On the Uses of Phantasmagoric Profits

21.-ops.-Scrooge-McDuck.-AzizonomicsWillie Neuman has a really great piece in the New York Times today about the big hit various multinationals’ bottom lines are taken as they’re forced to revalue their Venezuela profits from the fantastical Bs.6.30:$ rate to more realistically devalued levels. A taste:

Brink’s, the armored car company, could see about $400 million in revenue disappear this year from its operations in this country. Procter & Gamble announced a write-down of $275 million on its Venezuela business. American Airlines and Delta Air Lines are slashing their Venezuela flights.

Venezuela, once an apparent profit center for multinational companies, increasingly looks like a financial black hole.

It’s a great story.

There’s a dynamic at play here that Neuman didn’t quite capture, though. As he notes, lots of MNC executive in Caracas understood perfectly well that the “profits” they were reporting were never really likely to materialize in dollar form.

So why didn’t they say something before things came to a head? Is it just because of those nebulous “standard accounting practices” he talks about?

BS. It’s because lots of them had signed contracts that based their bonuses on formulas tied to those profits!

I’ve heard stories of people walking away with 7-figure dollar bonuses year-after-year for reporting paper profits they knew very well weren’t real. Accounting departments back at headquarters didn’t understand CADIVI insanity, and it would’ve been a lot of extra work and aggravation and locked-horns with their legal departments just to convince them that the official primary exchange rate was not a reasonable basis for booking profits.

That’s the kind of aggravation an MNC executive might be willing to pursue, if there’s something in it for him. But in this case, the “payoff” was just a massive cut to their bonus for the year.

So, of course, virtually no one did.

80 thoughts on “On the Uses of Phantasmagoric Profits

    • I do understand to some extent the bind these managers were in, though, Jeff: the point is that the “fair value” of the bolivar in dollar terms is unknown!

      I mean, what were they supposed to do cite the LechugaVerde.com rate on their SEC filings? DolarToday?!

      It would’ve been more realistic, yes, but also illegal in Venezuela.

      They were in a bind…and the year-end bonus was the tie-breaker.

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      • When there was a permuta they should have used permuta, when there was SITME it should have been SITME. Now it should be SICAD but there are still companies revaluing at SICAD 1 (example Directv last quarter, Colgate, Clorox, etc)

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          • Under most bilateral trade agreements, the revenues should have been booked at the only available rate at which they had an expectation of receiving funds. In other words, if the “official” rate was 6.3 and you book your sales, you value them at 6.3, since under the existing currency regime at the time, that should be the rate at which the funds are repatriated. This holds short of a “soft” default on the part of the government at which time you revalue. This is the scenario we are seeing now.

            While the bonuses have a part to play in it, I’ve mentioned before something that is being overlooked here.

            If I’m marking my sales to 50 bolivars in equivalent dollar value, and reporting them in revenues at 6.3, then I’m making a killing that plushes out the bottom line. Anything I actually repatriate between 50 and 6.3 is gravy. When it comes to the writedown, however, I’m still writing down, for the most part, the excess profits I would have counted at the end of the day over the 6.3 rate, when I was selling at a 50 rate. In other words, unless I’ve been trapped for 5+ years, I’m not losing nearly as much as I’m legally allowed to report. The bonus? The tax benefit/offset of a writedown against non-existent profits. I win in several different ways at minimal real cost.

            I don’t pity the MNCs much here. Barring abject stupidity on the part of the country/region manager, everyone has seen this coming for the better part of a decade.

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              • I have to say I do agree with pitiyanqui, except for the timeframe that scheme could have worked. As an expat for the best part of the last decade, in my yearly travels to Venezuela I have always converted and valued every expense I made in the country at the black market rate. While still cheaper than Europe, surely the prices were converging to European/real world prices (even when valued at the black market rate). In 2012 a cocktail was worth 2-4 euros and not even in Caracas, a pair of jeans 30-40 euros, and MCNs were doing the same. So they were selling products at a rate close to the black market rate at the time and reporting profits at the official rate. With the notable exception of international air travel, which for a long time could be around a 3rd or half of what tickets would cost if bought in Europe (valued at the black market rates).
                So basically depending on where in the private sector food chain a certain company sat on they would charge for products/services at a different (non-official rate) depending on their (perceived) chances of securing currency via the official market. Independent store owners, restaurants, etc. would be charging at a rate pretty close to the black market (they stood no chance at getting dollars via Cadivi, Sitme or whatever), Multinationals (with better chances of securing currency via official channels) at a rate still closer to the black market but not as high as the small outfits, and Airlines charging at a slightly overpriced version of the official dollar price (they were getting dollars in the early years of the exchange control).

                Where the miscalculation happened for MNCs and Airlines is how long they could keep going that way and how steep the devaluation has been. Had they been payed at Sicad I, I suspect MCNs would have made a nice profit as predicted by pitiyanqui, even if they had 5+ years without getting official currency as it has been a long time since they weren’t selling anything at 6,30 or 4,30 for that matter. Even Sicad II could have done it for the past two years of profits. The problem is the number of years they allowed this to go on… While selling at black market rates they were not repatriating profits and thus revenue made @ black market rate of 20 VEF/dollar (and claimed at 6,30) can now at best be paid at 50-60 VEF/dollar.

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              • I think Pitiyanqui is saying that the companies were trying to double dip by selling a $1 item at FBs 50 and then putting it on the books as roughly $8, meaning that as long as the government valued the dollar between 6.30 and 50 they would get their $1 back (most likely more). the stuff about tax writeoffs I don’t quite get because it’s not my field, but that should be the gist of it.

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      • Interestingly, a little googling tells me that there is an international standard, IAS 29, for the presentation of accurate accounting information in a hyper inflationary economy:

        ” In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same reporting period, is misleading.”

        https://www.ifac.org/sites/default/files/publications/files/ipsas-10-financial-report-1.pdf

        Of course, we who study at the foot of Weisbrot know that “hyperinflationary” is a term of art. Still, Venezuela is on the list as “highly inflationary” after 2009.

        https://xa.yimg.com/kq/groups/21832949/2091735021/name/IAS+Plus+IAS+29,+Financial+Reporting+in+Hyperinflationary+Economies.html

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        • Right, but that’s not quite what we’re dealing with. VZ has high inflation with currency controls at multiple rates, not hyperinflation. I’m not finding a regulation that deals with *that*!

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          • And with retroactive devaluations. In the sense that, because of the backlog in cadivi approvals, debts that were calculated at 4,30 are paid at 6,30 or 10. There is no accounting rule for Giordanomics.

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          • “VZ has high inflation with currency controls at multiple rates, not hyperinflation.”

            Venezuela entered into hyperinflation in November 2009: PricewaterhouseCoopers announced it in an internet report in December 2009.

            Deloittes:
            Which jurisdictions are hyperinflationary?
            IAS 29 defines and provides general guidance for assessing whether a particular jurisdiction’s economy is hyperinflationary. But the IASB does not identify specific jurisdictions. The International Practices Task Force (IPTF) of the AICPA’s Centre for Audit Quality monitors the status of ‘highly inflationary’ countries. The Task Force’s criteria for identifying such countries are similar to those for identifying ‘hyperinflationary economies’ under IAS 29. From time to time, the IPTF issues reports of its discussions with SEC staff on the IPTF’s recommendations of which countries should be considered highly inflationary, and which countries are on the Task Force’s inflation ‘watch list’. The IPTF’s meeting notes from the 19 November 2013 meeting state the following view of the Task Force:

            Countries with three-year cumulative inflation rates exceeding 100%:

            Belarus
            Islamic Republic of Iran
            South Sudan (although South Sudan only became independent of Sudan in July 2011 and data is not yet available to calculate a three-year cumulative inflation rate, the three-year cumulative inflation rate is projected to be 129% by the end of 2013)
            Venezuela
            Sudan

            http://www.iasplus.com/en/standards/ias/ias29

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      • “the point is that the “fair value” of the bolivar in dollar terms is unknown!”

        The fair value of the bolivar during hyperinflation is the parallel rate.

        However, in practice, fair value is the rate at which you receive payment for your sales. It is up to you to make a net profit after tax. Then you have to maintain the real value of that retained profit by buying property (invest in real estate) in a country like Venezuela where you cannot repatriate your retained profits. Companies have unlimited lifetimes: the company can repatriate the retained profits in 200 years time. It is up to the different management teams of the company to maintain its real value in property or in the shares of other Venezuelan businesses that have worked out a way to maintain the real value of their capital and retained profits over time during hyperinflation in a country that does not repatriate profits.

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        • “The fair value of the bolivar during hyperinflation is the parallel rate. ”
          The problem is that even suggesting the existence of said “parallel rate”, which is actually the black market value, is illegal in Venezuela.
          It wasn’t abject stupidity, they just fell into the regime’s trap.

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  1. Well, I also now a few people in AA and they all knew about the inflated profits. As a corporation, AA used this to mitigate the impact of many hits they got for at least 5 years. Now they will have to assume it, the party seems to be over.
    Many companies decided to do business in Venezuela knowing the risks it carried, if you want big profits you have to take big risks and that is exactly what happened.
    If you want to be impressed about a big accounting move that happened in our own face between PDVSA and BCV please read the summary of the operation prepared by Per Kurowsky from El Universal

    “En diciembre de 2013, Pdvsa recibió de manos del Estado y como una donación el 100% de la Empresa Nacional Aurífera (ENA) valorada en US$ 30.000 millones.

    Ese mismo mes, dice Kurowski, Pdvsa le vende al BCV el 40% de ENA contra el pago de una deuda de US$ 21,524 millones. Es decir, que el valor de venta de ese 40% – valorado inicialmente en US$ 12.000 millones – es ahora US$ 21,524 millones. Esta operación, concluye Kurowski, le reportó a Pdvsa una utilidad neta de US$ 9.524 millones, es decir, “el 60% de todas sus utilidades de 2013”. ”

    And you guys say that Ramirez is not good on creating profit for our homeland…

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    • What Pier Kurowski describes implies that very likely Pdvsa in 2013 , for the 1st time in its history had no yearly profits or negligible profits despite 10 years plus of record high oil prices !! This is beyond belief and should be a source of concerned reflexion for its bondholders and generally to for all its creditors worldwide .!!

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  2. Francisco,

    Excellent observations. However, there remains to be investigated the story about the independent auditors that produced and signed off on all the financial reports over the years. Large companies do not just accept the numbers from their local managers. They also use the services of large accounting firms such as Deloitte, Pricewaterhouse Coopers, KPMG, and Ernest & Young (the “Big Four”), or their local affiliates. They are supposed to send a warning notice up the flagpole when companies are reporting profits that may never be realized.

    I have an acquaintance who worked (retired now) for KPMG, who is the official auditor for PDVSA. He has assured me that PDVSA’s official books are pure fiction, and that this is well known inside KPMG’s office in Caracas.

    If these accounting firms have been seduced, suborned, or generally negligent in their accounting practices in Venezuela (as they well could be), it could have repercussions far and wide.

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    • If indeed PDVSA’s official books are “pure fiction” as noted above, then KPMG must surely have some accountability in all of this. That KPMG office in Caracas is putting their stamp of approval on financial documents used for investment purposes. How in the hell do they get away with stuff like that?

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      • “How in the hell do they get away with stuff like that?”

        As follows:

        The Big Four and other audit firms do everything exactly in terms of International Financial Reporting Standards: they apply IAS 29 Financial Reporting in Hyperinflationary Economies since Venezuela has been in hyperinflation (100% cumulative inflation over three years, the generally accepted definition of hyperinflation since April 1989 which is followed by the governments of the 147 countries – including Venezuela – that implement IFRS) since November 2009.

        And they have teams of good lawyers: nothing is left to chance in terms of the law and IFRS. You will never nail them for anything.

        Unfortunately IAS 29 is completely useless during hyperinflation because it requires indexation or capital maintenance in units of constant purchasing power in terms of the monthly published CPI.

        Proof that IAS 29 is completely useless? It was implemented during the last 8 years of hyperinflation in Zimbabwe: as you all know, it had no positive effect on anything in the Zim economy during those 8 years of hyperinflation: the Zim economy imploded with full implementation of IAS 29 on 20 November 2008.

        Do the International Accounting Standards Board know this? Yes. I told them so. Contrary to millions of accountants and economists to whom it is very clear that IAS 29 had no positive effect in Zimbabwe, the IASB informed me they cannot give an opinion about what the effect of IAS 29 in Zimbabwe was till they undertake an official review. Why do they say that? Hyperinflationary economies are normally either very small, like Zimbabwe´s ($5 billion total GDP at the bottom in 2008) or not politically important, like Belarus and Venezuela. The IASB thus simply ignores the fact that they have a standard (IAS 29) for 25 years that is completely useless.

        However, if IAS 29 were to be changed to require daily indexing, then it would stabilise any hyperinflationary economy over a short period of time. What is required is daily indexing not monthly indexing. That is what Brazil did with their Unidade de Valor Real daily index in June 1994: they stopped their hyperinflation overnight at no cost with daily indexing – and immediately limiting the growth in their money supply.

        The daily indexing stabilised their non-monetary economy and the check on money supply growth actually stopped the hyperinflation.

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        • Let us be clear about that indeed (though perhaps mostly due to FX differentials) BCV did acquire those ENA shares at a much higher price than what the government had valued these that same month when they did a donation they said was worth $30.000 million… and so 40% would be $12.000… and they paid $21.524… and so where one needs to begin is asking BCV who signed off on it.

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        • Daily indexing! That’s right. That’s a fundamental concept in most good econ classes. If ‘daily’ wages are indexed to ‘daily’ inflation the government will be forced to stop printing money. Basic economics. Good stuff! I had not known about IAS 29 though.

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          • All countries that issue government inflation-indexed bonds already have an official Daily CPI. That is currently a USD 3 trillion market indexed daily in terms of the official Daily CPIs.

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          • Furthermore, just imagine a union representative from SIDOR who just happens to read this blog. He gets some new ideas and suddenly realizes the possibilities. At the very next contract negotiating meeting with the government he demands that his workers wages be ‘indexed’ on a weekly basis to the weekly inflationary figures. Fair is fair! “You’re the sumbitches printing-up all that money. We want some of it back” What fun could be had! Every other union in Venezuela would take note. Utter chaos.

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            • No, it cannot be indexed weekly. It has to follow every change in the general price level, i.e., at least daily. It can be more than once or twice a day too during severe hyperinflation. But, at least daily.
              Daily indexing of salaries and wages was used very successfully in Brazil in 1994.

              There was no chaos in Brazil when they used daily indexing of salaries and wages. There was stability in their non-monetary economy during very high and hyperinflation during 30 years from 1964 to 1994.

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          • Daily inflation-indexing the entire money supply stops only the real value destroying effect of inflation. It does nothing to actual inflation. Only decreasing the growth in actual money supply reduces inflation. But, the monetary economy would operate without any effect of inflation. Chile inflation-indexes more than 25% of its entire money supply on a daily basis for a number of years already.

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        • I am far from an expert in this the field of accounting, but shouldn’t a professional and responsible accounting industry take account of the actual conditions and revise the Standards, or at least provide proper guidance to their clients? The melt-down of Venezuela is causing accounting “surprises” that really shouldn’t have been a surprise to anyone. Isn’t that really the job of auditors? — preventing “surprises”?

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          • I have personally been trying to get the International Accounting Standards Board to revise IAS 29 over the last several years. As I stated before: hyperinflation happens in either very small economies or politically unimportant economies like Venezuela and Belarus. That is why the IASB simply ignores the problem.

            I tried, unsuccessfully, to get the president of your accounting standards institute to get involved. I think the problem was the language difference.

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            • You would not believe this, but the IASB stated a little more than a year ago that there is no guidance in IFRS regarding financial capital maintenance in units of constant purchasing power.

              I then pointed out to them that IAS 29 contains that guidance since April 1989 – for the last 24 years. The IASB did not even realize that. This shows how little they understand about capital maintenance in units of constant purchasing power. They now state IAS 29 contains that guidance after not realizing it for 24 years. They still do not understand it – and they are considered as being of the best accountants in the world.

              I stated very clearly to the IASB that the guidance in IAS 29 does not result in capital maintenance in units of constant purchasing power, because of the mistaken use of the monthly CPI.

              The only way you can get capital maintenance in units of constant purchasing power is in terms of the Daily CPI – like Brazil did it in 1994 with their Unidade Real de Valor daily index.

              I asked for and they did an interpretation regarding this matter. However, they got it all mixed up and finally stated that if you were to implement capital maintenance in units of constant purchasing power, it has to be in terms of IAS 29, i.e., in terms of the monthly CPI.

              They never got to understand the fundamental importance of using the Daily CPI.

              They told me in a telecon that financial reporting has no effect on the economy. I fell off my chair.

              I was dumbfounded.

              When I told them that is absolutely wrong they almost banned me from contacting them. They stopped working with me on the interpretation I asked them to do.

              I am almost a person non grata at the IASB. They only respond to me because they have to.

              It is a very difficult matter because of the lack of understanding that only daily indexing results in capital maintenance in units of constant purchasing power as well as the politicized nature of the IASB.

              The biggest problem is that inflation is relatively low in the world economy. In a recent Discussion Paper most countries stated revising the capital maintenance paragraphs in the Conceptual Frameworks is not an important matter.

              Requests from a country like Venezuela would make a big difference. I have not yet succeeded in bringing that about. I tried.

              A top accounting professor in Belarus understands the concept and agrees with me, but he states nothing would come out of Belarus regarding this matter. They are a dictatorship too.

              Deloittes in Argentina was involved too, leading a LA commission. They all blamed inflation. When I pointed out to them, via the IASB that it is not inflation, but the stable measuring unit assumption that destroys the real value of capital, a constant real value non-monetary item and that inflation can only destroy the real value of money and nothing else, they also did not want to hear anything from me any more.

              This is a new understanding and it will take a very long time before IAS 29 would require daily indexing.

              Unless a country like Venezuela gets involved directly in this matter. But, that requires your accounting authorities to understand the fundamental need for daily indexing in IAS 29.

              I do not have the contacts or resources to bring that about.

              I am sorry.

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              • It is not a new understanding. Daily indexing was very well understood in Brazil in the 1990’s. Unfortunately they called it monetary correction. They saw it as a monetary matter. They never understood that it is an accounting matter. They never understood that it is about the stable measuring unit assumption in the case of constant real value non-monetary items, e.g., salaries, wages, pensions, taxes, capital, retained profits, trade debtors and trade creditors, etc. They never understood that it is only about inflation in the case of money and monetary items (money loans).

                So, it is not at all something new. It was done very successfully in Brazil in 1994. However, they called in “correção monetária”.

                Unfortunately, no-one is interested now when world inflation is relatively low.

                This correction of IAS 29 to require the use of the Daily CPI should come from Venezuela and Belarus.

                Unfortunately your accounting authorities are not even aware of this matter. Argentina´s accounting authority is aware of the matter, but refuses to work with me on solving the problem. The IASB knows of my involvement with Argentina, but the IASB also does not understand what is required.

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            • N Smith,

              With all due respect to you personally (you obviously understood the problem and tried to do something about it), this is affecting the bottom lines of some very large corporations and is impacting share holders by surprise. The accounting industry dropped the ball here, and there needs to be an investigation of why and how to prevent it in the future. Maybe the International Accounting Standards Board will listen to you now.

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              • Roy, do you have any contacts with the CFOs or CEOs of the very large corporations you are talking about?

                Unless you know somebody with clout in the right place who will listen to you and is prepared to actually lend their weight to the problem, you will get no-where.

                It has to go through your FCCPV.

                Do you know somebody at the Federacion de Colegios de Contadores Publicos de
                Venezuela http://www.fccpv.org?

                I have the president´s name and email.

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              • Roy,

                The way to do it is as follows:

                First, your FCCPV board members and its president, Rafael Rodriguez (presidente@fccpv.org) have to understand the solution.

                Then the FCCPV has to authorize a Venezuelan National Accounting Standard copying IAS 29 almost exactly, but requiring Daily Indexing instead of the use of the monthly CPI. I could be involved with that. And the IASB could be involved too. However, it would only be a Venezuelan Accounting Standard.

                That is all that is required really – in Venezuela. That would fix the use of IAS 29 in Venezuela.

                The IASB can then copy the Ven Standard later on to fix IAS 29.

                Obviously, pressure from various MNCs for a solution – once they understand the solution – would be a very important factor.

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              • Roy, why do you say: Maybe the International Accounting Standards Board will listen to you now?

                The IASB does not understand the issue even after I worked via daily emails and phone calls for about two months with a visiting associate at the IASB – who is a Deloittes Partner in London.

                He could not even grasp the concept of daily indexing to pass it on to the IASB board members.

                Then the IASB had the global Discussion Paper. No-one is interested in touching capital maintenance. Almost all countries stated it is only required during high inflation and hyperinflation. So, the IASB decided to postpone a thorough review of IAS 29 and the capital maintenance concepts to the future if it perhaps becomes necessary during a future look at financial reporting during high inflationary conditions.

                The matter has been settled at the IASB: maybe IAS 29 might be reviewed sometime far in the future.

                Unless the FCCPV authorizes a Venezuelan National Accounting Standard copying IAS 29 but requiring Daily Indexing, nothing is going to happen for the next 15 to 20 years at the IASB.

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    • Roy,

      With some knowledge I can say that Big 4 consultancies are only interested in maintaining their accounts with multinationals without giving much hassle. Pfizer, Colgate, P&G… all of them have like 10+ years without receiving USD to send to HQ. Why do PwC, KPMG, Delloite or E&Y say anything about it? Do they know there is something called qualified opinion? Although for me, the result of using 6,30 as exchange rate is pervasive because everyone knew they will ever see a single penny of those “profits”

      Shame for the accounting profession. It hasn’t been commented enough how misleading are the financial accounts of the Venezuelan branches of theses MNC.

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      • I am with you on this. The “Big Four” can claim they were only following IAS 29, or whatever, but at the end of the day, they are not serving the best interests of their clients. If I were a MNC CEO, and I got blind-sided by this, I would be furious. In addition to evaluating my local managers, I would also have some hard questions for the auditors.

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  3. Miguel Octavio told me via Twitter that companies have not been able to repatriate dividends since 2007…! That’s six years of heavy, Cadivi-inflated bonuses right there.

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  4. I’m just taking a step out on a limb here, but is it possible to take bolivars earned in the country and buy something. …and then take that something out of the country? …or can companies invest their bolivars in Orinoco production? …can they do anything with their bolivars? …buy land? …or will they simply leave the bolivars to rot?

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    • Some airlines put the money into real state. I remember a quote about a major airline revamping its Venezuelan office as a hedge against devaluation.

      I guess anything that loses value slower than VEF is a worth a shot, stuff that actually rises in real value is also a smart move. In Venezuela that means SICAD 2, the USD denominated bonds that were purchasable in VEF, real state, cars, etc.

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      • Yes, but only commercial real estate (offices and the like). Those weren’t rent controlled until recently.

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        • Mercantil Bank is the largest recipient of the ALAV’s partners BsF waiting to be repatriated. It’s a huge amount of Bs at any exchange rate…Mercantil Bank is simply benefiting of such impediment, nothing wrong with that. Most MNC’s won’t dare to utilize or channel these funds in any other anti-inflationary investment vehicle because of the strict rules from their HQ’s and foreign legislation regarding foreign capital/revenue legislation, besides the unimaginable risks involved. If I were the MNC’s I would have already repatriated a good % of such funds at SICAD’s exchange rate against a loan in Bs and use the huge amount of bolivares as collateral…You always can repay the loans easily in case of any eventuality, but at least I would had lower our currency risk exposure, and hope for the best but been prepared for the worst. Yes, you will immediately argue the cost of the loan will be too stiff, but actually the negative rates in Venezuela will help to hedge such against the devastated effects of hyperinflation.

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      • I just head from a friend that a new law now requires foreigners to pay a 35% tax when selling property on the difference between the purchase price and the sale price. Assuming the property has been held for a significant amount of time, after years of inflation, the original purchase price in Bolivars is now insignificant compared to the current fair market selling price. Effectively, the government has just expropriated over a third of the value of property owned by foreigners.

        My friend was not clear on the details. Does anyone else know anything about this and can you expand on it?

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        • Obviously the original price was in Bolivars at the CPI at the date of the purchase. That historical nominal reference price has to be updated to the CPI at the date of the sale. Original historical nominal price X (CPI at date of sale divided by the CPI at the date of purchase). Then the 35% tax has to be calculated on the capital gain: selling price minus updated purchase price (purchase price in terms of the CPI at the date of sale).

          Venezuela is in hyperinflation.

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    • You have the right idea: they should invest in property for the long term and take the profits out in 100 years time or they can take their profits out using bitcoin.

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      • Who’s selling bitcoins for VEF?

        They would have to use the VEF to buy USD as a bank transfer, transfer out those USD to purchase bitcoin, then sell those bitcoins for USD trasnferred to HQ.

        In my eyes, it would be enough to use the VEF to buy USD as a bank transfer, either addressed directly to HQ accounts, or to an intermediary account and then HQ. No need to add the risk of bitcoin volatility into the mix.

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        • I see there are at least two bitcoin exchanges in Caracas.

          No USD need to be involved. You use the USD parallel rate to do the trades and the exchange makes its profit in the spread between buying and selling rate.

          A company buys bitcoin at parallel rate (profit margin included for the seller) and pays in VEF.

          Then simply sends the bitcoins anywhere in the world.

          Bitcoin is not very volatile at the moment. A little volatility is immaterial compared to never getting paid.

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  5. No one should trust any organisation in Venezuela, from qualifications, the law , the government, nothing.Corruption is rampant as we all know. Those companies were holding on hoping for a change before things got so terrible but their gamble did not pay off. Would a company in, say, the US, employ a graduate from a Venezuelan university?

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    • Are you kidding me? They can’t get enough. Lots of Venezuelans have been approved for H1B visas, or skilled inmigration programs like Canada’s or Australia’s. Most countries like it when young professionals arrive, specially if they studied on someone else’s dime.

      The middle class is leaving the country in droves, because as it turns out in other countries living wages and way above are the norm for in STEM professionals, accountants, doctors, technicians, etc. I’m not sure how high is the demand for graduates in humanities, but english teachers and college professors have been well received in other Latin American countries.

      There are alumni from Venezuelan universities in Silicon Valley, in Fortune 500 companies, in multilateral organizations (UN, World Bank, IMF), in European research centers, etc.

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        • Venezuelans who graduated before Chavez became president are not young. Someone who graduated in 1998, being 24 years old, is 40 years old today. At this point they probably have kids in elementary school or middle school. And they have at least 15 years of work experience.

          Venezuelans from my generation, born in the 80’s, are in their mid twenties-mid thirties. That generation mostly studied in Venezuela and is leaving with a college degree and about 5 years of experience (but sometimes much less). They leave either single, newly wed or with small kids.

          Venezuelans born in the 90’s are a different story. Middle class (and above) kids in this generation started skipping Venezuelan college and going straight to college abroad, using CADIVI as a scholarship program or even as a way to make a profit from going to college.

          In case you are curious, there are 7 Venezuelan Universities in the Latin American University ranking for 2013 (the top 300) (http://noticias.universia.edu.ve/en-portada/noticia/2014/03/07/1086534/ucv-es-mejor-posicionada-pais-ranking-universidades-america-latina.html). If you look closely, 4 of them are in the top 100.

          29º – Universidad Central de Venezuela
          34º – Universidad Simón Bolivar
          63º – Universidad Católica Andrés Bello
          71º – Universidad de los Andes Mérida
          161º – 170º – Universidad de Carabobo
          161º – 170º – Universidad del Zulia
          161º – 170º – Universidad Metropolitana

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  6. Generally Accepted Accounting Principles (GAAP) and their interpretation forced publicly traded companies to use the official exchange rate for many years, as it was the only rate that had any real observable value. However, companies could have (and mostly didn’t) call out the risk in any one of their many footnotes, although they usually included Venezuela in a large statement about the ability of the company to continue to deliver results may be impacted by currency and political risks in countries such as Venezuela….. (or something to that effect).

    The reason they didn´t, from what I saw at a very large MNC and heard from many others, is the bonus mentioned in previous posts. The question is, if boards of directors were “tricked” into paying these bonuses, then they can sue to have them returned. But again, the boards benefitted from the paper profits also, so themselves could be sued for the fiduciary duties that they didn´t uphold. Net, the small shareholder and the Venezuelan consumer end up paying for all this issue.

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  7. Everyday I’m more convinced that the Chávez era can be summed up by “no, vale, tómate otro que yo invito”. “Are you sure? I have to work tomorrow” “Don’t worry, we’ll make it a national holiday” “Are you sure? we’ve gone through almost 10 thousand dollars of booze” “Don’t worry, it practically comes out of the ground” “Are you sure, some people are starting to fight and steal our stuff” “No, vale, tómate uno por la Paz” “Are you sure, there’s a list of people who want you to stop, it’s getting out of hand” “Oh, really, I’ll get the list of the party-poopers and make sure they never, ever get invited to anything” “But really, some people are saying they need to work to buy stuff for their houses” “Don’t worry, we’ll give out appliances tomorrow morning to everyone who toasts with me: ¡Salud!”

    And then the party host passed out just after drunkenly declaring one random friend as the guy in charge in case something happens. And now everyone is waking up, piecing together the night and finding out that everything that happened was not as they imagined it. And it turns out there’s not even enough coffee or arepas or aspirin to even try and soothe the hungover

    The petrostate version of beer goggles, perhaps.

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  8. You are absolutely right Quico. And the auditors (ALL the big four that is) were in cahoots with the local CFOs, I saw it over and over. Many even refused to enter into simple and perfectly legal hedging transactions for fear that the 6.3 illusion would become evident to their bosses

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    • That is not true. Accounting principles say that you should book numbers at the correct rate. If you receive CADIVI or if the decree says you will receive dividends via CADIVI, that is the rate at which you book it. Thus, if the only official rate was 4.3, you had to use 4.3. Even today, when the Government is still saying it will pay airlines at a certain rate, that is the rate that accountants have to book it even if they know they will never collect.

      Having said that. The Management of the company can turn around and say that they dont think they will ever collect, thus they will reserve it. But accounting and auditors dont do that.

      For example, if you have access to Sicad 1, you have to book things at Sicad 1, you can’t say you will do Sicad 2. Companies like Brinks have no access to Sicad 1 or Cencoex, so they can go to the highest legal rate. But they could also say they will not collect any of it ever and reserve all the Bolivars they have. If they collect some day, they can reverse it.

      (I am not an accountant, forgive my terminology, but its something like that)

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  9. The accounting losses are just the ex post reflection of the ex ante stupidity of believing in an access to Bs 6.30 US$. What head-offices should have done was to create the provisions for that not to happen.
    It is amazing see history repeat itself in about 30 year and no one having become any wiser… or indeed, as suggested, the bonus incentives applies not only to the executives in Venezuela but also to head-offices and… who knows… perhaps even in the accounting department.

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    • They couldn’t create provisions for that because under the Venezuelan Tax Law that is taxable (at least it was 5 years ago). Just imagine these guys reporting back to HQ that their insane financial profit was going to be eaten by corporate tax?
      Also, their bonuses were far more important than that… and the local big-4 only wanted to keep the account instead of given any real financial advice.

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