Middle-class Venezuelans routinely hop the borders to neighboring countries to get their hands on illicit dollars, spawning a thriving and lucrative black market in local currency exchange. Some gamble on nearby islands, while others make fake shopping excursions to Panama or Colombia.

Middlemen, taking a hefty cut, deliver the dollars and manufacture an elaborate trail of fake receipts in case the Venezuelans are later audited by the currency control board at home.
Locals do all of this in a bid to protect themselves from the region’s highest rate of inflation and to circumvent stiff exchange controls President Hugo Chavez imposed in 2003 to halt the flow of capital out of the country.

“People outside Venezuela don’t understand how uncomfortable this situation is … and the things we have to do to avoid the law,” said one young woman who works as an administrative assistant for an international company. She declined to be identified.
Playing the black market

The government sets the official exchange rate at 2.15 bolivars to the dollar, but on the black market $1 is currently trading for around 3.40 bolivars, or 58% higher than the official peg.

The spread between the two rates opens a world of opportunity for profit-loving capitalists happy to exploit the quirks of Chavez’s experiment in “21st century socialism.”

Here’s how the simplest and most common scheme works: In an effort to control access to dollars, Venezuela limits its citizens to $5,000 in credit-card purchases abroad. A government currency-control authority, known locally by the acronym Cadivi, makes that sum available at the official exchange rate, or 10,750 bolivars.

With those cheaply bought dollars loaded onto a credit card issued by a Venezuelan bank, a traveler can head to Panama, Aruba or Curacao; get a cash advance in dollars; and, finally, convert the hard cash back into bolivars, which at the current black-market rate would net 16,000 bolivars.

For those unable to make a trip abroad, smaller amounts can be exchanged by using credit-card quotas for Internet purchases to play online casino games. People play the required hand or two and then cash their chips, which are payable in dollars.

It isn’t avarice alone that drives people to play the credit-card game or devise similar ruses to secure dollars. For many Venezuelans, holding on to dollars is their only hedge against soaring inflation.

In a recent report, Morgan Stanley said it expects inflation in the country to reach 30% this year, up from 22.5% in 2007. The investment bank’s expectations are in line with many other forecasters.

“It doesn’t make sense to save bolivars,” said the unidentified young woman.

Fly-way robbery

In the uncertain days leading up to the referendum last December on President Chavez’s constitutional reform, the parallel — or black — market sank to nearly 7 bolivars to the dollar. Virtually all airline seats to Panama and Curacao were booked weeks in advance, and international charter flights popped up around the country as Venezuelans made a run at booking their profits.

As the rate hovered near 6 bolivars to the dollar, I called all my friends and family in the States to see if anyone wanted to come to Venezuela. In those days, Continental, which flies direct from Houston to Caracas, allowed customers to choose whether they wanted to buy a ticket in bolivars or dollars — even for flights originating in the U.S.

The airline converted a ticket’s cost using the official exchange rate. Therefore, if one had purchased bolivars on the black market, a $1,000 ticket on the airline’s Web site actually cost less than $400 when purchased locally — literally, a steal.

Source: MarketWatch