Chapter 5

Mini Case

The Venezuelan
Bolivar Black
Market1
 Mini-Case: Venezuelan
Bolivar Black Market
It’s not clear whether Mr. Chávez understands what a
massive hit Venezuelans take when savings and
earnings in dollar terms are cut in half in just three
years. Perhaps the political-science student believes
that more devalued bolivars makes everyone richer. But
one unavoidable conclusion is that he recognized the
devaluation as a way to pay for his Bolivarian
“missions,” government projects that might restore his
popularity long enough to allow him to survive the
recall, or survive an audacious decision to squelch it.
-- “Money Fun in the Venezuela of Hugo Chávez,” The Wall
Street Journal , February 13, 2004, p. A13.

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 Venezuelan Bolivar

"Rumor has it that during the year and

a half that Venezuelan President Hugo
Chávez spent in jail for his role in a
1992 coup attempt against the
government, he was a voracious reader.
Too bad his prison syllabus seems to
have been so skimpy on economics and
so heavy on Machiavelli."
“Money Fun in the Venezuela of Hugo Chávez,”
The Economist, February 13, 2004.

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 The Venezuelan Bolivar Black
Market
• It's late afternoon on March 10th, 2004, and Santiago opens the window of his office in
Caracas, Venezuela. Immediately he is hit with the sounds rising from the plaza-cars honking,
pro-testers banging their pots and pans, street vendors hawking their goods. Since the
imposition of a new set of economic policies by President Hugo Chávez in 2002, such sights
and sounds had become a fixture of city life in Caracas. Santiago sighed as he yearned for the
simplicity of life in the old Caracas.
• Santiago's once-thriving pharmaceutical distribution business had hit hard times.
• Since capital controls were implemented in February of 2003, dollars had been hard to come
by. He had been forced to pursue various methods-methods that were more expensive and not
always legal-to obtain dollars, causing his margins to decrease by 50%. Adding to the strain,
the Venezuelan currency, the bolivar (Bs), had been recently devalued (repeatedly).
• This had instantly squeezed his margins as his costs had risen directly with the exchange rate.
He could not find anyone to sell him dollars. His customers needed supplies and they needed
them quickly, but how was he going to come up with the $30,000-the hard currency-to pay for
his most recent order?
Political Chaos
• Hugo Chávez's tenure as President of Venezuela had been tumultuous at best since his
election in 1998. After repeated recalls, resignations, coups, and re-appointments, the
political turmoil had taken its toll on the Venezuelan economy as a whole, and its currency in
particular.
• The short-lived success of the anti-Chávez coup in 2001, and his nearly immediate return to
office, had set the stage for a retrenchment of his isolationist economic and financial policies.

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 The Venezuelan Bolivar Black
Market
• On January 21st, 2003, the bolivar closed at a record low-Bs1853/$. The next day President
Hugo Chávez suspended the sale of dollars for two weeks. Nearly instantaneously, an unofficial
or black market for the exchange of Venezuelan bolivars for foreign currencies (primarily U.S.
dollars) sprouted.
• As investors of all kinds sought ways to exit the Venezuelan market, or simply obtain the hard-
currency needed to continue to conduct their businesses (as was the case for Santiago), the
escalating capital flight caused the black market value of the bolivar to plummet to Bs2500/$
in weeks. As markets collapsed and exchange values fell, the Venezuelan inflation rate soared
to more than 30% per annum.
Capital Controls and CADIVI
• To combat the downward pressures on the bolivar, the Venezuelan government announced on
February 5th, 2003, the passage of the 2003 Exchange Regulations Decree. The Decree took
the following actions:
1. Set the official exchange rate at Bs1596/$ for purchase (bid) and Bs1600/$ for sale (offer);
2. Established the Comisin de Administracin de Divisas (CADIVI) to control the distribution of
foreign exchange; and
3. Implemented strict price controls to stem inflation triggered by the weaker bolivar and the
exchange control-induced contraction of imports.
• CADIVI was both the official means and the cheapest means by which Venezuelan citizens
could obtain foreign currency. In order to receive an authorization from CADIVI to obtain
dollars, an applicant was required to complete a series of forms. The applicant was then
required to prove proof of business and asset ownership.

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 Exhibit A Official and Gray Market Exchange
Rates for the Venezuelan Bolivar

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 The Venezuelan Bolivar Black
Market
• Unofficially, however, there was an additional unstated requirement for
permission to obtain foreign currency: authorizations would be reserved for
Chávez supporters. In August 2003 an anti-Chávez petition had gained
widespread circulation. One million signatures had been collected. Although the
government ruled that the petition was invalid, it had used the list of sig-natures
to create a database of names and social security numbers that CADIVI utilized
to cross-check identities on hard currency requests. President Chávez was
quoted as saying "Not one more dollar for the putschits; the bolivars belong to
the people."
Santiago's Alternatives
• Santiago had little luck obtaining dollars via CADIVI to pay for his imports.
Because he had signed the petition calling for President Chávez's removal, he
had been listed in the CADIVI database as anti-Chávez, and now could not
obtain permission to exchange bolivar for dollars.
• The transaction in question was an invoice for $30,000 in pharmaceutical
products from his U.S.-based supplier. Santiago intended to resell these
products to a large Venezuelan customer who would distribute the products.
• This transaction was not the first time that Santiago had been forced to search
out alternative sources for meeting his U.S. dollar-obligations. Since the
imposition of capital controls, his search for dollars had become a weekly
activity for Santiago. In addition to the official process – through CADIVI – he
could also obtain dollars through the gray or black markets.

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 The Gray Market: CANTV Shares
• In May 2003, three months following the implementation of the exchange controls, a window of
opportunity had opened up for Venezuelans-an opportunity that allowed investors in the Caracas
stock exchange to avoid the tight foreign exchange curbs.
• This loophole circumvented the government-imposed restrictions by allowing investors to
purchase local shares of the leading telecommunications company CANTV on the Caracas' bourse,
and to then convert those shares into dollar-denominated American Depositary Receipts (ADRs)
traded on the NYSE.
• The sponsor for CANTV ADRs on the NYSE was the Bank of New York, the leader in ADR
sponsorship and management in the U.S. The Bank of New York had suspended trading in CANTV
ADRs in February after the passage of the Decree, wishing to determine the legality of trading
under the new Venezuelan currency controls.
• On May 26th, after concluding that trading was indeed legal under the Decree, trading resumed in
CANTV shares. CANTV's share price and trading volume both soared in the following week.
• The share price of CANTV quickly became the primary method of calculating the implicit gray
market exchange rate. For example, CANTV shares closed at Bs7945/share on the Caracas bourse
on February 6, 2004. That same day, CANTV ADRs closed in New York at $18.84/ADR. Each New
York ADR was equal to seven shares of CANTV in Caracas. The implied gray market exchange rate
was then calculated as follows:

• The official exchange rate on that same day was Bs1598/$. This meant that the gray market rate
was quoting the bolivar about 46% weaker against the dollar than what the Venezuelan
government officially declared its currency to be worth.

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 The Black Market

• A third method of obtaining hard currency by Venezuelans was through the rapidly expanding
black market. The black market was, as is the case with black markets all over the world,
essentially unseen and illegal. It was, however, quite sophisticated, using the services of a
stockbroker or banker in Venezuela who simultaneously held U.S. dollar accounts offshore. The
choice of a black market broker was a critical one; in the event of a failure to complete the
transaction properly there was no legal recourse.
• If Santiago wished to purchase dollars on the black market, he would deposit bolivars in his
broker's account in Venezuela. The agreed upon black market exchange rate was determined on
the day of the deposit, and usually was within a 20% band of the gray market rate derived from
the CANTV share price.
• Santiago would then be given access to a dollar-denominated bank account outside of Venezuela
in the agreed amount. The transaction took, on average, two business days to settle. The
unofficial black market rate was Bs3300/$.
• In early 2004 President Chávez had asked Venezuela's Central Bank to give him "a little billion"-
millardito-of its $21 billion in foreign exchange reserves. Chávez argued that the money was
actually the people's, and he wished to invest some of it in the agricultural sector.
• The Central Bank refused. Not to be thwarted in its search for funds, the Chávez government
announced on February 9, 2004, another devaluation. The bolivar was devalued 17%, falling in
official value from Bs1600/$ to Bs1920/$ (see Exhibit A). With all Venezuelan exports of oil being
purchased in U.S. dollars, the devaluation of the bolivar meant that the -country's -proceeds from
oil exports grew by the same 17% as the devaluation itself.
• The Chávez government argued that the devaluation was necessary because the bolivar was "a
variable that cannot be kept frozen, because it prejudices exports and pressures the balance of
payments" according to Finance Minister Tobias Nobriega.

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 The Black Market
• Analysts, however, pointed out that Venezuelan government actually had significant control
over its balance of payments: oil was the primary export, the government maintained control
over the official access to hard currency necessary for imports, and the Central Bank's foreign
exchange reserves were now over $21 billion.
It's not clear whether Mr. Chávez understands what a massive hit Venezuelans take when savings
and earnings in dollar terms are cut in half in just three years. Perhaps the political-science
student believes that more devalued bolivars makes everyone richer. But one unavoidable
conclusion is that he recognized the devaluation as a way to pay for his Bolivarian "missions,"
government projects that might restore his popularity long enough to allow him to survive the
recall, or survive an audacious decision to squelch it.
-"Money Fun in the Venezuela of Hugo Chávez," Wall Street Journal (eastern edition), February 13,
2004, p. A13.
• Time Was Running Out. Santiago received confirmation from CADIVI on the afternoon of
March 10th that his latest application for dollars was approved and that he would receive
$10,000 at the official exchange rate of Bs1920/$. Santiago attributed his good fortune to the
fact that he paid a CADIVI insider an extra 500 bolivars per dollar to expedite his request.
Santiago noted with a smile that "the Chávistas need to make money too."
• The noise from the street seemed to be dying with the sun. It was time for Santiago to make
some decisions. None of the alternatives were bonita, but if he was to preserve his business,
bolivars-at some price-had to be obtained.
• Post Script. Although President Chávez died in 2013, and the Venezuelan bolivar has been
devalued repeatedly and renamed the bolivar fuerte since the time of this case, it remains a
currency that is overvalued by its government and restricted in its exchange, and therefore
continues to lead a double life – officially and unofficially.

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 Venezuelan Bolivar: Case
Questions
1. Why does a country like Venezuela impose capital
controls?
2. In the case of Venezuela, what is the difference
between the gray market and the black market?
3. Create a financial analysis of Santiago’s choices and
use it to make a recommend a solution to his problem.

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 Venezuelan Bolivar: Case
Questions
1. Why does a country like Venezuela impose capital
controls?

• Capital controls allow a country to preserve a fixed rate of exchange

for its currency without risking its holdings of hard currency or
foreign currency reserves. The problem, however, is that this control
or preservation comes at a substantial cost, as many investors will
no longer be willing to invest the same levels of funds in that
country, if at all.
• Capital controls allow a country, whether Venezuela, Malaysia, or
China, to control the level and flow of capital flowing in and out of
the country. Because few countries have a problem with too much
capital flowing in, but rather with capital out flows – capital flight –
capital controls are typically utilized to prohibit massive capital
outflows following unfavorable or crises in political or economic
events

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 Venezuelan Bolivar: Case
Questions
2. In the case of Venezuela, what is the
difference between the gray market and the
black market?

• The black market is the easier to define: the trading of

currency through unlicensed or unrecognized organizations
or institutions, which by definition in these countries is
illegal.
• The gray market is the use of a legal process to achieve
what is generally considered inconsistent with government
desires or policy goals.
• Although by definition not illegal, gray market trading is
often considered inappropriate and may be politically
dangerous by the participants.

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 Venezuelan Bolivar: Case
Questions
Venezuelan Bolivar
3. Create a
Item Value Rate (Bs/$) Bolivars
financial Funds needed $30,000

analysis of CADIVI approval $10,000 1,920

Santiago’s
500
2,420 24,200,000

choices and use Remaining Funds Needed: $20,000

it to make a Alternatives:
recommend a 1. Gray Market $20,000 3,400 68,000,000
solution to his 2. Black Market $20,000 4,080 81,600,000
problem. (gray + 20% )

3. Vebonos Bonds $20,000 2,973 59,460,000

The solution criteria is to find the "best" effective exchange rate for obtaining the $30,000.
The CADIVI rate, if available for the first $10,000, is the first step. The remaining funds
needed, $20,000, is obtained at the lowest possible cost via the Veb

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