The stillborn adjustment?

That's us.

That’s us.

One of my girls’ favorite bedtime stories is “Seven Blind Mice,” by Ed Young. The book tells the story of seven blind mice who meet with an elephant, only they don’t know what it is. Each one of them inspects a different part of the elephant, and they always make a mistake when saying what the things is. It is only when all of their perceptions are put together when they realize they are in front of an elephant.

The book is a perfect analogy for the current state of the analysis of the Venezuelan economy. None of us really know what’s going on, but if you start putting bits and pieces of information together, the picture might appear to be clearer.

With that in mind, what do we know about the Venezuelan economy as of late?

  • The government has stopped publishing inflation figures. Inflation for June is more than a month overdue. Inflation for July is more than a week late. It doesn’t take a genius to imagine why they’re hiding the figures. Some guess-timates I’ve seen say that June’s inflation was 5.5% – I haven’t seen any for July.
  • Venezuelan GDP supposedly dropped by 4% in the second quarter – supposedly because that number, too, is super secret.
  • Liquid foreign exchange reserves have dropped by almost $1 billion in the last few days.
  • According to Barclay’s, the government is increasing its outlays of foreign exchange to importers. The government has handed out $9.6 billion through Cencoex in the first half of the year – keep in mind that Cencoex sells dollars at the BsF 6.3 rate, which is more than ten times less than the black market rate.
  • According to various informal reports I have gotten, scarcity of some basic staples has gone down relative to how things were a few months ago. This does not appear to include medicines or beauty products, apparently, but more like food stuffs. It’s too soon to tell for sure … again, little info.
  • The government continues to talk about the rise in the price of gas, but no decisions appear to have been made yet.
  • China gave the government a big wad of cash in the last few months.
  • Bank of America, in a research note put out yesterday by our friend FRod, was increasingly pessimistic. It referred to an interview Rafael Ramírez gave, in which he said that Venezuela was, perhaps, going to a “dual exchange rate system” FRod thinks that momentum for “unification,” something Ramírez had strongly hinted at a few months ago, has diminished. It would appear as though internal government politics are watering down any attempt for adjustment, and this will make the government’s fiscal situation more tenuous.
  • Venezuela has to pay more than $6 billion to service its foreign debt in October.
  • Opinion polls are putting most of the blame on the economic situation on the government.
  • Price of oil is holding somewhat steady, although the trend seems to be that it is going down.
  • Oh, and the sale of Citgo continues to move along.

What can we make of all this? Here is my incredibly simple story: the government needs to win elections next year. It is broke. It doesn’t have the cash to hand out goodies. Scarcity is hurting the government. Inflation does not seem to be hurting the government as much as scarcity. It is unpopular. They are burning the midnight oil, using all the reserves they can to patch up the economy in the next few months. The sale of Citgo sounds like a way of shoring up foreign reserves ahead of the elections, although they continue to talk it down. There is no political capital for implementing a broad adjustment package, so they will continue to muddle through. The exchange rate manguangua will remain. Gas prices will probably not adjust in the near future.

Am I wrong? We’re all blind mice in this, so your guess is as good as mine. Will the government’spostponement of tough decisions work? I don’t see how. Will we avoid default on our foreign debt or hyperinflation? These signals are suggesting it’s less likely than a few months ago.

We had an intense discussion on the blog about whether the government was going to adjust its economic policies. It seems as though a sensible “cleaning up” of the country’s distortions is increasingly unlikely.

49 thoughts on “The stillborn adjustment?

  1. I think the most interesting question is this: how come Rafael Ramírez, vice-president for the economy, energy minister, chairman of PDVSA, the man with his hands on 97 of every hundred dollars that enters the economy CAN’T do what he’s been telling us for months is ESSENTIAL? He can’t unify the exchange rate, can’t put up the price of gasoline, can’t stop the central bank printing money to finance the company he runs. And he can’t even tell us WHEN he might be able to do the few, pathetic things he’s now promising.

    Giordani’s gone and the ‘izquierda trasnochada’ wasn’t able to get a hearing at the party congress. There has never been a better time to announce a bunch of unpopular economic measures, and if people take to the streets, well — isn’t that what the national guard is for? So who or what is stopping him? I find it very hard to believe that the senior remaining civilian ‘ultras’ in the cabinet – Jaua and Arreaza – constitute any sort of road block. One sneeze from Maduro and they are out too. It can only be someone with real power. Anyone willing to guess?

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    • Someone behind the mafias, like the idiotic “tenientico” diablodiado cabello, a dollar trafficker (currency exchange) or one of those drug lords like the ones who fully support the narco-terrorist-pedophile farc.

      They say “Touch our banana, and you’ll get a COUP!”

      And, who said maburro had any power at all? The imbecile’s saying now that “everybody’ll be responsible about the gas price increase” even when he said weeks ago that he and only he alone took every economic decision in Venezuela.

      A babbling lunatic.

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  2. Only Ramirez is pushing for the adjustment. The erst think if they adjust they lose in2015. Ramirez guesses, that if they dont adjust, they lose too. I understand even Merentes does not back the adjustment.

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  3. If they can hold the crumbling fort long enough while keeping the opposition from putting forth an electoral alternative that is more attractive to voters than all their promises, they will probably get to stay by muddling along.

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    • When people get fed up they go for anyone and anything else and many times not for the better. This is how Chavez was elected, Fujimori and for that matter the zany Tea Party and other right wing parties in Europe.

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      • Renacuajo67,

        Given two awful choices, no matter how fed up they are of one, they will not choose the other if the other seems worse. And frankly, many, many people are well aware that they would be worse off with the opposition.

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        • You made me think of the runoff election between Fujimori and Vargas Llosa in 1990.

          Vargas Llosa ran a campaign stating clearly that much pain was ahead for the Peruvians to fix the misgovernment of the previous 20 years. Fujimori said nothing of substance.

          Fujimori got elected. He applied what popular press called the “Fujishock” which ultimately was an IMF intervention, a totaly 90s heavy handed action.

          The point of this historical reference is that Venezuela has not room to maneuver, no matter who is in power, there are VERY PAINFUL measures in store.

          The political artistry needed is to convince Venezuelans to ‘suck it up this one goes without anesthesia’ and hope that the expected economic growth of solid economic policies show their effect sooner than later. Gettting elected may be a trick of just saying very little of what you’ll do while denouncing what chaverment is doing.

          What I expect though, while Chavismo is in power, is a Mugabe style reactive lurch of incomplete economic measures (sacudon, anyone?).

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          • I disagree, the political artistry needed is the willingness for a politician to suck up the desire to control the natural resources revenue, and to promise and deliver on the daily, unconditional distribution of natural resources revenues as the means to countering the “VERY PAINFUL” belt-tightening to which you refer. The key is to explain that we want the pain to be felt by government and rich, not by poor. Because, let’s be clear, without cash distribution the pain will be mostly felt by those at the bottom. Distribution is the best way to prevent the feared sacudón.

            Notice how comments of opposition keep pointing to how badly things are for the poor, and how much worse they will be for the poor, yet they refuse to support the single alternative that has a chance to make things better for the poor. Do you really think the poor are going to vote for that kind of thinking? You’re even talking about fooling them into voting for the opposition with the plan of worsening things for them, y que for their own good…

            Don’t try to change people to make the system work; change the system so that it works with the people you’ve got.

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            • In Zimbabwe the poor rejected local cash distribution because the cash was worthless. The poor (not the government or opposition) then saved/stabilized the economy when they spontaneously dollarized it.

              It is, in fact, still an option that the same might happen in Venezuela 10 to 15 years from now.

              So, the poor and the US government ($) may also still come to the rescue of Venezuela.

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              • N Smith, do you forget that the cash distribution to which I refer is natural resource cash, which is sold in dollars? Its distribution, therefore, would be equivalent to a dollarization.

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              • Extorres, only when the bolivar is replaced by US Dollars (no more bolivars at all) in the entire economy would the economy be dollarized. It is impossible to do anything in bolivars that would result in a regime that is “equivalent to” dollarization. Nothing is “equivalent to” dollarization. It is either dollarization or it is not dollarization. Dollarization means no local fiat currency. During dollarization your central bank loses its money creation function. Anything done in bolivars created in the Venezuelan economy can never be “equivalent to” dollarization because your central bank would still be 100 % intact which is not the case under dollarization.

                I am against dollarization as a medium or long term solution for any economy. I would only support it as a very costly, very short term stabilization shock and then back to fiat local currency creation with daily indexing of both the monetary and constant real value non-monetary item economies once the economy is stabilized with dollarization.

                The above daily indexation of both the monetary and constant real value non-monetary economy removes the need for dollarization or a currency board.

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              • N Smith,

                I agree with your definition of dollarization, no bolivares involved. I also agree to be against dollarization, for the same reasons you state, and a few more, as I’m sure you have, too.

                I am taken aback by your not understanding what I meant by “equivalent to” dollarization since this is something I discussed with your contact at the Brazilian Central Bank and he agreed with me that by converting dollars to bolivares at a free exchange rate and handing them out daily, unconditionally to all citizens would make said income be dollar-indexed.

                This is analogous to saying that the Daily Indexation would be “equivalent to” eliminating the effects of inflation. It doesn’t really change inflation, nor its nefarious effects, but all those whose income is indexed won’t suffer the effects, so I can use the term “equivalent to” to refer to that effect.

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              • Extorres,

                Yes, I agree with you that it “would make said income to be dollar-indexed.” Yes, “equivalent to dollar-indexed”, which is not the same as “equivalent to dollarization” which is what you stated in the beginning – and what I responded to initially.

                Dollar-indexed is just that and nothing more: 98% daily indexation of all items dollar-indexed (assuming a 2% $ inflation-target) only at the time of the hand-out (Daily Indexation is much, much more).

                Dollarization always has at least two parts: 1. all items are dollar-indexed and 2. the central bank has no monetary policy or fiat creation capacity.

                You forgot part 2. When I say it is impossible to have anything in bolivars “equivalent to” dollarization I am referring to the central bank part of dollarization.

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  4. I find it amusing that your fable talks about mice and the picture shows people, five of them with white robes…scientists? Is the subliminal message telling us that our social scientists are as stupid as mice?
    One alternative is to remove the blindfold and scale up a little bit and see the elephant in all its splendor.
    We have a nation ruled by bandits, each one of them acting on his or her own goal of maximizing the profits of their criminal intent. The invisible hand of Adam Smith becomes the absence of information that despite being guaranteed in the constitution, is a state secret in a criminal state. So information about the economy is invisible because the thugs in power hide it to their own benefit.
    No one knows the inflation rate, the unemployment rate, the scarcity index, the violent deaths, but we all know the government is in the hands of a band of criminals who care not about the welfare of the people they swore to serve.

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  5. Your analogy of the elephant reminded me of a corollary saying applicable to government’s reaction to all of the problems: “When all you have is a hammer, every problem looks like a nail.”

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    • The venezuelan version of that adage would be “When all you have is a gun, every problem looks like a murder, at least for the malandros.”

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  6. You lost me at “the government needs to win elections next year”

    Do you picture Tibisay announcing a beating against “el proceso”?

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      • Well, we all know that Capriles claims fraud and calls for street protests whether there is any evidence of fraud or not, so that’s a given. The bigger question is whether all of you will demand that he actually provide evidence for his claims, or if you will all just swallow the bullshit wholeheartedly like last time.

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        • “we all know that Capriles claims fraud and calls for street protests whether there is any evidence of fraud or not, so that’s a given claims fraud and calls for street protests”

          A ‘given’…Did he claim fraud in 2012? Or call for street protests?

          And did you miss the part in April 2013 when he told people NOT to protest because of the probable violence they would encounter?

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          • “Capriles claims fraud and calls for street protests”
            ¡Hahahahahaha! En serio el pobre disociado beto ya no sabe en qué palo ahorcarse, así le tendrán tan lavado el cerebro que ya sólo repite las mismas estupideces una y otra vez ¡Hahahahaa!

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          • Claims of fraud in 2012 would have been idiotic given the margin, and the fact that everyone knew Chavez had won.

            And yes, his little warning that there could be violence totally absolves him of any responsibility in the violence that erupted after he told his followers that the elections had been stolen. Are you mental?

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    • You honestly think the elections next year simply don’t come into play for the government? That they’re not even thinking about it?

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      • One question, do we know the date of next year’s elections? Or is it up to Tibi/the government to decide?

        In general I agree with the article, I think the big indicator is what will happen with Citgo. Selling it relatively quickly and using the cash to inject forex into the economy and alleviate scarcity (for now) would be in line with the electoral strategy that Juan is describing. There won’t be goodies to give out willy-nilly like before but a reduction in scarcity and economic troubles (however small) may give the government enough momentum to go through an election. And it also plays well into the “guerra económica” narrative: Yes, we had a moment of crisis because of the ‘war’ but we are now coming out of it.

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      • No, I mean that Tibi will declare the winner so they are not that concerned.

        I predict around 50ish/49ish psuv/oppo

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        • I predict 25 pus, 75 oppo, and yet the pus’ll get like 200 congressmen from the 165.
          How?
          Ask tibitibi, that lady does magic with numbers xDD

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  7. My two mice. 1) the political interest groups/gangs benefiting from cadivi/cencoex are too powerful for the manguangua to disappear. They would rather run Venezuela to the ground, and smoke Citgo along the way. 2) The radicales are blocking any attempt at addressing internal distortions (price controls and subsidies). Ramirez is stuck in the middle.

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  8. Maduro is living proof that they can sustain the charade forever. People simply adapt to scarcity and getting killed.

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    • maburro is the living proof that you can sell a bag full of shit to a bunch of people, and said people’ll eat the whole bag of shit just to avoid accepting they made a mistake.
      The pride of the stupid choose the corpse first, then drove Venezuela right into an abyss.

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  9. I really liked this piece by Pedro Benítez on http://www.konzapata.com. He says that the exchange rate controls are the key to everything, and that if they take them away, everything crumbles.

    http://konzapata.com/2014/08/si-levantan-el-control-de-cambio-se-cae-todo/

    This, in particular, was written with style:

    “[Con el control de cambios] … se controla al sector privado, a los medios de comunicación, las importaciones, el movimiento de capitales, las inversiones y el ahorro. Se controla a la díscola clase media venezolana, a la boliburguesía para que no tome más poder del que tiene, a los pobres para que no se vuelvan escuálidos.

    Se controla a la Sociedad amarrándola al reparto de la renta petrolera.

    Esa fue la idea central de la exposición de Rafael Ramírez en la plenaria del III Congreso del PSUV donde justificó la necesidad de ciertos ajustes como el incremento de la gasolina: capturar y distribuir la renta petrolera. Y el mecanismo, el eje central, es el actual régimen cambiario venezolano.

    Instaurarlo fue un momento crucial en el proyecto de poder de Chávez en 2003, luego del paro petrolero. Entonces disponía de una justificación que a ojos del público lucía irrebatible. Posteriormente, en los días de las vacas gordas de los precios del petróleo (2006 o 2007) pudo levantarlo y volver a la libre convertibilidad que heredó de la administración Caldera. Pero no. El control de cambio había llegado para quedarse, para siempre, como Chávez en el poder.

    Fue una decisión política, no económica.

    Ese es su legado. Fue él quien dijo que nunca más se levantaría. Aristóbulo sólo lo recuerda porque tiene buena memoria.

    El problema es que ese modelo, ese control de cambio, condena al país a un empobrecimiento irremisible, tal como lo estamos padeciendo.”

    In English:

    “With currency ontrols, you control the private sector, the media, imports, the movement of capital, investment, and savings. You control the rebellious middle class, the bolibourgoisie so that they don’t accumulate more power, and the poor so that they don’t become squalid ones.

    You control society by tying them to oil rents.

    That was the main idea in Rafael Ramírez presentation to the PSUV Congress, where he provided justification for measures such as raising the price of gas: it’s about distributing oil rents. And the mechanism, the central axis, is the current currency exchange regime in Venezuela.

    Installing it was a crucial moment in Hugo Chávez’s project to consolidate power in 2003, after the oil strike. Back then, he was justified in the eyes of the public. Afterwards, when oil prices were high (2006 or 2007) he could have lifted it and come back to free conversion he had inherited from the Caldera administration. But no. Currency exchange controls were here to stay, forever, just like Chávez.

    It was a political decision, not an economic one.

    That is his legacy. He was the one who said it would never be lifted. Aristóbulo only remembers it because he has good memory.

    The problem is that in this model, with these controls, the country is condemned to irreversible poverty, just as we are witnessing.”

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    • The currency controls are a huge problem, but they aren’t what “condemns the country to irreversible poverty”… If they remove them they open up a whole other bag of worms, with different kinds of problems, but certainly it doesn’t solve the root of the problem.

      You all are just focusing on symptoms here, not the real problem, which has to do with lack of investment in productivity.

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      • Betty,

        I think you are pointing at a symptom too. The problem is that Venezuela as a society is not conducive to any type of real long term investment. In no small measure, it is because of the failed capitalism of state cloaked in pseudo socialism. From here you can add all other scourges such insecurity, red tape, corruption…

        You see, a revolution is really needed now. But one that is friendly to wealth creation. For examples just look to our neighbors to south (Chile, Peru, Colombia , Bolivia and Brazil).

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    • And the currency exchange’ll be the crime that’ll be used to kick many of these bastards right into a cell for 30 years.
      It’s funny to see how the arbitrariness of a few stupid morons can destroy a country and sink it into critical poverty.

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  10. I have a question with respect to the potential sale of Citgo. Assuming it can be sold lock, stock and barrels which is not a given because some government entity, Federal and/or state (i.e. Texas) may decide to put their nose in the transaction on behalf of oil companies that have been wronged by the galactic corpse, will Maduro government suddenly walk around pitching wads of cash right left and center to win next year’s election, mellow discontent or whatever? I suspect who ever would buy these assets wiould make a deposit up front then pay the balance over a number of years especially if the deal includes a contractual agreement with PDVSA to feed the purchased refineries. Apparently CITGO is worth more with such contract than without. In short, would the sale of Citgo make a noticeable difference on government cashflow in the short term?

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  11. Without the Venezuelan oil supply Citgo is worth lots less because the Citgo refineries in the USGC are adapted to maximize the return on the refining of Venezuelan heavy crude, not other kinds of crude . The Lemont refinery ( up in Chicago) is too far away for Venezuelan supply to reach it and in an area were refineries arent usually a good business so it probably would not bring in much money. The refinery co owned with Exxon is an A grade, top of the line refinery and Exxon would probably like taking over Pdvsa s half share very much. Because any buyer is likely to know that Citgo ( or a part of Citgo) is being sold on a distress situation they are sure to bargain hard to get it at a reduced price . There are financial liabilities attached to Citgo s income stream which also reduce its value. I fear that Pdvsa may have problems maintaining its supply to Citgo and that the share of Citgos use of Venezuelan crude ( already falling hard) is anyway bound to fall to very small levels. This is not the best time to sell Citgo for any thing like a decent price . The thing is that in 3 years time Venezuela may be mourning the loss of a highly strategic marketing system that it let go off too easily .!!

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  12. Regarding this same topic there is a revealing article by Asdrubal Oliveros in todays Prodavinci : “Donde se quedo el apoyo del Chavismo al Ajuste Economico de Rafael Ramirez?” If true it sheds a lot of light on whats happening inside the whale.

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  13. I read that Canadian tar sand oil is competing with Orinoco heavy oil for refinery services that are specialized for heavy oil refining. Does not look good.

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  14. Cost of producing tar sand oil is much higher than the cost of producing heavy orinoco crude , orinoco crude has to be upgraded or mixed with light crudes to allow it to be transported or refined into oil products. probably the same for tar sand crudes . big difference is that presently transporting canadian tar oil crude to where the heavy crude refining facilities are concentrated ( US Gulf Coast) is much more difficult and costly than bringing it from Venezuela . Canadian crude has to be sent either via pipeline (which hasnt been constructed) or via other very expensive means of land transport while synthethized orinoco crude can be transported in a tanker direct to the US Gulf Coast refineries .

    To give you an idea of the crass stupidity of selling Citgo it helps to know that Citgo has the capacity to refine 650.000 barrels of crude per day and has a price tag of 10 to 15 billion US Dollars while building an Upgrader to process 200.000 barrels of crude per day costs 12 to 18 billion US Dollars . Which means that moneywise by selling Cirgo we lose 650.000 barrels per day of refined products and gain less that it would take to build an upgrader to transform 200.000 barrels per day orinoco crude into a synthetic CRUDE oil which only then can be refined to transform it into saleable refined oil products. .

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    • Are you trying to use facts for any informed discussion here BB?
      Funny.

      the sell of Citgo is a saqueo measure to embezzle some more USD’s fro the golden exiles and such.
      Its a final nail in the coffin to enslave Venezuela to the occupation’s control. Its a very stupid idea if you look at the nation’s interests! but remember who is running the show!

      Cheers.

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  15. Mugabe most probably only won the first election in Zimbabwe: all the others he simply “arranged” and he is still there after 30 years. I don´t see Maduro ever needing to actually win an election in a transparent way: possession is nine-tenths of the law.

    The only way I see Chavismo being defeated in Venezuela is through an uncontrollable foreign shock; for example, a big drop in the oil price (unlikely), or something in that line: an external shock that the fragile Venezuelan economy cannot absorb.

    A relatively stable status quo, all else being equal externally, equals indefinite Chavismo tending towards the Cuban model.

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