There is an article today in the New York Times, which while factually correct, seems to me to be a little late to the game in explaining to its readers how Chavismo has “vanished” the profits (And equity too) of private companies, whether they are Venezuelan or not.
Chavismo has never played by the rules, whether international or national. It has ripped off the Venezuelan people by claiming to care for them, while allowing inflation to soar and wasting the oil windfall of the last decade on propaganda, incurring in new debt and simply doing whatever was necessary to preserve Chavismo in power. And it continues to do so.
But to pretend this is a new phenomenon, or that it only has to do with the most recent devaluation in Venezuela, is to ignore fifteen years of Chavismo as well as eleven years of exchange controls. Not to mention the total lack of scruples by Chavismo to steal, lie, bully, ripoff and deceive multinational and national companies, accustomed to people being honest and respecting the laws and customs of business and trade.
When Chavismo imposed foreign exchange controls in February 2003, the Bs. 1.59 per US$ rate was established as a way of protecting international reserves and the Government promised to make that rate available to bona fide companies in import and manufacturing, as well as allowing people to buy at the controlled rate for some of their needs. The system and the controls allowed companies to repatriate profits and even capital, if required, you just had to follow certain procedures to make sure your needs and requests were real.
Since the Government imposed certain limitations, a parallel “swap” market developed immediately, as people realized that the Government had not banned exchanging two properties, such as a security denominated in Bs. for one denominated in US$. This market took a while to develop, as people discussed its legality, some companies were afraid to use it and the Government and the Government kept talking about issuing a Bill that would make it a crime to exchange money outside of the official controls.
But about two years after imposing exchange controls, the Venezuelan National Assembly approved the so called “Foreign Exchange Illicits Bill” which did penalize buying or selling dollars, but actually exempted “securities” from the Bill, essentially saying that it was healthy for a parallel market to exist.
This was a critical step in the development of the swap market (mid-2005 or so), as most companies started trading in the swap market to solve temporary foreign currency (or Bolivar!) needs and even to speculate with the currency.
But few companies used the swap mechanism to repatriate dividends. The argument was that why bother doing this, when the Government, via Cadivi, was going to give them the foreign currency for repatriation at the official rate of exchange.
By the time the law was approved, the official exchange rate was around Bs. 2.1 per US$, while the swap rate was maybe 20-30% higher.
But then things got complicated. Just as Chávez began using reserves for parallel funds, squeezed PDVSA for social spending and issued debt to cover shortfalls, the international financial crisis of 2007-2009 hit and oil prices went down. Since Chavez needed more and more funding for his exploits, Cadivi became stingy, giving less and less for dividend repatriation which mostly (90%?) ended by 2007.
The Government kept promising that it would pay and companies actually believed it. But multinationals home offices began pressing for some form of repatriation. There was one problem though. if you bought at the swap rate, you had to take a loss in earnings. Some companies started doing it, others not, they were worried about their reputation, I mean, what would happen if Chavez accused them publicly of using the swap market, whether it was legal or not. Their reputation was at stake.
Meanwhile, the swap exchange rate closed at Bs. 3.3 in 2006, 5.6 in 2007, 5.6 in 2008, 5.9 in 2009, as the Government began actually intervening in the swap market, while refusing to devalue until January 2009 from Bs. 2.1 to Bs. 4.3 per US$.
By now, Chávez realized that he could rip off foreign investors without much trouble. In January 2007, he “nationalized” telecom company CANTV offering to pay US$ 16.85 per share, despite Carlos Slim offering US$ 21 per share a few months earlier. Slim’s offer was never processed by the Government and the Government kept the fiction that it would pay a dividend before the tender expired, which never happened. It also took over Electricidad de Caracas, the partners that did not agree to be a minority in the heavy oil fields and even Chavez’ Argentinean buddies in Sidor. The first two got paid fast. The oil fields are still in arbitration and the latter got paid because of the close relationship with the Kirtchners.
Nobody has gotten paid since.
And while today’s NYT article would make you believe that it was the recent devaluation that screwed multinationals, nothing is further from the truth. Each time the Government has devalued, it has reduced its revenues in US$ and its earnings and since 2007, it has all been vapor profits, monopoly money, as almost no dividend repatriation has been approved by CADIVI, now Cencoex. Only companies that repatriated via the swap market before it was shut down in 2010, managed to salvage, yes, salvage, some of their profits.
Thus, companies took a 50% cut on both revenues and profits when the Government devalued in Jan 2009, a 46% hit when it devalued in February 2013 and a 63% hit when Sicad 2 was created.
And counting, because it is all still vapor earnings, revenues and profits. The Government is not going to pay them at the Sicad 1 rate either. Thus, some companies mentioned in the NYT article have decided to take the loss. Because they can. You see, before Sicad 2 existed, accounting rules say they had to follow the Government foreign exchange rates, even if they knew they would never get the money. Once Sicad 2 was created, serious companies, like Brink’s, decided to take the worst case and take a hit of 80% on their earnings using the Bs. 50 per US$ exchange rate, versus the Bs. 10 or whatever Sicad 1 rate is.
Think about it, wiping out 80% of your revenues and profits…
They actually could have said 100%, we will never get paid…
The things is, Brink’s is a minority and most companies are still “wishing” and lying to their home offices or simply hoping they will get paid at a rate below Sicad 2, so that it does not look so bad and their bonuses don’t suffer as much.
But if I had to guess, most of them, if and when they get paid, will get paid closer (above even) to the current Sicad 2 rate than the Sicad 1 rate they are booking their profits at today.
And note this includes earnings for 2007, 2008, 2009, 2019, 2011, 2012, 2013 and 2014 and counting. We are talking eight years of Monopoly money, virtual profits for all.
Not exactly a recent event.
Nothing has changed, I wrote an article on this last December, entitled “Virtual Profits in Venezuela” in which I warned companies that they will get screwed yet again.
Companies seem to be getting the message, but many rely on “hope springs eternal”, particularly airlines.
Airlines are a very particular animals. They are not trying to repatriate profits, but revenues. This is worse. They sell tickets in US$ at the official rate of exchange and are supposed to received the foreign currency immediately or fast, as per IATA agreements. Except they started seeing delays in payment and they decided to increase prices as a hedge. But they still have not been paid, nor do I think they will be paid at Bs. 4.3, 6.3 or even 10, look north friendly airlines, you may get part of the debt paid above Bs. 25 per US$, but not all of it. You have been ripped off. Period.
Why do companies behave like this?
It depends. If you are a multinational you really believed that BS that you are in Venezuela for the long haul. Except you never thought the long haul would last so long.
If you are local, you want to survive. And you do, until you can’t, like the many companies that the Government has not repaid for their CADIVI imports at Bs. 6.3. In January 2014, the Government said, we don’t have enough money to pay you. So, they still hope. Another ripoff.
Or the oil service companies that accept PDVSA paying them in bonds, which implies a discount. At least they get something.
But the locals are the ones most screwed by the revolution. If they are not paid, they are dead. Most that have yet to be paid, will never be. The revolution has no scruples. They already screwed them with the devaluation in 2012, what´s another one? Chavistas thinks all private entrepreneurs are wealthy.
There are other cases, but you get the point. The point is, this is nothing new, the revolution has been ripping off the private sector for eight years and counting and there are those that still think they will get paid. And the international press is starting to notice. To say nothing of the regulators that have allowed financial reporting based on these virtual profits and fake exchange rates.
As for the long haul, sure, it will be a long haul, but only to take what is left of your stuff back home.