when you have spent ten years under a fairly strict currency control regime system, when banks are limited to 15% of their equity in foreign currency, the same banks stop issuing letters of credit that could one day ruin them. Thus, with Cadivi, the letter of credit system was replaced by cash at the bank, to pay Cadivi (today Cencoex) approvals, while your suppliers assigned you a credit line: They are willing to ship to you an x amount of money in goods, but if the Central Bank does not pay any “Autorización de Liquidación de Divisas” (ALD) corresponding to that amount, shipment will be suspended temporarily, until some ALD is paid to reduce the amount owed. Lest you think that this is not a cumbersome process, here is a diagram of the whole thing from a well known local bank (remember step VI can take place and VII may never happen, but the goods have been sold):

cadiviThis process could be slowed down in an event of default, but it is already so long and complicated, that it will be business as usual. In fact, some of the more sympathetic countries in the region will jump with joy, if they can intermediate or supply products that used to come from Europe or the US to Venezuela if the money can not flow through regular channels when the BCV pays imports. Recall additionally that the Government has become one of the main importers in the county too.

Venezuelan oil shipments should be considered separately. Absent the assets abroad, which will take time to get rid of, the only risk will become the shipping of oil in Venezuelan tankers, a fleet worth some US$ 1 billion. PDVSA could always export FOB to countries where there was a legal risk of being attached or impounded. The oil would then belong to the other party and thus immune to being impounded.

Logistics would, of course, become very difficult and many suggest the Government or PDVSA do not have the people to do this. But I have heard that argument before and the revolution is still going on 16 years afterwards. At each step, whether it was exchange controls, firing 20,000 PDVSA workers, not paying imports, or dividends or taking charge of businesses, people predicted the end of the Chavista revolutionary world. And here we are. There may be interruptions in oil exports, but a way will be  found and maybe, another revolutionary enterprise or magnate would have been born. Chavistas are experts at that.

Economic Growth and trade after default

This is the area where economists seem to disagree the most. While it is true that the years following a default are bad for trade and GDP growth, it is also true that in many cases, the years prior to the default were just as bad. Argentina had unemployment grow sharply before default and exports never wavered. GDP did contract, but never by the 8% predicted by economists and there was a boom from 2003 on, whereby GDP grew by almost 9% for at least four years.

But Venezuela is no Argentina. There would be little advantage to exporting given that Venezuela only exports oil. But at the same time, GDP is not precisely booming in Venezuela right now. The only true advantage to a default would be that the Government would be able to spend more, without control and for electoral purposes, the same movie that got the country to where it is today. Thus, Venezuela’s exports and the economy are unlikely to benefit much from a default, the opposite from what would occur in most countries.

Conclusions

In the end, if a restructuring or default were handled properly, it would not have the dire consequences most people think it would have. The country would function, exports would flow, imports would also continue flowing. But there would be little economic gain, given that Venezuela has little to export other than human resources and those are being exported en mass as we speak. But maybe it is too much to assume to believe that this Government can handle a default gracefully or intelligently. In the end, a default favors Chavismo in terms of politics, but as long as Citgo is owned by PDVSA and the Chinese have any influence, it sounds unlikely that the Government will dare to take such a difficult step. Watch out for both!

ExxonMobil Decision A Win For Venezuela

October 12, 2014

Finally the arbitration panel of the World Bank, the ICSID ruled on the compensation for ExxonMobil over the nationalization by the Venezuelan Government of its Cerro Negro and La Ceiba projects, in a 138 page decision published this week. That there would be compensation there was no doubt by now, the only question was how large it would be and whether the panel would say anything about the relationship between its award and that of the International Chamber of Commerce in New york, where ExxonMobil was awarded US$907 million in 2012, which was covered in detail in this blog.

As expected, both sides claimed victory. The same way that both side fought with extremes during the case, Venezuela saying it had to give little to ExxonMobil in compensation and ExxonMobil asking for absurd amounts that people somehow took seriously in Venezuela. This has led many to believe that Venezuelan won huge, because in the end it will “only” have to pay a total of US$ 1,943 in compensation for ExxonMobil’s 41% stake in the Cerro Negro project. Exxon claimed victory and Venezuela said it was satisfied with the decision and that it would pay after November this “manageable” amount.

But the truth is that the number are not that far away from what analysts believed would happen and they are very far from what either side wanted. In fact, while most estimates were around US$ 10 billion for both ExxonMobil and ConocoPhillips (which is 2.5 times bigger than Cerro Negro), there were estimates as low as US$ 5.6 Billion.

But let’s look at the facts of the case prior to this week:

i) ExxonMobil was asking for US$ 14.5 billion in compensation (page 52 of decision), arguing that if it had not been expropriated, the 120,000 barrels per day (bpd) produced could have been expanded to 344,000 bpd by 2014. While this was feasible, the original project had a target of 120,000 bpd, there was never any authorization to expand it and it was clear none would not be given by the Bolivarian Government. This is typical over reach when you sue, you include everything asking for the moon, hoping the final award will be what you want. Dismissing this absurd request cut ExxonMobil’s claim by a factor of 2.4 to US$ 6 billion.

ii) On the opposite side, Venezuela was only offering US$ 353 million (page 57), based on a price cap set forth in the association agreement, from which the country would subtract US$ 238 million from the repurchasing of the Cerro Negro bonds by PDVSA.  The tribunal dismissed the price cap argument based on the laws that created the association, as well as subtracting the payment of the bonds. .

But let us also look at statements made by Venezuela on the case, which were purely grandstanding: “Venezuela considers the ExxonMobil case closed” said in 2012 Rafael Ramirez, the same one that claimed this week the decision was “just”. Or “the book value is less than US$ 750 million” said Ramirez on a different occasion and that is what would be fair to pay. But the best contrast may be what Hugo Chávez said in 2012 “From now on I tell you: Venezuela will not recognize any decision by that Ciadi (Spanish acronym for ICSID)”, which he said after Venezuela “won” the ICC case.

So, given this. Did anyone score a victory this week?

Let’s look at this week’s numbers and facts:

The ruling: The arbitration panel ruled in favor of ExxonMobil, deciding that it had no jurisdiction over tax increases to the participants of the project, but it did have jurisdiction over the remaining claims, including the imposition of an extraction tax, production limitations imposed by the Venezuelan Government and the actual expropriation of the projects.

No jurisdiction over tax increases means that there would be no compensation for that part. Subtract that from the US$ 6 billion requested.

The Compensation: The final award given to ExxonMobil and its affiliates is: a) US$ 9.0 million for the forced production cuts in 2006 and 2007, b) US$ 1.411 billion for the investment in the Cerro Negro Project c) US$ 179.3 million for the expropriation of the La Ceiba project. This amounts to a total of US$ 1.599 billion dollars plus 3.25% interest since the date of expropriation (June 27th. 2007) to the date on which payment is made. From this amount, the arbitration panel ordered the subtraction of the US$ 907 million awarded by the International Court of Arbitration (ICC) in December 2011, which has been paid in full.

If PDVSA pays this in November, as it has announced, I calculated the interest to be US$ 345.2 million, where I separated the interest due in the original US$ 907 million of the ICC decision, paid in early 2012 and the interest on the remainder US$ 1.1 billion since June 27th. 2007. This gives a total of US$ 1.943 billion for the award, minus the US$ 907, which would give a total bill due of US$ 1.036 billion, assuming PDVSA pays in November.

The award for La Ceiba is easier to judge. ExxonMobil asked for US$ 179.3 million. It was awarded exactly US$ 179.3 million for its half of the project. (The other half was owned by a Canadian company which accepted US$ 75 million in negotiated compensation). A small victory for ExxonMobil.

Obviously the award is on the low end of things, which is the reason that I consider this to be a slight win for Venezuela. But the actual reason the award is on the low end of things is quite ironic: Venezuela argued that country risk (it’s own!) was high and the discount rate used in the calculation of the payment should be near 20%. In the end, the panel used 18% versus ExxonMobil’s proposed 8.5% which made a roughly US$ 1.5 billion difference in the compensation.

This is what Venezuela argued:

“The Respondent (Venezuela) contends that the CAPM methodology is of little relevance in determining the value of an international oil project because it does not take into consideration the country risk. According to the Respondent, Prof. Myers has relied on a single, inappropriate method, whereas Respondent’s experts have used four separate methods, ICAPM and country risk survey (“market acquisition approach”), and backward- and forward-looking data (“make-whole approach”). These four methods resulted in discount rates “within a relatively narrow range”, which the Respondent’s experts averaged, yielding a discount rate of 19.8%”

Thus, the same Government that is always complaining that the markets demand such a country premium when it sells it bonds, turns around and cheers for the high country risk they have created by their mismanagement of the economy. .

Oh! The pretty revolution!

So, technically, ExxonMobil got less because the revolution has made the country so risky. Strange, but not only true, but also correct from a technical point of view. But I don’t believe analysts were using such a high rate in their calculations.

If ConocoPhillips was 2.5 times larger, then you can expect this decision to establish some precedents and that case will be 2.5 times larger, plus a bit more because that panel already ruled Venezuela negotiated in “bad faith” with ConocoPhillips. I don’t know how much that will cost, but say it takes it from 2.5 times to 3 times and ConocoPhillips will be awarded with interest around US$ 6 billion. This gives a total of US$ 8 billion for both cases, below the “average” expected by markets of US$ 10 billion between the two projects.

Yes, it is low, but ISCID awards have always been on the low side, this is after all, the second highest award ever after the Occidental Petroleum-Ecuador case. In fact, two weeks ago, the ICSID awarded Canadian company Gold Reserves US$ 730 million in its arbitration case against Venezuela in an award that surprised many by its large size. The company started asking for US$ 5 billion, was cut down to US$ 2 billion and was awarded US$ 730 million after investing some US$ 300 million in the Las Brisas gold project. Venezuela has not said what it thinks of this award, whether it will pay it or not.

Yeap, a slight win for Venezuela. But I get the feeling the real winners are the lawyers on both sides.

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