What are we talking about when we discuss Venezuela’s foreign debt? Usually, we use the term used to refer to financial debt. That’s what DAUZ trades: bonds that either the State or PDVSA issued, and that have a prospectus under New York Law. Financial Debt is the kind of debt that, if you don’t pay it, the sky caves in. Credit Default Swaps kick in, creditors seize your assets, and the country’s ability to transact with the rest of the planet comes to a stop. We have about $122 billion in Financial Debt, and we talk about it endlessly here.

But that’s far from the whole story. There’s also “non-financial debt”: a continuum of more-or-less hard commitments that may or may not be actionable in court. There’s no solid data on this debt but we figure it’s about $40 billion: $9.2 billion in pending arbitration claims and $30.9 billion in “Commercial Debt”, according to an estimate released by Ecoanalitica in April.

That last bit is money we owe foreign suppliers and companies doing business in Venezuela. Economists like to call it Commercial Debt, though it’s maybe easier to think of it as Cadivi Debt. The thing to grasp is that it’s not like the Financial Debt; it’s Debt 2.0.

Remember Schlumberger, the oil field service contractor that said it was cutting back on the work it does for PDVSA because they never get paid on time?

Debt 2.0.

All the foreign companies that have sold a kilo of rice or a car battery or a seat on a plane to a Venezuelan client and are still waiting for Cadivi to send their greenbacks?

Debt 2.0.

Debt 2.0 comes in many flavours: unpaid imports, approved but undisbursed dividends,  rents and services, and oil companies and PDVSA’s partners.

As of December 2014, we had $8.4 billion in unpaid imports, says Ecoanalitica. That includes goods that arrived in the country but never got paid for. The process involved three parties: the Venezuelan company, which had to pay its part in bolivars to the Central Bank; the foreign suppliers, who sold the goods; and the government, whose job is to take in the bolivars from the Venezuelan partner and pay out dollars to the foreign partner. In many cases everyone has already done their part except the government: the local partner already paid their bolivars, but the foreign partner is still waiting to get paid. That…well, under other circumstances you’d call that ‘fraud’ wouldn’t you?

Then – again going by the older, December 2014 Ecoanalítica numbers – there was at least $4.2 billion in undisbursed dividends. That’s profits foreign companies have made in bolivars, and have then asked to turn into dollars at the official rate – the whole point of foreign investment. The government said “yeah, sure”, but hasn’t disbursed the foreign currency, and the companies haven’t handed the bolivars to the government. Because most multinational company executives are sane, the bulk of this money is not held in bolivars. Companies have used different strategies to preserve the value of their profits like buying up real estate, buying local competitors or reinvesting the funds in machinery (when possible).

The rents and services debt include airline tickets, phone calls, and non-tangible imports. Back at the end of 2014, there were $5.9 billion in that category, and that’s the reason you can no longer make a phone call to Spain or Panama or buy an international airline ticket in bolivars.

Finally, at end-2014 we owed $4.9 billion to PDVSA’s suppliers: the whole constellation of service companies who keep the oil industry from collapsing altogether.

What are we supposed to do with this mountain of ambiguous debt?

That’ll be one of the most contentious questions any new government has to deal with. Because unlike with Financial Debt – where what’s legal, moral and financially astute all somewhat line up (pay up!) – the shoulds and musts are all a bit hazy when it comes to Debt 2.0.

One extreme option would be to say “debt is debt, we better pay everything at full value, at the official exchange rate at the time the debt was contracted.”

Setting aside the question of fiscal viability, is this a sensible thing to do?

Maybe not. Take the McDonald’s McFiesta fry-less combo, just Bs.490.

Alegra tu Balance Financiero

Say Bs.390 of that are costs, Bs.100 is profit.

Are we really ok with saying Cadivi should pay out ten bucks to McDonald’s for profits for this meal?!

It’s a burger and a coke!!

No me jodas, Ronald!

That’s a trivial example, but it illustrates a broader point: the dollar value of Commercial Debt for dividends at official exchange rates is crazy and unrealistic.

On the other hand, Ronald could also turn around and, not unreasonably, say “yes, that’s a lot of dollars, but why do you think we stuck it out in this crazy country for all these years? Precisely because the crazy policy framework legally held out that possibility.”

See how this stuff’s kind of ambiguous?

Perhaps the McFiesta example is a bit misleading. After all, at the very least here an actual hamburger is involved, and a drink, too. Somebody went into that interaction hungry and left sated. Value was transacted.

The place where the Commercial Debt gets really hairy is when you ask yourself how much of it is owed to the likes of:

sebin-derwick-associates-3

Make no mistake about it, while much of the Commercial Debt is owed to real companies that took risks to do business in Venezuela, a good chunk of it is owed to enchufados: guys who thought they had a connect at Cadivi, or at Bariven, who would be good for the dollars, and then got stiffed. Guys who over invoiced, importing 10 kg. of rice and getting CADIVI approvals for 100. Guys who defrauded the State, getting dollars in return for nothing, or left food to rot under the Puerto Cabello sun because they had already made a 3000% profit without needing to sell a damn thing.

The whole rotten panoply of Chávez era import corruption is well represented in the Commercial Debt bill. If your stomach is turned by the thought of an eventual MUD-led government taking dollars we don’t have and devoting it to paying off those fuckers… you’re not alone.

How do you separate legitimate imports from the enchufados and bolichicos? At some point a commission may, and should, be formed to look into these debts. It should be able to identify obvious cases of fake imports or over-invoicing, especially in public imports and contracts. They can recheck whether the foreign supplier is a shell company (for example, its owners are the same as those of the importing company,) or that’s it’s owned by Venezuelan government employees or their proxies – typical markers of import fraud. But the number of transactions is so large, and the tricks so many, there’s no foolproof way to distinguish proper imports from fraud. There’s no way to check on imports and transactions where the goods involved – if there were any – have long been consumed, and the paperwork looks in order.

So what to do? Well, there’s a precedent, since it’s not the first time the country has run up a suspicious bill under exchange controls. After the end of RECADI – the 80’s, Lusinchi version of CADIVI – the country was left with a large bill of unpaid imports. The policy dilemma looked uncannily like the one we have today. What did they do?

In 1990 the Central Bank issued $3.5 billion in dollar-denominated bonds, and handed them to foreign suppliers to cover RECADI obligations. (Here, we even have the Gaceta for you from all the way back then.) They issued them 20-year bonds with a 4% coupon to cover the principal, and 8-year zero-coupon bonds to cover the interest. Both could be sold in the secondary markets after one year. Since the same unrealistic exchange-rate math and suspicions applied to the RECADI debt as it does to CADIVI’s, the bonds implied a big haircut. For debts of less than $10 million, 35% was repaid, and for debts over that amount, 65% was repaid, while interests took a 30% haircut. Payments for debts under investigation were delayed.

We need not do it exactly that way, but the 1990 example provides a blueprint for how you settle the unpaid imports part: after checking for fraud cases, you apply a large haircut to all remaining debts and let the just pay for the sinners. Messy, but effective.

But that’s for the unpaid imports portion of the debt. The approved dividend part is trickier. Why? Because for unpaid imports, many Venezuelan importers already handed their bolivars. The issue now is purely between the foreign supplier and the State. You can’t ask the Venezuelan importer to pay again for something it paid for years ago already. But with the dividends, the companies kept their bolivars and likely managed to protect them from inflation, and for this reason their claim is weaker.

Say Telefónica had Bs 6.3 million in profits two years ago, and was approved $1 million at 6.3 $/Bs by the government. To protect its value, it bought office space that it can sell today for Bs 500 million, thanks to inflation. Should the country honor its commitment to let them buy $1 million for Bs 6.3 million? Or should it tell them “No way. Sell the office space, go to the new free exchange market, and buy yourself $1 million for Bs 500 million”? There’s then a compelling argument for not recognizing these commitments, and telling the companies to exchange their bolivars at a new weaker exchange rate.

The debt for rents and services can also be solved using a mix of those options: haircuts, and the free market. As for the PDVSA debt, while it’s obviously crucial, it might also be the easiest one to handle: pay with oil. With PDVSA under a new, more responsible administration, creditors might be more inclined to accept payment-in-kind to keep working for PDVSA, or agree to receive partial ownership in joint-ventures with the company as payment.

All of these arrangements will likely bring about lots of legal challenges, both at home and abroad. Knowing how long our courts take for, well, anything, foreign suppliers receiving partial payments might be better off accepting whatever the government offers that waiting who knows how many years mired in our courts.

In the end, the problem is complicated, sure, pero tampoco tanto: any foreign supplier who extended credit to Venezuelan companies was taking a risk. But then, that’s a feature of all credit everywhere. Every credit is a roll of the dice, and in Venezuela they all rolled snake eyes. But whatever the solution, the country should strive to pay at least a good number of the legitimate creditors, even if only very late and after a large deduction. Defaulting on the whole of these debts will result in Venezuelan companies being shut out of international credit for a long time. That’s no way to climb out of the hole we are in.

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27 COMMENTS

  1. Me dió dolor de estómago leer esta vaina.
    Felicitaciones a ustedes por tan buen trabajo de investigacion, pero hizo que aumentará mi nivel de arrechera.

  2. Yes, Venezuela has had a lot of precedent with exchange controls
    under 5 different presidents since 1984: LHC, Lusinchi, Caldera, Chavez and Maduro.

    Will have more in the future
    as story repeats itself, same corruption,
    same mishandling, same chinito de Recadi.
    But dollarization is a bad thing according to you.

    Debt 2.0 would not even be an issue with dollarization
    because the government would have nothing to do with commercial debt
    since it is a private matter
    and dividends would already be in USD.

    • Meanwhile, Maduro announces …
      that soon is going to announce
      more price controls.

      That soon will translate
      into more scarcity,
      more bachaqueo,
      more lines,
      less production.

      Lessons learned?
      People need to start demanding
      no more price controls!
      Because the government loves them.
      (the controls, not the people)

  3. I have this idea but its more of a sci-fi hypotetical scenario: we don´t want to be stuck forever paying the debts that chavistas made with encufados and with china, but goverments dont go broke,so In 30 we will be dealing with our own kind of bond’s vultures wether we wanted it or not, so… what would happend if we make this country dissapear from the map Somalia style? The Bosnians can’t be expected to pay up Yugoslavia’s debt, right? Wouldn’t a restructuration of this country be akin to that? We could just give independence to one of the forever red states (you cant live with people anyway) and use that as an excuse to pretend we are a totally different country and such no need to honor the debts made by that girl “Venezuela” or what ever she was called.

  4. Great piece …..one we needed to understand our situation , forcing us to face the dilemmas and hard decisions that will have to be made to restore order to our country !! One question still open , how do you treat debt owed Venezuela by ideologically favoured countries and tied to that how do you treat debt TO the same countries where it is certain that the govt itself connived to allow them to overcharge or recieve benefits well in excess of what they should have recieved ……!! Lots of times (the panama papers offer some examples but there are many more where Cuba was put in the middle of many transactions not because it contributed any thing to it but simply as a means to indirectly subsidising their regime….)

    Paying with oil is bascially no different than paying with cash because any oil we pay with is oil we can sell to the international market for hard cash except that in the lattter case we have the greatest flexibility to optimize the terms under which we get the maximum cash from our oil . the system of payment established with China was very unwise , because of all the strings attached and the burden of having to pay those loans in very short terms with the Chineses holding the purse strings. !!

  5. Speaking about such arrangements…

    I think Chronicles should give a shot at these: Universidad Simón Bolivar is technically laundering bolichico money. I know you have a couple of guys from USB here as part of staff.

    USB inaugurará salas de conferencias remodeladas por Fundación Derwick

    http://www.usb.ve/home/node/5398

    Formando líderes: Fundación Derwick y Funindes-USB capacitaron a 84 profesionales en Plantas Térmicas y Protecciones Eléctricas

    http://usbnoticias.info/post/45636

    http://www.analitica.com/noti-tips/derwick-y-la-universidad-simon-bolivar-crean-un-diplomado-en-operacion-y-mantenimiento-de-plantas-termoelectricas/

    Hell, even from the handwriting of the Bolichico In Chief himself!

    http://alejandrobetancourtlopez.blogspot.cl/2016/04/formando-lideres-fundacion-derwick-y.html

    What a sad state of affairs. What a pity that the leading technical university of this country fell so easily into such a trap to whitewash these Derwick thieves.

    It all started with direct USD sponsorship on USB’s SAE team (i know them well enough since i was heavily involved with it years ago for 4 years). The kids were naive or outright stupid and accepted such deal. In fact, the new prototype already shipped to a competition in Michigan on May 10 is wrapped in Derwick stickers.

    I guess it was from there that Derwick jumped to upper echelons in university structure (Starting with FUNINDES) and started to inject money with who nows what objectives in mind. Image washing to an extent, maybe more if someone is willing to scratch deeper than the obvious surface.

  6. Of the 30.9 billion dollars in “commercial debt,” very little of that will actually get paid while the Chavista’s are still in power. It’s their departing gift to the nation. It’s a debt that will never be paid. Currently the ‘more important’ owners of said debt, companies working for PDVSA etc., are being swindled into accepting even more dubious notes to keep the oil pipelines moving. Per Reuters: http://www.petroleumworld.com/storyt16050401.htm

    .”PDVSA has been offering promissory notes as well as other types of notes and financial instruments to settle debts with providers,” said another of the seven sources, who was also involved in one such operation.

    “They are offering them because there is no cash.”

    There is no cash. Ponder that fact for a moment. No cash. Will that condition change at some point in the future? Nope. That 30.9 billion of commercial debt will be left for the new government to figure-out.

  7. In paragraph two you say

    “…$30.9 billion in “Commercial Debt”, according to an estimate released by Ecoanalitica in April”

    Then later you say this debt is divided in

    “$8.4 billion in unpaid imports”
    “$4.2 billion in undisbursed dividends”
    “The rents and services debt” … “$5.9 billion”
    “$4.9 billion to PDVSA’s suppliers”

    This adds up to $23.4, not $30.9. Something is either wrong or missing (or both).

    • Because the estimates are from different dates. In April 2016, Ecoanalitica showed an estimate of $30.9bn for the total in one of its conferences. They also keep an estimate for each of the parts, which they didn’t showed that day. Just the total.

      The last estimate for each of the parts (that I could find) was from February 2015, where they showed figures up to the end of 2014. The total then was $23.4bn

  8. Not all the 4 categories of non financial debt offer the same need for scrutiny, certainly the undisbursed dividends in the oil sector are kosher , the un paid imports shoud be subject to a certification by a reputable outside auditor on the fees and commissions forming part of each payment (incuding those from similar operations from the past) , to the extent those fees and commissions exceed the normal market norm then their payment is deferred until they are further verified . (old overpayments should be factored into the equation and deducted) . Pdvsa suppliers should be looked into separately phocusing on the largest ones , there are bound to be overcharges when compared to normal market value , each of these should be examined …….Same for rents and services. We should try and have experienced outside auditors and experts conform a team together with local auditing bodies to check on each sector of claims , give it international credibility ….., in any event if there is a negotiation on the financial debt and these include a hair cut the same hair cut should be applied to all commercial debts that cannot be ascertained to be kosher. We should apply paretto principles and concentrate on those claims which are largest and easiest to scrutinize…..!!

  9. Question: Can anyone tell me, with any degree of certainty, what is Venezuela’s current GDP? The IMF is offering projections of percentage GDP contraction, but I cannot find an actual figure for the GDP. News articles are the same. I did find some websites with data from 2014, but nothing later. Now, I understand that this involves contradicting the Venezuelan government as to the actual value of the Bolivar. But is there no one with out there willing state the real figures, or at least estimate them?

    • Along the lines of Roy’s question……how will a GDP contraction of only 8% be possible given the contraction of the work week to 2 days and the electricity rationing and the lack of raw material imports. What would the real contraction be if all of these factors are included, 20%, 30% or more?

    • The Central Bank is not releasing the GDP figures in current bolivares, but in constant bolivares. The last data point for GDP at current Bs was from 2012: Bs 1635451060000. From then on, only GDP at constant bolivares (base 1997). The last full year released was 2014: Bs 59810257000. For 2015, they’ve only released the first three quarters: Bs 41404278000. You can take the inflation data from 1997 onwards, and convert those GDP figures at constant prices to current prices of 2014 or 2015.

      • And if you want it in dollars, then the question is what exchange rate to use. Using both the Cencoex rate, or the black market rate, would be wrong. The first one would overestimate GDP in $, and the second underestimate it.

        • I feel like we must be in some sort of Heisenbergian Uncertainty Hell. The fact of the matter is that, what appears to be a simple question is, in actuality, indeterminate. To discuss GDP in Bolivares is useless. In order fir the economic statistics to lend any degree of perspective, we must convert the figure to dollars. But, Pedro is right. Neither exchange rate is truly valid.

          However, we can say that the real exchange rate is somewhere in between the black market rate (~1,100) and Cenoex (10). That is a big margin of difference. So what is the “right” exchange rate? Without eliminating the exchange controls and allowing the market to find a stabilized rate, we really can’t know (Schrodinger’s Cat).

          What I was originally trying to figure out was real debt to GDP ratio for Venezuela. So, does anyone care to hazard a guess for the “correct” exchange rate? 800?

          • Several firms keep an estimate of a “weighted exchange rate”, which simply takes into account how much of the economy’s transactions are done at what exchange rate. For example, say 60% of imports/prices are set using the CENCOEX rate, 25% Simadi, and 15% black market, then that rate is around 268 Bs / $.

            It all depends what you believe (or know) those % should be. I just read that Francisco Rodriguez puts that rate at 200 Bs / $, today. In November, Ecoanalitica’s Olivero said it was 250. In any case, it varies with the allocations of official dollars.

            Today’s SIMADI / DICOM figures released by the BCV say that 8% (rounding up) of official dollars were allocated at that rate. Let’s say that 15% of imports are done at the black market rate, and 85% at official rates. Then (390×8% + 10×92%)x85% + 1100×15% = 199.34 Bs / $. Which is what FRod says.

          • Several firms keep an estimate of a “weighted exchange rate”, which simply takes into account how much of the economy’s transactions are done at what exchange rate. For example, say 60% of imports/prices are set using the CENCOEX rate, 25% Simadi, and 15% black market, then that rate is around 268 Bs / $.

            It all depends what you believe (or know) those % are. I just read that Francisco Rodriguez puts that rate at 200 Bs / $, today. In November, Ecoanalitica’s Olivero said it was 250. In any case, it varies with the allocations of official dollars.

            Today’s SIMADI / DICOM figures released by the BCV say that 8% (rounding up) of official dollars were allocated at that rate. Let’s say that 15% of imports are done at the black market rate, and 85% at official rates. Then (390×8% + 10×92%)x85% + 1100×15% = 199.34 Bs / $. Which is what FRod says.

          • Thanks, Pedro. That is helpful. I would never have guessed that so much of the GDP is still weighted toward the Cenoex rate.

  10. According to http://www.tradingeconomics.com/venezuela/gdp Venezuelás GDP for 2014 is about $509.9 billion. This would be a very up to date value. This is half of So. Korea’s and almost half that of Taiwan’s . It’s now equal to Norway’s .
    2015 GDP must be lower than that.
    Miguel Octavio would probably know (The Devil’s Excrement)

    • Here is a fun exercise:

      Look at that $509.9 billion figure and compare it to the year before.

      Now click on the link taking you to the annual growth rate. http://www.tradingeconomics.com/venezuela/gdp-growth-annual

      Notice the dissonance. The $509.9 billion figure is from the World Bank, whereas the growth rate is from the BCV. There’s an issue or two with the WB number: the chain deflator and currency, primarily. This gives a false impression of the GDP which is pretty heftily over-inflated; I don’t think anyone believes the economy has grown in the past 24-30 months; stagnation at best, a pretty hideous retraction at worst, even amongst chavistas.

      Same holds true for the per cap and PPP GDP.

      It is possible to reconfigure information for the GDP from the BCV by reverse engineering their numbers, particularly related to growth. Who would have thought that the BCV would have the more reliable figures.

  11. More important that documenting debt, 1.0 or N.0, is to also document potential funding sources to address its service and principal paybacks.

    My suggestion to the skillful and committed researchers and producers of this piece, start documenting and earmarking foreign accounts by the PEP’s (political exposed Persons) of the regime and see what you come up with.

    Any serious reconstruction effort needs to a address the financial and moral implications of letting this round of thieves just walk away into the sunshine… as many others before. if anything, the opportunity in this crisis is to change our attitudes about corruption and do something about it.

    • Chavez in his failed rebellion supposedly was going to round up the 300 he considered most corrupt and fusilarlos in the Poliedro. Miquelena/Chavez were initially supposedly going to pursue corrupt overseas bank accounts, and did nothing, since all the Chavistas also had rabos de paja. Don’t hold your breath on recuperating any significant part of Venezuela’s Chavista stolen hundreds of billions, if anything is even ever recuperated at all. The real question is, “Where is the hard currency going to come from just to keep Venezuela afloat in the future, much less to pay any of its debts, given oil in the doldrums, perhaps with one last timid hurrah, and global warming requirements in the future pressing more and more heavily on hydrocarbon usage/production/prices?”

  12. I have a really bad problem. I had been working for a couple of petroleum giants for more than 30 years in Venezuela. About 9 years ago I retired from the last of them due to QC problems. Because of my long term experience and information on many of the compression plants in the lake. PDVSA said I could retire from my company but not form them. I have worked 8 years as a private contractor maintaining several plants operational and assisting in other mechanical problems. I have now more than 20 months with no payment and more than $600K in outstanding invoices.
    I love this country and the people in it. Don’t know what more I can do to help

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