As crisis worsens, Venezuela becoming more isolated

simon bolivar airport

Venezuela’s implosion continues.

Amid hyperinflation, massive unemployment, social unrest, political oppression and shortages of food and medicine, the South American nation is on the verge of general anarchy, a legacy of Hugo Chávez’s years of mismanagement, along with that of successor Nicolás Maduro.

So it’s hardly surprising that airlines such as Lufthansa and LATAM Airlines are crossing the country off their schedules.

The pair joins Air Canada, American Airlines and Alitalia which in recent years have scaled back or suspended Venezuelan operations, according to The Economist.

But it isn’t just unrest or political chaos that’s driving airlines to divert flights elsewhere.

Venezuela, seeking to avoid yet another devaluation of its currency or outright repudiation of debt, which would cut off credit to the ailing oil industry, has tightened currency controls introduced by Chávez in 2003.

The restrictions make it almost impossible for companies such as international airlines to convert the Venezuelan currency, bolívares, into dollars.

This has made it difficult for international airlines, who typically charge customers in local currencies, to repatriate their profits.

That isn’t surprising given that Chávez initially implemented currency controls after capital flight led to a devaluation of the currency.

“Lufthansa has written off the more than $100 million it says it is owed; LATAM says it is due $3 million,” according to The Economist. “The International Air Transport Association, the airlines’ trade body, estimates that Venezuela’s government is withholding $3.8 billion of airline revenues.”

A Lufthansa spokesman told Agence France-Presse that the country’s difficult economic situation and “the fact that is it is not possible to transfer foreign currency out of the country,” is behind the company’s decision.

Lufthansa is scheduled to quit service to the country this week; LATAM, Latin America’s largest airline group, has said it will stop flights to Venezuela by Aug. 1.

Contrast the current situation with that of 40 years ago, when Venezuela’s oil wealth attracted business travelers – and airlines – from all over the world.

At present, just a handful of foreign airlines continue to serve the troubled nation, including Air France and United Airlines.

But both are public companies and it seems unlikely either can or will stand for having their revenues tied up by a banana republic.

(Top: Air France plane show in foreground at Simon Bolivar Airport, near Caracas, Venezuela.)

Advertisements

Venezuela: Continuing down the rabbit hole of ineptitude

venezeula inflation

Unbridled inflation tends to wreak havoc with economies, but one would think that if any industry were to benefit from rampant rising prices it would be that of paper currency manufacturers.

A country which is churning out billions of bank notes has got be good for the folks who run the printing press, right?

Leave it to Venezuela to botch that line of business, along with just about everything else.

As the country’s hard currency reserves sink to critically low levels, Venezuela’s central bank is paying foreign paper currency providers so slowly that the latter are beginning to back off on taking on additional contracts. In addition, it was disclosed recently that one company under contract to print money for the South American nation was owed more than $70 million.

Venezuela began its downward spiral with Hugo Chavez’sBolivarian Revolution,” which involved nationalizing different industries, implementing price controls and expropriating farmland.

Today Venezuela’s inflation is the highest in the world; it’s expected to rise to nearly 700 percent this year.

Adding to the nation’s fiscal difficulties is the fact that it takes a boatload of money for even the most basic transactions. Venezuela’s largest bill, the 100-bolivar note, barely pays for a loose cigarette at a street kiosk, according to Bloomberg.

Venezuela differs from other countries that have struggled with hyperinflation because it hasn’t reacted to raging prices by printing bank notes of astronomical denominations, such as the $100 trillion note produced by Zimbabwe not too long ago.

As inflation skyrockets and hard currency reserves plummet in Venezuela, paper currency manufacturers find themselves reluctant to commit sizeable resources as the nation’s ability to repay dwindles daily.

“The first signs of the currency shortage date back to 2014 when the government began increasing shipments of bank notes as wallet-busting wads of cash were already needed for simple transactions,” according to Bloomberg.

Today, Venezuelans spend hours waiting in line for consumer staples, lining up first at banks and cash machines, and often carrying money in backpacks and gym bags to pay for dinner out.

In 2015, the nation’s central bank selected companies in the United Kingdom, France and Germany to produce 2.6 billion bank notes. Before the delivery was even completed, the companies were approached by the central bank seeking even more notes.

UK-based De La Rue, which handles work for more than 150 nations, took the lion’s share of the order and enlisted Ottawa-based Canadian Bank Note Company to ensure it could meet a tight end-of-year deadline.

How big an order are we talking about?

Once printed, they arrived in Venezuela in dozens of 747 jets and chartered planes, according to Bloomberg. Under cover of security forces and snipers, it was transferred to armored caravans where it was spirited to the central bank in the dead of the night.

Even as the cash was still arriving authorities began planning for 2016. In late 2015, the central bank more than tripled its original order, offering tenders for some 10.2 billion bank notes.

But currency manufacturers began to grow concerned.

“According to company documents, De La Rue began experiencing delays in payment as early as June,” Bloomberg reported. “Similarly, the bank was slow to pay (Germany’s) Giesecke & Devrient and (France’s) Oberthur Fiduciaire. So when the tender was offered, the government only received about 3.3 billion in bids, bank documents show.”

Just last month, De La Rue sent a letter to the central bank complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming.

(Top: Even simple transactions require stacks of paper currency in Venezuela, thanks to massive inflation.)