TRANSACTIONAL: Upstream Developments – Latin America: Foreign Exchange Controls in Venezuela Strangle Parts of Energy Sector

by King & Spalding

Introduction – Upstream Players

In February 2013, after devaluating the official exchange rate of the Venezuelan Bolivar from VEB 4.3 to 6.3 per USD, the Venezuelan government set up the Complementary System of Administration of Foreign Currency (Sistema Complementario de Administracion de Divisas or SICAD) to address the purchase of foreign currency by importers operating in Venezuela who do not have access to the Commission for the Administration of Foreign Currency (Comision de Administracion de Divisas or CADIVI). This step, at a time when the black market rate is approximately four times the official exchange rate, seems to be necessary in order to control inflation and grant companies access to foreign currency.

Companies involved in upstream oil and gas activities in Venezuela are not directly subject to the CADIVI Regime. Upstream oil and gas joint ventures (Empresas Mixtas) and Petróleos de Venezuela, S.A (PDVSA), are regulated by Exchange Agreement No. 9 [1] specifically excluding them from the CADIVI regime. Exchange Agreement No. 9 allows Empresas Mixtas to maintain proceeds from their operations in offshore accounts in foreign currency to pay their contractors to the extent applicable. PDVSA as a contracting entity has certain limitations pursuant to Exchange Agreement No. 9 and as a majority shareholder of all Empresas Mixtas has imposed such restrictions on them. PDVSA is allowed to make payments in foreign currency to its contractors and creditors only with respect to the foreign component of said contracts.

Exchange Agreement No. 9 defines the foreign component of contracts as the value of goods and spare parts included in the structure of costs that are transferred in ownership or use to the contracting entity, provided that these are not manufactured in Venezuela and are necessary for the development of the operations of such companies. The maintenance expenses of the above mentioned goods and the services required for the development of the operations of the contracting entity will also be considered part of the foreign component when foreign knowledge, technology, and advice (not available in Venezuela) is required. In view of the foregoing, oil field services contractors and other suppliers of goods and services to the Venezuelan oil and gas sector could receive payments in foreign currency if they could prove that such goods and services fall within the scope of foreign component. For all other purposes, however, such suppliers of goods and services are subject to the CADIVI Regime.


It is important to understand that foreign exchange controls have been in place in Venezuela for ten years. In February 2003, the CADIVI regime (i) centralized in the Venezuelan Central Bank the purchase and sale of foreign currency in Venezuela, (ii) established the official rate of exchange, and (iii) only allowed the sale by the Venezuelan Central Bank of US dollars at the official exchange rate for the payment of certain types of obligations (imports of products qualified as of basic necessities, and requirements for certificates evidencing the non-production of goods in Venezuela).

Because of the limitations imposed on the purchase of foreign currency at the official exchange rate through CADIVI, alternative mechanisms were developed to allow companies to obtain foreign currency for their operations. Financial transactions were available that structured a de facto parallel market. Said operations were commonly structured through the swap of securities or the straight forward sale in one currency of securities denominated in another. The most common vehicles to implement the swaps were Venezuelan public debt instruments denominated in Bolivars (DPNs), U.S. Government Treasury Bills (T-Bills), and Venezuelan public debt instruments denominated in foreign currency.

Many companies operating in Venezuela including suppliers of goods and services to the oil and gas sector, were able to pay for imports, foreign services and dividends to their foreign shareholders in foreign currency through the parallel market. This allowed for the Venezuelan economy to function despite the strict foreign exchange limitations of the CADIVI regime. Venezuela is a country that depends on oil revenues for subsistence [2] and imports a great number of goods and products, especially after the widespread nationalization of companies covering different sectors of the economy including upstream oil activities, gas compression services activities, lands used for agriculture and cattle raising, food industry companies, paper manufacturing companies, the cement industry, the iron transformation industry, and the electric power sector. The nationalized companies in general reduced production and there is a higher dependence on imported products. [3]

Elimination of Parallel Market

The parallel market was declared illegal on May 17, 2010 via the amendment of the Law Against Exchange Crimes. The amendment included securities denominated or payable in foreign currency in the definition of "Foreign Currency" and provided that any operation with such securities for the ultimate purpose of obtaining foreign currency by means of their sale prior to their maturity may only be carried out by the Venezuelan Central Bank. The violation of this provision constitutes an exchange crime punishable with a substantial fine, and if the operations exceed US$ 20,000 in a calendar year, with imprisonment between 3 and 6 years.

Several foreign currency brokers and entities were closed, audited by the State, and their directors were put in jail. The parallel market was no longer an option. The Government then created the – now eliminated – "System for Transactions of Securities in Foreign Currency" (Sistema de Transacciones con Títulos en Moneda Extranjera or SITME), providing that the purchase and sale in Bolivars of securities denominated in foreign currency issued by the State could only be carried out (i) through the intermediation of Venezuelan banks on the terms and conditions established by the Venezuelan Central Bank, (ii) via securities denominated in foreign currency determined by the Venezuelan Central Bank, and (iii) within the bands of prices in Bolivars for the purchase and sale to be published daily by the Venezuelan Central Bank.

The SITME system had a daily cap of US$ 50,000 per day per company, not to exceed a total of US$ 350,000 per month per company and was restricted to importers. It was also available for individuals in special circumstances. The SITME was eliminated on February 9, 2013.

New SICAD System

The new system - SICAD - contemplates strict tender procedures for acquisition of foreign currency by importers who are duly registered with CADIVI, through the RUSAD -Registro de Usuarios del Sistema de Administracion de Divisas. [4] A new governmental agency called the Superior Foreign Currency Agency (Organo Superior de Divisas) was set up to regulate the SICAD. The tenders and the maximum total amount in US dollars to be offered is announced by this agency. Importers make their offers through local banks who in turn remit them to the Venezuelan Central Bank, which awards the foreign currency through a modified Vickrey auction. [5] In this modified Vickrey auction the importers make offers until the total amount offered is exhausted. At the end of the day, the Venezuelan Central Bank calculates the average price offered and agrees to pay such average price to the importers who presented offers, despite the actual offers made. If the price offered by an importer is between the minimum price offered and the average price, the Venezuelan Central Bank will pay the price offered. [6]

After the Venezuelan Central Bank reviews all supporting information provided by the importers and confirms that it is correct, it will inform the local banks of the names of the importers that were awarded the right to acquire foreign currency. Such importers must deposit the equivalent amount in Bolivars within the five days following the award. The local banks will issue letters of credit in favor of the foreign providers of imported goods indicated in each offer made and after there is confirmation that the imported goods have arrived at the local ports in the amounts and quality established in the offers, the Venezuelan Central Bank will pay the respective letters of credit.

This system includes a much greater level of control by the Government than the SITME and it does not provide foreign currency directly to the importers, instead the foreign providers are directly paid by the Venezuelan Central Bank. Before the first auction, there was general enthusiasm for the new mechanism; however, the lack of transparency of the first auction created uncertainty.

The first and only auction so far was dated March 26, 2013 and 383 importers were awarded a total amount of USD 200 Million at an exchange rate that is unknown. [7] Reportedly, unofficial information from the Venezuelan Central Bank indicates that the average foreign exchange rate was approximately Bs. 12.5 per USD, (approximately twice the official exchange rate) [8] but the Government did not publish the exact rate.


The Venezuelan government intends to control economic forces of the market via regulation and is preventing companies operating in Venezuela from accessing foreign currency. There are many companies that have not had access to foreign currency since May 2010 when a "parallel market" was eliminated. Subsidiaries of multinational companies, such as certain oil field service providers, have been able to maintain their operations via arrangements with their parent companies that allow them directly to pay foreign providers but profits have not been repatriated. Venezuelan companies do not have such options and have been unable to pay foreign providers, resulting in scarcity of numerous products.

The Venezuelan economic players have restricted access to foreign currency which reduces local and foreign investment and strangles the private sector. Up until now, the exchange control system has only been tightened. On the bright side, a new cabinet of ministers was announced in mid-April and there seem to be changes in the Finance Ministry. The Government has the opportunity to create a more flexible exchange control system and revive Venezuela's economy.

[1] Published in the Official Gazette of August 11, 2009.

[2] Oil revenues account for roughly 95% of export earnings, about 45% of federal budget revenues, and around 12% of GDP (CIA - The World Factbook - Venezuela)

[3] Imports in Venezuela increased to 17841 USD Million in the fourth quarter of 2012 from 14694 USD Million in the third quarter of 2012. Imports in Venezuela are reported by the Banco Central de Venezuela. Historically, from 1997 until 2012, Venezuela Imports averaged 7172.6 USD Million reaching an all time high of 17841.0 USD Million in December of 2012 and a record low of 2099.0 USD Million in June of 2003.

[4] Companies that are not registered with the RUSAD cannot participate. Registration with RUSAD involves filing documents and complying with administrative requirements that make it a very cumbersome process.

[5] Type of sealed bid auction where the successful buyer or seller pays only the second-best price. This mechanism serves as an incentive for the potential buyer to offer a value that is the true value of the item in his or her judgment. Invented by the Canadian Nobel-laureate economist William Vickrey (1914-96). Also called second bid auction or second price auction. Read more:

[6] Oliveros, Asdrubal and Saboin, Jose Luis - Sicad - toward a new foreign currency architecture? Ecoanalitica, March 19, 2013.




DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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