VZCZCXYZ0000
RR RUEHWEB

DE RUEHCV #1215/01 1251959
ZNR UUUUU ZZH
R 051959Z MAY 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 4364
INFO RUEHBO/AMEMBASSY BOGOTA 6412
RUEHBU/AMEMBASSY BUENOS AIRES 1184
RUEHLP/AMEMBASSY LA PAZ MAY LIMA 0185
RUEHQT/AMEMBASSY QUITO 2039
RUEHSG/AMEMBASSY SANTIAGO 3485
RUEHGL/AMCONSUL GUAYAQUIL 0449
RUCNDT/USMISSION USUN NEW YORK 0159
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

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 
 
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SUMMARY 
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¶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. 
 
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COMMENT 
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¶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