Venezuelan Arbitrage

by on September 24, 2013 at 1:55 pm in Economics, Travel, Uncategorized | Permalink

Flights out of Venezuela to anywhere are 100% sold out, months in advance. Yet many planes are flying half-empty. Why? The official exchange rate is 6.3 bolivars per dollar but the black market rate is more like 42 bolivars to the dollar. Few people are allowed to convert bolivars to dollars at the official rate but there is an exception for people with a valid airline ticket. As a result people with an airline ticket can convert bolivars to dollars at the official rate and then sell the dollars at the much higher black market rate. Reuters has the story:

“It is possible to travel abroad for free due to this exchange rate magic,” said local economist Angel Garcia Banchs.

The profit is realized from an arbitrage process known locally as “el raspao,” or “the scrape.”

Credit cards are used abroad to get a cash advance — rather than buying merchandise. The dollars are then carried back into Venezuela and sold on the black market for some seven times the original exchange rate.

The large profit margin easily absorbs the cost of flights and accommodation for a trip.

“I’ve been able to buy new clothes and give some cash to all my closest family members!” said one delighted Venezuelan lady, just back from a trip to Europe.

…Some Venezuelans do not even bother leaving the country, but merely send their credit cards to friends overseas, who swipe the cards and send the cash back to Venezuela.

“This is the reason many airlines are sending half-empty planes,” Ricardo Cusanno, head of a local tourism council, told Reuters, saying the government should cross-reference flight lists with those requesting foreign exchange to outwit the no-shows.

Hat tip: Carl Danner.

1 JWatts September 24, 2013 at 2:13 pm

Venezuela seems to be trapped in a socialist statist death spiral.

2 Doug September 24, 2013 at 2:17 pm

A nice reminder of the lunacy of capital controls. Despite the recent enthusiasm by Krugman and other left-wing economists.

3 david September 24, 2013 at 2:26 pm

They arguably worked very well in Malaysia.

It’s true that they only work for a short time, but in speculative panic models of currency crisis, a short time is all you need anyway. If you have to defend a rate through controls for a long time, you’re doing something else wrong.

4 JWatts September 24, 2013 at 2:31 pm

That’s a good point. Can we get some good working formula’s on what that time frame is for various situations? It seems like that would be a pretty useful financial policy tool.

5 david September 24, 2013 at 4:14 pm

About the time it takes for people to start inventing creative ways to reliably sneak money through the border, I suppose.

If the economy is mostly formal – as it was in Malaysia – then restrictions on legal money transfers are very effective. Malaysia circa 1997 was rather corrupt, but it conscientiously wrote down all its corruption. There were cronies but cronies did not generally evade taxes on that wealth, and if people are used to operating in the open, then they will find it hard to trust money transferred through procedural dodges.

But Venezuela has a large grey market.

6 Doug September 24, 2013 at 5:43 pm

Even if its true that short-term capital controls have good short-term uses, they’re rarely, if ever, properly and honestly deployed. Capital controls need to be completely removed from the policy menu. They’re simply too tempting for politicians to abuse. They mostly target rich people and foreigners, always politically popular targets. Plus they do a great job of short-term boosting the economy (at the cost of long-term inefficiency) just in time for elections.

Alcoholics shouldn’t keep bottles of vodka around the house, even if it makes a great wound disinfectant.

7 Sigivald September 24, 2013 at 2:27 pm

Imagine that.

A fixed exchange rate leading to a black market.

8 jon livesey September 24, 2013 at 3:22 pm

This used to be the standard trick to convert non-convertible Soviet era rubles into hard currency. Buy two Aeroflot tickets to London in Moscow – where I worked for a western company – using Rubles, then fly to London using one of the tickets and hand the other one into Aeroflot in London for a refund in Sterling. IATA rules said an airline had to give you a refund in the currency where you handed in an unused ticket, no matter what currency was used to buy it.

9 Michael B Sullivan September 24, 2013 at 6:02 pm

I really loved the Cusanno’s comment that clearly the issue here is that they just need to crack down on the no-shows.

10 Dismalist September 24, 2013 at 6:08 pm

No, they need to float their exchange rate.

11 Aric September 24, 2013 at 7:03 pm

Or the airlines need to discover the concept of ‘overbooking’.

12 Rahul September 25, 2013 at 12:32 am

Denied-boarding compensation to be paid in dollars or bolivars?

13 wonk September 26, 2013 at 11:56 am

From the Reuters article:

“As a result of the high level of unused seats, some airlines are beginning to overbook at much higher rates than usual.”

I like the new government hotline to rat out the “scrapers,” 0-800-SABOTAGE

14 Anthony September 24, 2013 at 8:42 pm

Opportunity: find out the cheapest places abroad to find toilet paper, or whatever else is in short supply or about to be nationalized, , and use those tickets to bring back supplies for the black market. You may have to part with some of them at the airport, but if you make it clear that you intended for some to be a gift to your customs agent, it shouldn’t be too hard to get the rest in.

15 Jay September 25, 2013 at 8:04 am

Only in a Democrat’s paradise could such idiocy prevail.

16 TESC September 25, 2013 at 11:43 am

Dr. Cowen, why do left wing regimes like the current Venezuelan andArgentina regimes want an artificial high exchange rate. I would think they would want cheaper exchae rate to increase exports. Left wingers devalue in Spain several times before the Euro. Why is it that these current left wing regimes do not do the same?

17 Givco September 25, 2013 at 12:48 pm

Left wing regimes collect taxes in bolivars but purchase tanks, barbwire, riot shotguns, glass-clad polycarbonate detention windows, tear-gas and toliet paper in dollars.

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