SICAD II: Lost in Translation

lost_in_translationConfused about SICAD II? Wondering whether the new currency exchange system really is a legal, market-based alternative to the black-market, or whether it just plays one on TV?

Don’t worry, you’re not the alone: Nicolás Maduro himself seems to conflicted on the question to the point of schizophrenia.

In his New York Times OpEd, he describes SICAD II as “our new market-based foreign exchange system, which is designed to reduce the black market exchange rate.”

See if you can spot the difference in MINCI’s official translation of the same OpEd. It describes SICAD II as “un nuevo sistema de cambio de divisas que ya ha reducido la inflación durante las últimas semanas.”

Did you catch that? Either SICAD II is somehow more market-based in English than it is en español, or the system’s market-basedness is locked in quantum indeterminacy, cycling in and out of existence over time.

It’s no wonder confusion is pretty rampant.

Take Girish Gupta’s commendable attempt to explain the whole mess to The New Yorker’s readers. First, Gupta describes SICAD II as “a supply-and-demand-based exchange system for the dollar”. Then, further down the page, we get this:

Authorities have not revealed how many dollars are being sold through the new exchange, stoking worries that there is simply not enough foreign currency available to meet demand. [emphasis added]

So SICAD II is, we’re told, “supply-and-demand based” but, at the same time, “there is simply not enough foreign currency available to meet demand.” Can both these things be true at the same time?

Let’s go back to basics: in a market-based system, the magic pixie dust that makes demand match supply is the price. Nothing else.

You wouldn’t say that “there is simply not enough supply of beluga caviar available to meet demand” because the market for caviar really is “supply-and-demand based”. The price of caviar can float as high as it needs to go to match a very limited supply to a very big demand, even if that means floating extraordinarily high indeed.

In principle, even if there was just a single dollar up for sale through SICAD II, there is some price at which demand would match supply.

That price would be caviar-high, though, and big numbers like that scare Venezuelan policy makers. The problem with SICAD II isn’t that there aren’t “enough dollars” on offer. The problem is that if you let the market float given the number of dollars supplied, the price mechanism would do its magic pixie dust stuff at a level that scares the crap out of Rafael Ramírez.

So, instead, they’re fixing the price at Bs.49-51:$, and at that rate there clearly aren’t enough dollars to supply all comers.

But then, that’s sort of definitional: when prices aren’t allowed to float, demand can’t match supply! (In fact, those are just two different ways of saying the same thing.)

The fact that orders in SICAD II are going unfilled, and the fact (ok, the rumor) that bids that come in above Bs.64 aren’t getting supplied dollars at all puts the lie to the whole idea that SICAD II is “a supply-and-demand-based exchange system for the dollar”.

And how can we be sure it isn’t? Simple, because the gap beween the SICAD II rate and the black market rate isn’t closing.

If SICAD II really was “market-based”, if BCV was willing to let prices do their magic-pixie-dust trick of matching existing supply – at whatever level – to existing demand – at whatever level – then the SICAD II rate would merge with the black market rate within days.

Because in markets where there are no price ceilings arbitrage erases price differentials. If there’s one thing we know about free markets is that the Law of One Price always holds: absent controls, the same good can’t have two separate prices in two separate markets.

What I’m saying is that SICAD II is …well, I don’t know what it is. But, until we see the SICAD II rate merge with and subsume the black market rate, I do know what it won’t be. It won’t be a market-based mechanism. At best, it can aspire to be a new bureaucratic price tier masquerading as a market-based mechanism.

On current evidence, with the black market selling dollars at an exchange rate 38% above the SICAD II rate, it looks like Spanish Maduro was closer to the mark. And English Maduro was doing what seems to come naturally: lying through his teeth.

[Hat Tip: Sergio Guerra]

44 thoughts on “SICAD II: Lost in Translation

  1. Nice article Quico, as usual.

    So I was wondering these days: since the main thing about Sicad 2 is that the govt is stressing the purchases are “free” of regulations regarding quantities/use of the greenbacks, and given that there’s still a sizable difference between S-2 and the black market benchmark, does it mean it’s practically possible to arbitrage those rates without engaging in “currency fraud”? Can someone advise me on the legal implications?


      • Well, someone’s gonna arbitrage those rates, and if there’s no legal barrier for that (since these aren’t subsidised dollars, according to the govt), why not give it a chance? ;) Would be a bit foolish to leave that money on the table


  2. I told you a couple of weeks ago what SICAD 2 was (or is): It is nothing but SICAD 1 at a higher exchange rate. For some reason, you refuse(d) to believe that. Is it because the government said it was going to be a free market? You really believed that? After 15 years of lies? Come on…


    • Huh? Your memory deceives. I went into this saying from day one the government would freak out when the rate spiked and start intervening, or pulling the plug altogether. As it is, they started intervening before the rate even had the chance to spike.


    • I just got from a Meeting in the Business Chamber of the sector of the Company I work for. A Company that tried to acquire dollars though SICAD 2 the first three days had their applications denied the 3 times, then they were called the fourth day (when they actually haven’t tried to “buy” dollars) to be informed by Bariven (PDVSA subsidiary) that they could get the dollars they had applied for in the 3 previous days if they wanted to. Then they made then sign a form listing their suppliers and the use they were going to be giving to the US dollars. If that’s an “open” market of dollars then I’m Barck Obama.


  3. Maduro’s piece should be completely discredited just because he (they) need to cheery-pick an “adequate” translation to the point that the spanish version tell a different story. Not to mention the “half/more than half” issue when blaming at the protesters.

    Emiliana’s post motivated me check the translation for this type of “selective-wording”. Indeed, this is a new political scenario for them and we should keep our eyes wide open.


  4. Quico: it seems that BCV’s claim that they are assigning a certain amount of dollars does not correspond with the actual amount of dollars people are getting. Someone referred to me the case of an importer who theoretically got $25,000 from Sicad 2, but he only received $5,000 in his Venezuelan foreign currency account. It also seems that the “comisión” (o “cuánto hay pa’eso) is “vivito and coleando” (percentage may vary depending on the amount the corporation/person would like to get.


    • This explains the difficulty in “arbitraging” the Sicad II rate and the Parallel rate–after commissions, there is litlle, if any, difference.


      • Of course, the Chavista enchufados, who will be the major benefactors of Sicad II,and who will not pay commissions, will be able to arbitrage with the Parallel rate, if they want to leave their Bs. in Venezuela.


          • I wonder. I think those that are truly connected have access to the lower SICAD1/CADIVI rates.

            The margins on those are fabulous compared to SICAD2, particularly if the parallel rate closes at all. Currently it would be about 900%/500% roughly to 30% (just profit!) or so on the conversions alone, let alone other cost factors that would drain that down, if what we see is true. Which would you prefer?

            As I mentioned elsewhere, I think this is all a show to appear as if the government is doing something when it is much happier maintaining the status quo. I don’t know of anyone personally, who has successfully accessed SICAD2 as yet.


            • Reports i have read/accessed say that mainly enchufados have received Sicad II $, but perhaps they are only semi-enchufado vs. those receiving Sicad I/Cadiv $. Still, in an environment of very scarce $ (I’m not even sure about recent Chinese/Russian loans, and, even if, the Chinese part would probably insist on 1/2 non-convertible Yuan to be spent in China, and the Russian part to pay for past/future arms purchases), a quick 30% turnaround is not to be sneezed at….


              • The fundamental problem is that everyone else expects you to receive a 500-900% profit and they want their 30% of your cut. Middlemen, bureaucracy and corruption can make a quick 30% a negative in a rather remarkably short time.


  5. Ha!!! It reminded of an article I had read on The Economist’s site some time ago…

    “Many people report feeling like different people when they speak a foreign language. I’ve been sceptical of these claims, since many of them seem to line up too neatly with national stereotypes: “I feel warmer and more relaxed in Spanish,” “German makes me reason more carefully” and the like. But a new study seems to show that people really do think differently in a foreign language—any foreign language. Namely, people are less likely to fall into common cognitive traps when tested in a language other than their mother tongue.”

    That probably explains why English-speaking Maduro is far more reasonable and down-to-earth than Spanish-speaking Maduro.


    • I’m certain Maduro didn’t write a single word in that Op-Ed. The arguments sound uncannily like something Eva Golinger sputtered a few weeks ago on HuffPost


      • Spanish-speaking Maduro is incapable of crafting that piece. In fact, he is incapable of reaching the level of literacy of the vast majority participating in the comments on this blog. Ergo: The article was ghost written, and the Spanish and English versions were crafted slightly differently for the different audiences. It has nothing to do with Maduro.

        Having said that, I have noticed the subject phenomena in myself. I am happy to hear it isn’t just me that has experienced that feeling.


  6. “doing the same thing over and over again and expecting different results”. Does SICAD mean insanity in Spanish?


  7. Ah yes, “Maduro”. If that op-ed didn’t pass through thousands of PR filters, then it probably wasn’t even written by him to begin with. Which I suspect was the easier thing to do.


  8. SICA2 as a strategy produced the stated desired result, at least for a while, even though the same kinds of strategic subterfuge has been consistently used by this regime. I’m not sure whom to blame! They who trick, or they who fall for it!

    As for the “market driven” aspect of this latest fiasco, two things: 1) it was reported or alluded that China and Russia gave the regime x billion dollars to fund SICD2, 2). Replacing Jorge Giordani with Nelson Merentes was alluded to be further proof of a policy shift toward a more market driven approach. I’m thinking that it may not be pure trickery, but an internally driven political battle that we are experiencing. It’s a battle between the ideological and the pragmatic? Given that ideology is on a path to bankruptcy, I don’t see how violent repression, no matter how extreme, is going to solve this crisis! The same for informational hegemony. It’s hard to put a good face on this economy, and I can’t imagine a solution that is going to come to the rescue. My bet, the USA policy toward Venezuela has come to the same solution and has plans.


  9. An important point is being missed here. What happens to the hospital supply administrator, the car parts importer or the director of pharmaceuticals for a drug store chain who decide to “pass-along” the new SICAD II rate to his/her customers? At 55! …or 60! is it illegal? Will they go to jail? Is this included in Maduro’s definition of “market based?”


    • The problem continues to be that, even if the Sicad !!/!/Cadivi importer were to “win” a dollar allotment, he cannot legally pass on the substantial commissions normally needed to “win” such allotment, and, if he does try to pass them on just to stay in business, he is subject to sanctions, such as fines, business closing/even expropriation, and jail.


  10. Gordo, I tend to think you are correct. More particularly, as I said on my blog and in an AQ piece: it seems that there were two reasons the Chinese (Russians for similar reasons, but there are other factors there) gave Maduro this extraordinary $5 b. loan.

    First, Beijing rationally perceived that the demonstrations could spread and a rapid demise of Maduro et al would leave a situation where no one could quickly re-establish the economy and oil sector. They were exposed to Venezuela for some $20b, so they loaned the money — but under a different rubric from the one Ramirez & Maduro asked for last September when Beijing sent them all packing – i.e., this is a loan-for-oil under Fondo Chino, which means it has quite good guarantees of eventually being repaid as compared to any loan to be repaid in cash.

    Secondly, Beijing would have been very pleased with the very liberal terms for the new SICAD 2 market that Ramirez presented to them. China has been pushing for such reforms (and especially transparency, accountability, etc. in dealing with the money they’ve extended to Chavismo) for over two years.

    But, why NOW the more very liberal conditions now and not before?? (Whether they really have the cash and the resolve to stick to the declared liberal rules is another issue … as Quico rightly questions above.) On this, I agree with you, it is probably largely a matter of the internal struggle — pragmatists v. Giordani-ites. So,what made the difference THIS time in this struggle? Clearly the new factor were the protests.

    The protests gave urgency to resolving these issues internally and acting quickly–and it gave the Chinese a sense of urgency as well. I can’t imagine the Chinese having extended this extraordinary loan so rapidly, after all the extended back-and-forth that went into coming to agreement on the loans and oil deals of last September…there were huge preparations and long talks, etc. The protests were a pressure on the state to act quickly and decisively. Whether they can/will carry through with this Sicad 2 is of course another issue. They may simply not have the cash and/or resolve to let SICAD 2 do its thing … esp. if the demos are calming down.


    • I think you are spot on in this assessment, Dr. O’Donnell.

      I wonder who is leveraging whom however. By letting the protests run, (apparent) reserves drain and other little things that point to regime instability, the government could use it as leveraging on stakeholders in the short term to obtain additional funds. The timing of the “cleaning out” of San Cristobal appends nicely with the recent loan tranches from Venezuela’s friends. The Chinese and Russians do have a lot to lose, potentially, if the government were to fall – something I don’t think will happen anytime soon – but makes for a nice story in the press.

      In the long-term, however, trickling funds to the government and using their inability to access cash by any other means than exporting oil (which had PDVSA been able to increase production according to any of their plans in the last 10 years, would render the whole issue moot) greatly benefits the Chinese SOEs and the Russian oil companies. China has billions to burn and enduring structural problems in a cash-starved and inefficient state lets them negotiate better ToTs. I wonder what we don’t know about the recent loans and what preferential terms the Chinese were able to extract.

      I think SICAD2 is just a dog and pony show. My brother-in-law has been unable to get an order/bid/purchase/whatever filled for a relatively modest amount to buy some specialized machine tools. Three times, no response. A fourth was rejected because of a “typo” in the name of company he sought to purchase from.


    • Tom ODonnell, after reading various comments on this post, it appears that the left hand doesn’t know what the right hand is doing in this Regime. If I may, my suspicious imagination is contemplating a possible fiasco that’s on a much larger scale than one could normally imagine. Could it be that the deception and concealment of information is not only aimed at the public, but it has been occurring also between the various ranks of the regime? Specifically, maybe the Dollars that were supposed to support SICAD 2 officially, are simply are not there anymore? Afterall, this is a kleptocracy!


      • Gordo, Indeed, this is possible. Or, even moreso, that some event takes place, and shakes their resolve, and they change their plan and funnel a bunch of the cash set aside for SICAD 2 somewhere else. Constant chaos and crisis management is their normal style.


  11. The govt has Forex payments to make which cannot be put on the SICAD 2 market e.g. , govt Forex purchases , govt service payments, imports of basic foodstuffs and staples which need to remain cheap so as not to rile up the discontent of their supporters , loan payments to international financiers , China etc. All the signs are there that the govt after covering these direct Forex commitments doesnt have much forex left from its oil exports to offer forex on the Sicad 2 market.

    This means that for Sicad 2 to work and replace the free forex market there must be an offer of dollars from private sources , which if the price is right and if the enthrance requirements are not too difficult should be able to sattisfy the demand for forex from mainly private parties.

    If the price is not actually set by the market but instead is calculated by the govt according to undisclosed criteria , or the system is seen to be skewed to favout certain purchasers while leaving others cold whatever their price offers, then the private Forex suppliers are not going to offer their dollars in the sicad market but will continue using the free market.

    This means that the only way the govt can try and supply the Sicad 2 market is through the emission of new loan papers on the international market , a very expensive proposition . Suspect that this is the way they will try to go no other one being available .

    Have heard through the grapevine ( there is always a boliburgues who ‘loves telling’) that the Sicad 2 system currently is geared to favout certain welll connected friends of the regime who are reaping good profits from the system .


    • Oh well, looks like my reply where I typed the wrong name went into the eather … here it is again:

      Bill, I see your point about private dollars needing to be attracted.

      I can imagine that there would be a lot of volatility, arbitrariness and bureaucratic chaos the first couple weeks or so.with the SICAD 2 market. After that, if they stick to the announced plan, things might calm down. (Note also: Miguel Octavio made the point that big institutional players will wait a couple weeks to understand the rules, …due diligence and such.)

      Then, after things calm down, say they have set aside $5b (i.e., the Chinese loan, for the sake of argument) for SICAD 2. A USA bank analyst (forgot which one) the other day said they need to put $20-$30 million/day into the system to satisfy the demand for financing imports and such. So, say, $25 million/day–that’s 200 business days or 40 weeks. By that time, if they are serious, and really let the price go where it goes, and slowly move more and more Cadivi and Sicad 1 addicts over to Sicad 2, then, by that time one might indeed attract private dollars? What do you think? Is this reasonable. They just have to stick to it and take what comes.

      The alternative is the state is back where it was a few weeks ago, with yet another round of protests over shortages and inflation and they have blown their change to liberalize the dollar market.


  12. Explanation: the GOV tells one lie to the NYT, and tells another lie to its constituents. In either case, the lie is designed to mollify those to whom the lie is addressed. As any adman can tell you: different message for different demographics.


  13. FT, your “New Republic” article is excellent. Only a small nit: “Chavismo reforms of both systems (school/legacy hospital network) have been broadly popular. From my experience, the school system free meals/pass all students no matter how dumb-unqualified/Bolivarian University medical “doctor” graduation in 3 years,/CDI’s/ even Barrio Adentros before 1/2 or so have been closed, were broadly popular, but, the Venezuelan key health care legacy hospital system, one where pre-Chavez even people from nearby island nations came for quality medical attention, has generally been popularly viewed by its downscale Chavista users as an increasing disaster since virtually the beginning of Chavismo.


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