HOW VENEZUELANS OBTAIN FOREIGN CURRENCY IN THE

UNCLAS CARACAS 001215

SIPDIS

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR KLINGENSMITH AND NGRANT

E.O. 12958: N/A
TAGS: EFIN ECON PGOV VE
SUBJECT: HOW VENEZUELANS OBTAIN FOREIGN CURRENCY IN THE
PARALLEL MARKET

REF: A. CARACAS 03134

B. CARACAS 02826

C. CARACAS 03601

D. CARACAS 00512

E. CARACAS 00659

F. CARACAS 03782

--------------
SUMMARY
--------------


1. (SBU) Average Venezuelans have found a variety of ways,
beyond the official Foreign Exchange Administration
Commission (CADIVI),to convert Bolivars to foreign currency.
Options include trading Bolivar-denominated bonds for
foreign currency-denominated bonds, purchasing
dollar-denominated BRV and Argentine bonds, and buying
American depository shares (e.g. shares of local
telecommunications company CANTV that are tradable for U.S.
dollars). Most of these "parallel market" transactions are
legal, or at least, arguably legal. Financial contacts
estimate the parallel market transactions (for Bolivars and
for foreign currency) to be between USD 15-25 million daily.
Most financial sector contacts believe that the black market
is much smaller. We expect the parallel market to remain
strong given the uncertain political environment.

--------------
CADIVI: THE OFFICIAL MARKET
--------------


2. (SBU) In the aftermath of the general strike which shut
down petroleum production from December 2002 through January
2003, the BRV established exchange controls and required that
the Foreign Exchange Administration Commission (CADIVI)
administer all foreign exchange transactions (reftel A).
However, at the time, the BRV did not establish penalties for
failure to comply with the law. In September 2005, the
Foreign Exchange Crime Law (Official Gazette No. 38,272)
imposed penalties and criminal sanctions for illegal exchange
transactions (reftel B). As of May 2006, the official
exchange rates are 2,144 Bolivars/USD for purchase operations
and 2,150 Bolivars/USD for sale operations. (Note: We
estimate that the official exchange rate overvalues the
Bolivar by approximately 20 percent. End Note.)


3. (U) CADIVI, known for its strict application
requirements, requires a significant amount of information be
provided by applicants. This includes commercial registry,
shareholders assembly meeting report, proof of payment to
social security, tax registration number, administrators and
legal representatives, proof of payment for municipal taxes,
and proof of payments for value added taxes and federal
income taxes. CADIVI approves foreign exchange requests for
specific purposes such as imports, study and travel abroad,
family remittances, foreign debt payments, insurance, health
care, airline services, and royalties (reftel B). In March
2006, CADIVI authorized an average of USD 76 million daily in
foreign exchange requests, which financial sector contacts
estimate satisfies approximately 80 percent of the demand for
foreign currency, primarily U.S. dollars. The parallel
market serves those individuals and companies that may not
meet CADIVI's requirements (e.g., tax solvency),those
requesting foreign currency for purposes not authorized by
CADIVI, those who wish to hide otherwise permissible
transactions from the BRV, and those who wish to purchase
cheaper Bolivars at the parallel market rate or CANTV rate,
rather than the overvalued official rate.

--------------
THE PARALLEL MARKET
--------------


4. (U) Parallel market transactions fluctuate between USD
15-25 million a day, according to financial sector contacts.
Contacts say that swap transactions (commonly known as "la
permuta") are the most popular. To complete the "la permuta"
transaction, a person wanting U.S. dollars, first buys BRV

domestic bonds through a broker and then, swaps the BRV
domestic bonds for dollar-denominated government bonds of
equivalent value. The dollar-denominated government bonds
are usually BRV bonds periodically issued, or highly tradable
bonds from another country. The person then sells the
government dollar-denominated bonds to obtain U.S. dollars.
This series of transactions can also work in reverse to
purchase Bolivars.


5. (U) A financial broker contact estimates that
approximately 70 domestic brokers (those registered at the
Caracas Stock Exchange and unregistered),conduct "la
permuta" transactions, working with an offshore company, for
their clients (individuals and corporations). The Foreign
Exchange Crime Law (passed in September 2005) includes a
loophole for operations in securities, originally advocated
by the BRV's Finance Ministry to allow it to continue issuing
dollar denominated bonds purchasable locally in Bolivars,
which many Venezuelans have interpreted to allow these
transactions. However, more conservative financial
institutions consider the transactions legally questionable.


6. (SBU) Another financial contact offered a variation on
the "la permuta" transactions, whereby the broker purchases a
BRV bond in Bolivars for the client and then sells the same
bond overseas to his foreign affiliate. The foreign
affiliate pays for the bonds in U.S. dollars or other foreign
currency. The process generally takes 3 days. Our contact
preferred these transactions to "la permutas" because the
transactions, he claimed, had been legally certified by an
international accounting firm.


7. (SBU) Venezuelans wishing to purchase U.S. dollar can
also invest in American depository shares (ADS),traded on
the Caracas Stock Exchange. Contacts say that about USD 1
million is traded through ADS each day. Local
telecommunication company CANTV is the most well-known, but
other options exist, including the paper products producer
Mampa, the local steel company SIVENSA, and the state
electric company Electricidad de Caracas. Brokerage houses
buy and sell ADS and package seven ADS to sell for U.S.
dollars as an American depository receipt (ADR) on the NYSE.
(Note: CANTV selected Banco Venezolano de Credito as the sole
financial intermediary to trade CANTV ADS, packaged as ADRs,
with New York. The Bank of New York reportedly handles the
CANTV transactions in the United States. End Note.)


8. (SBU) Brokers calculate the implicit rate for the CANTV
dollar and the "la permuta" dollar based on each day's
trading action. For April 20, 2006, the CANTV exchange rate
was 2,550 Bolivars per U.S. dollar and the "la permuta" rate
was 2,580 Bolivars per U.S. dollar. A financial broker
contact warned that the time delay to complete the CANTV
transaction creates some uncertainty about the implicit
exchange rate for the purchaser. Another contact estimated
that the CANTV transactions take approximately 3 weeks.
These transactions also work in reverse; those interested in
trading U.S. dollars for Bolivars can go to Bank of New York
to purchase ADRs to trade back to ADS for Bolivars. One
financial sector contact recommended this option to clients
wishing to bring money into Venezuela while avoiding the
uncertainty of capital gains taxes. According to this
contact, clients pay a 1 percent tax on the transaction
earnings and have no further tax liability.


9. (SBU) To change Bolivars to U.S. dollars, Venezuelans can
also purchase dollar-denominated BRV or Argentine bonds
(reftel C and D),purchasable locally in Bolivars and have
them resold abroad. In the case of BRV bonds, brokerage
houses place orders for the desired number of bonds with the
Finance Ministry, which allocates the number of bonds to
buyers. According to a financial broker contact, the Finance
Ministry sells the bonds at the official rate, but the market
adds a premium to the bond price because the bond is highly
demanded by the market. Depending on market conditions, the
range for the implicit exchange rate for Finance Ministry
bonds could be between 2,300-2,500 Bolivars per U.S. dollar
versus the official exchange rate of 2,150. In the case of

the Argentine bonds, the Finance Ministry allocates Argentine
bonds to financial institutions, who then resell them (reftel
E and F). A financial broker described these transactions as
slightly inconvenient for potential investors because the
availability of these bonds is sporadic and the transactions
are one-way (exclusively Bolivars to U.S. dollars). Also,
the Finance Ministry may not allocate to a potential investor
the entire number of bonds the investor requests to purchase.


10. (SBU) Other transactions involve trading foreign
currency with unauthorized dealers (black market) or
receiving payment for domestically provided goods and
services in accounts abroad (typically, in the United
States). One financial contact noted that the BRV pays some
domestic service providers directly to their accounts abroad.

--------------
COMMENT
--------------


11. (SBU) Venezuelan private sector demand for foreign
currency through the parallel market continues to be strong
as Venezuelans try to hedge their bets in advance of an
expected devaluation in 2007 and the uncertain political
environment. The BRV appears tolerant of the parallel market
and will likely remain so, as long as the parallel market
offers the BRV some convenience. For example, the BRV has
benefited from its participation in the parallel market with
the selling of BRV bonds and Argentine bonds. To date, the
BRV has not issued regulations for the New Foreign Exchange
Crime Law, which allows legal uncertainty about some
transactions to continue. This legal uncertainty allows the
BRV flexibility to determine potential oversight options.

BROWNFIELD