Tag Archives: Hugo Chavez

Venezuela’s Latest Currency Devaluation

Venezuela is South America’s forth largest economy. Many people forget that it was one of the founding countries of OPEC. By the early 1990s Venezuela was the third largest oil producing  nation in the world. These facts get lost in the never-ending debate over the effects of President Hugo Chavez’s push towards socialism.

The late Hugo Chavez was considered a defender of the poor. He was admired by many of his contemporaries because of his ability to stand up to Western imperialism. The left-leaning South American presidents supported President Chavez’s efforts to lead Venezuela down a path to socialism. In my opinion no head of state of any South America country have Chavez’s political sophistication or ability to manipulate public opinion. For years President Chavez convinced his supporters that their lot in life had improved because of his leadership. Without Chavez’s imposing personality and fiery rhetoric it is likely that Venezuelans will start to question the nation’s economic health. The Venezuelan community be surprised to learn that President Chavez ruined the nation’s oil industry by using its revenues like a piggy bank to fund his socialist experiment. It is time for Venezuelans to ask where the government gets the money to fund so many expensive social programs.

After waging a long battle with cancer Hugo Chavez died on March 5, 2013. According to a statement released by the military he died of a massive heart attack. Most commentators believe that he had returned from Cuba because no further treatment would arrest the progress of his disease. If is safe to assume that Chavez knew that his time was up. I do not believe that Chavez was actually in charge of the country’s daily operations during his last few weeks. The late president was probably consulted on major policy decisions and actions.

On February 8, 2013 the government devalued its currency by 32%. At that time it was suggested that this action was designed to clear the decks for a new economic regime. Most economists concluded that the devaluation by itself would not lead to an appreciable improvement in the economy. I think that the devaluation was part of a strategy to give the President’s presumptive successor a political advantage in the soon to be held elections.  I do not believe that this monetary action was taken to improve the lives of poor Venezuelans. 

Generally speaking the value of a given currency is determined by its relativity to the value of another currency. This exchange rate is normally based upon the amount of the home currency which is needed to purchase one unit of the foreign currency. It is common for countries to base their currencies upon the U.S. dollar or Eurozone euro. Currencies rise and fall depending on movements in the financial markets. Today major currencies are said to “float” along with market conditions.

Many third world nations have elected to fix the value of their currencies. The New York Fed. Reserve Bank explains how this method of evaluating a country’s currency works:

 “Under a fixed exchange rate system, only a decision by a country’s government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value.”

Venezuela’s national currency is the bolivar. Its exchange rate is fixed to the US dollar. Many of the world’s Third World Nations’ currencies are fixed. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves to purchase all offers of its currency at the established rate. Because of the Venezuela’s political and economic isolation the country has always had problems maintaining an adequate amount of foreign reserves. Over the last few years Venezuela has not been able to support (defend) its currency. The country has devalued the Bolivar numerous times the last decade. Most commentators and financial experts believe that Venezuela’s economic problems cannot be addressed by constantly devaluing the Bolivar.

Hugo Chavez’ Gold Gambit

On August 18, 2011 Venezuelan President Hugo Chavez demanded the return of his country’s gold reverses held in foreign banks. The Venezuela president referred to the “criminal bankers in New York and London” as the prime custodians of the gold. Estimates put the Venezuela reserves at @ 200 tons of gold. In order to conceptualize how much gold this is, you need to imagine 170 armored trucks in a line. To receive its gold Venezuela must make all the necessary arrangements to receive the shipment, including adequate insurance and secure transportation. The movement of so much gold is a logistic nightmare. This being said; I believe Venezuela can make the necessary arrangements.  Request for Gold

It is likely that the U.K. and U.S. banks might not be able to immediately comply with Chavez’ request. The banks might not physically have all the gold. Also there might be legal restrictions that prevent the banks from returning all the gold. Banks regularly enter into contracts where gold reserves are leased to other banks.  The banks trade and negotiated these contracts without any movement of gold. The banks cannot violate the terms of the contracts. Some of Venezuela’s gold is covered by these contracts. Consequently the custodian banks might have to buy “Venezuelan’s gold” on the open market. Because  gold is being traded at record highs the banks would suffer loses buying gold on the open market. Likewise the banks would suffer loses if it had to delivery the physical gold that is worth more than the traded contracts. Hugo Chavez has the right to request the return of his country’s gold. I believe that the custodian banks’ compliance with the request would be everyone’s interest.

The experts differ about why Hugo Chavez is requesting the return of Venezuela’s gold. Most suggest that he does not want his country’s assets frozen by the imposition of international sanctions. President Chavez’ comrade in arms, Muammar Gaddafi, lost control of his regime due partly to the imposition of sanctions. This explanation is plausible and logical but it cannot be the President Chavez’s principal consideration. We may not approve of Hugo Chavez, the man, his policies or rhetoric, but he is no Muammar Gaddafi or Robert Mugabe. The imposition of international sanctions against Venezuela is an unlikely possibility.

After requesting the return of Venezuelan gold President Chavez, just days later, signed a decree nationalizing his country’s mining industry. It is not clear what exactly was nationalized. Rusoro Mining Ltd., a Vancouver-based company, is the only non-Venezuelan firm actually mining gold in the country. Understandably Rusoro is keeping a low profile as not to antagonize Venezuelan authorities. However; two other Canadian companies who  had their mining interests nationalized are seeking compensation for their loses. Gold Reserve Inc. and Cystallex International Inc. demanded that Venezuela arbitrate their expropriation claims. Canadian Companies Pursuant to the Canada-Venezuela Investment Protection Treaty of 1996Venezuela could suffer an adverse arbitration award in the billions of  dollars. Gold Reserve Other companies are also suing Venezuela as a result of their interests having been expropriated. What legal reason does Venezuela have for  not compensating these companies for their interests which were expropriated? Based upon my research the Canadians companies will prevail after an arduous arbitration  process.