Artículo publicado en Bloomberg.com
By Michael Smith and Anatoly Kurmanaev
Retired Venezuelan Army Captain William Biancucci paces around his sparsely furnished Caracas office, clutching a red, bound copy of Hugo Chavez’s socialist constitution. He’s discussing his plans to buy a private jet to ease travel to and from his cattle ranch in Brazil’s Amazon rain forest. From a sprawling stretch of pastureland, he packs cows by the thousands on ships headed to Venezuela.
Biancucci, 55, who grew up poor, says he won contracts to supply Venezuela with livestock thanks to friendships with military officers now in the government. His voice rises with emotion as he says he’s been a devotee of Chavez since military college, when the late leader was his history professor.
In 1992, Biancucci joined 140 other officers in staging a coup attempt led by Chavez. Although the coup failed, Chavez was elected president six years later — and Biancucci’s business thrived. Socialism, Biancucci says, is the solution to poverty, Bloomberg Markets magazine will report in its September issue.
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Chavez’s socialism, he says, has made him personally rich.
“I’m a socialist, but I love having cash in my hands,” he says, shaking a fist holding an imaginary wad of money. “Socialism is wealth.”
Biancucci is one of a coterie of Venezuelans close to Chavez who acquired wealth during his 14 years in power and under his successor, former bus driver and union leader Nicolas Maduro. The companies of these businessmen have received billions of dollars from the government since Chavez took office in 1999, for food distribution, banking and other activities, according to government records.
Mansions, Jets
A close look at who these people are and how they made their fortunes provides insights into how Venezuela, a country blessed with the world’s largest oil reserves, has descended into disorder and paralysis — even as politically connected people have become wealthy.
Some of the beneficiaries of doing business with the government live in mansions and luxury apartments, own horse farms in Florida, travel by private jet and play polo.
Venezuela is, by many measures, a failed economy. Goods such as meat, flour, plastic, car parts and even water are in short supply. Annual inflation hit 61 percent in May, the highest rate among 122 countries tracked by Bloomberg. Venezuela’s spate of murders, 24,763 last year and double the number a decade ago, has left once-bustling theaters and salsa clubs empty.
Street Demonstrations
Venezuelans have taken to the streets, barricading their neighborhoods and marching at government buildings, prompting reprisals from the police. Hundreds of Venezuelans have been arrested this year for challenging the government, including opposition leader Leopoldo Lopez, who’s been jailed since February on charges of inciting violence.
Lopez says he’s innocent and was jailed for exercising his constitutional right to protest peacefully. Forty-three people have been killed during the clashes this year.
“Venezuela has gone through many crises in the past, some severe,” says Harold Trinkunas, a senior fellow at the Brookings Institution in Washington who has published extensive research on the country. “But nothing on the scale of what we are seeing today.”
Military officers run much of Venezuela’s state-dominated economy, and their business and government interests are intertwined. Active or retired officers hold a quarter of Maduro’s 31 cabinet posts, including the Finance, Electricity, Food and Interior ministries.
‘A Danger’
“There is a danger in allowing the military, which has the greatest ability to coerce people, into business like they have,” Trinkunas says. “This is a significant obstacle to reform.”
Chavez, who died of cancer last year at age 58, made bold promises. He pledged to use Venezuela’s oil riches to help the poor and transform the country into a prosperous, egalitarian economy modeled after Cuba. He seized about 1,200 private farms, shops and factories — sometimes during his weekly television show — and reduced foreign companies to minor roles in the nation’s oil fields.
Chavez — and later Maduro — also made some of their friends rich with lucrative government contracts, says Henrique Capriles, the governor of the state of Miranda who narrowly lost the presidential election to Maduro in April 2013.
“There’s nothing more capitalist than a socialist in power,” Capriles says over a bowl of chicken stew at a baseball diamond in Barlovento, 100 kilometers (60 miles) east of Caracas.
Food Shortage
One area where Chavez’s chosen few wield immense power is in the distribution of food. More than 20,000 government shops and canteens are supposed to provide Venezuelans with inexpensive basics such as rice, milk and beef. Chavez started building this distribution network in 2003, tapping into $40 billion in annual oil export revenue.
Even with that financing, production of meat had plummeted 36 percent in May from a year earlier, according to the Venezuelan Association of Industrial Slaughterhouses. Workers abandoned many ranches and farms Chavez had seized because price controls and a lack of supplies made them too difficult to operate.
In January, more than one in four staples was out of stock, the latest central bank statistics show. In such an environment, mob scenes are common, as is the case one Saturday in mid-May in the Caracas neighborhood of 23 de Enero, named for the date in January 1958 when opposition parties and soldiers overthrew military dictator Marcos Perez Jimenez.
Long Lines
The coup’s leaders inspired Chavez in his quest for power, the late president once said.
People line up outside a tented government food depot guarded by soldiers carrying machine guns. The shoppers clutch numbered tickets that give them the right to purchase subsidized frozen chicken, rice and cooking oil. The food is gone before many of those outside can get into the tent.
“It used to be when I ran out of something, I just popped down to the shop,” says Wendy Guerra, a mother of three. “Now, I have to stand in line for half a day.”
The state food system has been riddled with deficiencies, lax accounting, loss of documents and lack of auditing and oversight, the Comptroller General of the Republic found in an April report. In 2008, Chavez created PDVAL, a unit of Petroleos de Venezuela SA, the state oil company, to scour the globe to buy food because supermarket shelves were often empty.
Rotting Food
Within months, hundreds of shipping containers filled with beef, chicken, pasta and milk were abandoned and left to rot in the tropical heat because of government negligence at Puerto Cabello, the country’s biggest port, according to the report.
Venezuela’s flawed food distribution system fails the public, while enriching people with political connections, says Neidy Rosal, a legislator in Carabobo state who has investigated mismanagement in the system for five years.
“A lot of people are making money off people’s desperation for food,” she says. “They are using hunger and access to food to get rich. It’s a disgrace.”
Maduro blames food shortages on smugglers, speculators and corporate opponents seeking to destabilize his government by withholding production.
“Our people have enough conscience to withstand the difficulties caused by this economic war,” Maduro said in a speech on April 15.
Government Control
Former Food Minister Felix Osorio, an army colonel, said in response to a Bloomberg Markets question at a March 21 news conference that the government had eliminated the flawed procedures that led to food rotting on the docks by buying goods directly from friendly governments, such as Brazil.
“The government is the main food distributer now in Venezuela,” said Osorio, who was replaced by General Hebert Garcia Plaza in June. Maduro and Garcia declined to comment for this story.
The government has gradually been giving the military a bigger role in the food distribution system, legislator Rosal says. Biancucci, the retired army captain with the cattle export business in Brazil, says that once the military has more control, the bad management that’s caused shortages will be resolved.
Former soldiers like him are serving their nation, he says.
“Everyone in the food sector is retired military now,” he says. “It helps because it brings discipline, order.”
Cattle Ranch
Biancucci was a construction contractor before getting into the food business with Chavez’s administration. Biancucci, who speaks fluent Portuguese (his mother is Brazilian), started his business in Brazil in 2006, when he bought a ranch near Belem, in the Amazon rain forest. He loads his cattle onto ships in Vila do Conde, an Amazon River delta port.
“I can ship up to 5,000 cows a month from my lands,” says Biancucci, dressed in a short-sleeved safari shirt over the kind of red T-shirt Chavez had favored.
By last year, Brazilian Agriculture Ministry records show, Biancucci’s company, Portal do Boi Representacoes & Comercio Ltda., had acquired two ranches near Belem. Portal do Boi and another Biancucci-controlled company, Comercializadora Internacional Thawi CA, exported up to $110 million in value to Venezuela from 2009 to 2011, according to the Brazilian Ministry of Development, Industry and Foreign Trade.
On a Monday morning in mid-May, in a second interview with Bloomberg Markets, Biancucci talks about his plans to expand. He’s meeting in his Caracas office with General Alexis Hernandez, commander of the army’s anti–drug trafficking unit.
Slaughterhouse Plans
Hernandez, who declined to comment, has since retired from the military. Dressed in fatigues, Hernandez nods silently as Biancucci proposes buying more ranches and building a port in Venezuela to ramp up sales. Biancucci also plans to construct a $19 million slaughterhouse in Brazil so he can ship butchered meat to Venezuela.
“I’m building a business empire,” Biancucci says.
By showering contracts on former military officials and pro-government business executives, Chavez put a new face on the system of patronage that has sapped the country’s wealth since 1500, when Spain started colonizing the region that later became Venezuela.
A group of oligarchs appointed by the crown held economic and political sway. In 1811, Venezuela declared independence, sparking a 12-year war against Spain led by Simon Bolivar, which ended with the defeat of royalist forces in the Battle of Lake Maracaibo. Venezuela’s fortunes changed dramatically in 1914, when the company that’s now Royal Dutch Shell Plc drilled the first commercial oil well.
Oil Exporter
Venezuela grew into the world’s biggest oil exporter by 1935, showering riches on an elite group whose wealth was tied to doing business with the government, says Kim Morse, a professor of Venezuelan history at Washburn University in Topeka, Kansas.
On Feb. 4, 1992, Chavez, then an army lieutenant colonel paratrooper commander, led a failed attempt to overthrow President Carlos Andres Perez amid strikes over public-spending cuts. Perez jailed Chavez for two years. Chavez’s actions and imprisonment won the charismatic leader public support and paved the way for his landslide presidential victory in 1998.
As Chavez aided the poor by building affordable housing and providing free education, he also put economic power into the hands of a new elite, Morse says.
“Chavez just changed the way the patronage worked, bringing new people into the system,” says Morse, who co-authored “Venezuela: Latin America in Focus” (ABC-CLIO, 2010). “The old upper class was replaced by the nouveau riche favored by Chavez.”
Wedding Royalty
One of the highest-profile people in Venezuela’s post-Chavez elite is Victor Vargas Irausquin. He’s chairman of Maracaibo-based Banco Occidental de Descuento, Banco Universal CA, known as BOD, Venezuela’s fourth-largest nonstate bank.
Vargas, a former president of the Venezuelan Banking Association, plays polo for his own professional team, Lechuza Caracas. A decade ago, Vargas began appearing in Spanish newspapers after his daughter Margarita married Luis Alfonso de Borbon, a second cousin of Spanish King Felipe VI.
For years, Vargas has been publicly applauding Chavez and Maduro’s economic policies. In a June 5 speech in Maracaibo, the heart of Venezuela’s oil industry, Vargas praised Chavez for helping the poor get mortgages.
“We have a solid and robust financial system,” he said. “Here, I feel like a socialist, because we’ve given a chance to the neediest. Chavez restored the mortgage market.”
Successful Banker
Vargas was a successful banker before Chavez came to power. In 1993, a Vargas-owned holding company bought BOD, says Andres Perez Capriles, a BOD executive vice president. At the time, BOD was a regional bank serving Zulia state. Vargas’s bank grew into a national franchise under Chavez, as the president nationalized banks that didn’t support his administration.
BOD’s assets totaled 121.6 billion bolivars ($19.3 billion) in May, according to Perez. Vargas owns 95 percent of BOD’s stock, Perez says.
Vargas didn’t receive special treatment from Chavez, says Diego Lepage, one of the banker’s lawyers.
“Victor, far from just focusing on increasing his wealth, is a man with 35 years in banking,” Lepage says. He says BOD has grown in part by taking risks and creating jobs. “When they say Vargas has been a businessman who’s benefited under Chavez, they don’t say that Vargas has 15,000 employees in Venezuela. That’s very important.”
Government Deposits
BOD has made money by receiving more government deposits than any other private bank, according to filings with Sudeban, Venezuela’s banking regulator. Venezuelan government deposits totaled 10.9 billion bolivars at BOD as of March 31, Perez says.
As of Dec. 31, 2013, BOD had at least 50 percent more deposits than any other private bank, Sudeban data show.
“The bank’s leadership in official deposits is due fundamentally to the loyalty of these clients,” Perez says.
BOD, like other Venezuelan banks, pays an average 0.78 percent annually on checking account deposits, according to the central bank. It invests some of the cash from the government in Venezuelan bonds. Yields on Venezuelan debt issued in U.S. dollars — and thus insulated from the country’s runaway inflation — have averaged 11.8 percent since Chavez took office. On July 15, the bonds yielded 11.2 percent.
BOD and other Venezuelan banks make business loans, charging an average of 17.3 percent, according to the latest Central Bank data.
‘The Spreads’
“BOD makes money on the spreads,” says Theresa Paiz Fredel, senior director at New York–based Fitch Ratings.
As with all Venezuelan banks, inflation decreased the value of nondollar-denominated profits in the past two years. Profit surged 44 percent to 1.04 billion bolivars in the first five months of 2014, Perez says.
Doing business with the government is valuable for BOD, Perez says.
“BOD actively participates in that sector, strengthening its relations with state companies that manage revenue from oil and other minerals, as well as revenue from mayors, governors and agencies,” Perez says.
BOD is among the Venezuelan banks that have helped restructure government debt and execute currency controls. Fees for these activities have rained riches on bank owners, says Russell Dallen, Miami-based managing partner at Caracas Capital Markets, a firm that specializes in trading Latin American securities.
Bank owners in Venezuela had a pathway to profit under Chavez, Dallen says.
‘Pro-Government’
“And being pro-government was a great insurance policy against them taking your bank away from you.”
Chavez didn’t always like what Vargas did, says Lepage, the banker’s lawyer. In 2008, Vargas tried to buy Banco de Venezuela SA, the country’s biggest bank by deposits. He made a $150 million down payment.
“President Chavez came out and said Vargas wasn’t going to buy Banco de Venezuela because the state was going to buy it,” Lepage says. Vargas is still battling in court to recover the $150 million, the lawyer says.
As Chavez railed against the rich on his weekly television show, Vargas spent on a luxury lifestyle. In 2005, a mansion was purchased in West Palm Beach for $33.6 million through a company that lists one of Vargas’s lawyers as a top executive, real estate and corporate records show.
Three years later, an oceanfront home sold for $68.5 million to a company co-managed by the same lawyer.
Polo Tournament
In September 2012, Vargas won a trophy in a polo tournament in Sotogrande, Spain. He boarded the Ronin, a 58-meter (190-foot) yacht he’d bought from Oracle Corp. founder Larry Ellison and gave an interview to the website PoloLine.
“You are not going to believe this, but polo gives me peace,” he said.
Those who get rich doing business with the Venezuelan government can go in and out of favor — which is what happened to Ricardo Fernandez. Before Chavez came to power, Fernandez, now 49, had already owned fishing boats, sugar and flour mills and delivery trucks.
He won Chavez’s gratitude in 2002 for refusing to join a national oil strike, says Rodrigo Agudo, a food industry consultant in Caracas. Fernandez ordered his trucks to deliver food, and Chavez rewarded Fernandez with contracts to supply the fledgling distribution system.
“Fernandez got big because of the help he gave Chavez during the strike,” Agudo says.
Billionaire Businessman
Within three years, Fernandez owned 41 companies in five countries, including his flour mill in Puerto Cabello, a Panama-based tuna-fishing fleet and a forestry company based in the Brazilian Amazon, according to a Dec. 31, 2005, audit he commissioned from KPMG LLP for his bankers. His net worth was $1.6 billion, KPMG concluded.
A decade into Chavez’s rule, Fernandez fell as fast as he’d risen. By 2009, Chavez was concerned that some of his newly minted business moguls were becoming more powerful than the president, Miranda state Governor Capriles says.
In November 2009, prosecutors in Caracas charged Fernandez with illegally using deposits and loans from failing banks he’d bought from the government the year before, court records show. The government jailed him for three years. He spent a year of that time in and out of military hospitals.
While Fernandez was in prison, the government took over his assets in Venezuela, according to documents submitted by his lawyers in the 28th Criminal Court in Caracas. The government also seized his banks, after he’d bailed them out with about $1 billion of his own money, the documents say.
No Role
On Dec. 6, 2012, a report by Fogade, the government agency that guarantees bank deposits, concluded Fernandez had played no role in the misuse of bank funds. The authority blamed board members for the alleged irregularities.
Fernandez was released from prison in March 2013. He still faces accusations of misappropriation of banking deposits and drawing unauthorized loans. During his three years of imprisonment, he never had a trial. Fernandez declined to comment, citing a court gag order.
“These are the scuffles among the insiders for a cut of the business,” Capriles says. “Today, one is useful to them. Tomorrow, he’s persecuted for not giving them the cut they wanted.”
In an oil-rich country run by leaders who’ve promised to create a socialist economy that benefits the poor, millions of people struggle every day to find the basics. In this nation blessed with abundant natural resources, it’s the friends of Chavez and his ministers — people like Biancucci — who have accumulated wealth.
‘New Elite’
“There’s a new social group that has flowered since Chavez, a new elite, which I am part of,” Biancucci says.
In Puerto Cabello, 200 kilometers west of Caracas on the Caribbean coast and a few hundred meters from ships loaded with grain and beef, Maria Melendez, who runs a fried-pastry stand in town, is standing in line with hundreds of others to buy two rationed bottles of cooking oil for her business.
“Everything has become one long waiting line,” she says. “It’s hard to earn a living as it is. Instead of frying, I’m here, waiting. This is our new existence.”
To contact the reporters on this story: Michael Smith in Santiago at mssmith@bloomberg.net Anatoly Kurmanaev in Caracas at akurmanaev1@bloomberg.net
To contact the editors responsible for this story: Jonathan Neumann at jneumann2@bloomberg.net Gail Roche
