“Cambio dólares cambio…”
On Calle Florida, the arbolitos are out in force. They are the public face of the blue dollar market – an exchange so ubiquitous, so open, and so important to the local economy, you could almost forget that it is illegal.
The blue dollar is unique: an unofficial currency bourse with the outward appearance of a legitimate exchange. The impression is supported by web sites and stories in the press covering daily fluctuations. Many cuevas – informal exchange houses – even have fixed addresses and business cards.
But it is still a black market, and the inner workings are opaque. If your local currency dealer tells you that the rate rose ten cents since yesterday – why did it rise? And why ten cents, instead of five? Or fifteen?
Is the blue dollar rate a matter of straightforward economics or is the entire market an elaborate sham stage-managed by a criminal conspiracy?
“Supply and demand,” people speculate —but since there is no central exchange, no single individual can ever know the available supply, or demand, on any given day. Even Cabinet Chief Jorge Capitanich recently challenged newspapers that publish the daily blue rate to include information on traders and volume. “If they can’t do it,” he concluded, “then it is not transparent and doesn’t constitute a market.”
Yet thousands of blue transactions do occur, every day. Many are initiated by tourists, or Argentines planning to travel, or protecting their savings against inflation. (There is a reason that the waiting list for safe deposit boxes in Buenos Aires is now over a year.) Others are by businesses making deals or skirting taxes, and moving large volumes. Each transaction begins with the same question: What is the rate today?
I had different questions: Who sets the rate? How do they do it? Who loses and who, if anyone, is making a fortune?
The Independent Operator
Pablo puts down his wine glass with an appreciative sigh.
He is balding, a husband and father, in every way the image of a hardworking businessman. Instead of socks, or train carriages of wheat, Pablo buys and sells money. Every day, he sets out across the city, meeting customers, and occasionally stopping to refill his backpack with bundles of cash.
Pablo is a tall step above the action in the street. No need to trek down to Microcentro – he will meet you in your favorite cafe and give you a higher rate than the arbolitos or your local cueva. Not by much but, since he will not venture out for less than US$600, the difference will be enough to matter.
Talking to Pablo was my first peek behind the blue dollar curtain, into the mechanism within. He gave up his last real job in late 2011, when President Cristina Fernández de Kirchner tightened currency controls and, almost overnight, turned a small side business into a thriving new industry.
Over his first coffee of the day, Pablo checks DolarBlue.net. Not because he will offer their rate, but because his clients will have checked before calling and he may need to manage expectations…
DolarBlue.net‘s success has been phenomenal. Since it opened, in 2011, every money changer, broker and tourist checks the site to keep up to date with the latest blue market happenings.
In my imagination, it was run from a back room filled with accountants in green eyeshades, like in the old films, picking up phones and shouting numbers across the desks. The truth is simpler, smarter, and ultimately less relevant.
The published blue, or parallel, rate, is based on stock prices in the US and Argentina, and calculated entirely by algorithm. The process is untouched by human hands, and therefore beyond anyone’s ability to rig for personal gain. [See box out below for a full explanation.] Think of it as the ‘pure’ rate from which all other rates descend.
Calculating the Blue
In countries where currencies are convertible (i.e. most of them), the relative values of currencies are determined by the costs of an equivalent good in two different places. For instance, if a Big Mac costs $1 in the US, and $10 (pesos) in Argentina, then the exchange rate would be 10:1, or US$1= $10.
The trick is to find equivalent goods and current prices in different countries. DolarBlue.Net neatly solves this issue by tracking stocks of eight major companies offered on both Argentine and US exchanges. Every twenty minutes, their computers check the prices in both locations, take the average, and publish it as the blue, or parelelo, rate.
The companies used to calculate the blue rate (and their stock ticker in US/Argentina market) are:
Grupo Financiero Galicia S.A. (GGAL/GGAL)
Tenaris S.A. (TS/TS)
BBVA Banco Frances S. A. (BFR/FRAN)
Banco Macro S.A. (BMA/BMA)
Pampa Energía S.A. (PAM/PAMP)
Petrobras Argentina S.A. (PZE/PESA)
Petroleo Brasileiro S.A. (PBR/APBR)
Telecom Argentina S.A. (TEO/TECO2)
The blue rate is the best-known alternative to the official exchange, but there are others: rates described by colour (grey, light-blue), by city (Miami, Colonia), a rate for individual savers, and another just for soy exporters.
The myriad of rates highlights a quandary of Argentina’s currency underground. Most illegal markets, such as drugs (everyone’s favorite comparison) are closed systems that work on a simple supply-and-demand basis. Every weed smoker knows that when supply goes down, the price goes up.
The blue dollar – as we shall see – responds chiefly to demand stimulated by the government’s economic policy, and expectations of it, which can be stimulated by other forces. However, since the blue is also directly tied to the international stock market, and affects exports and other basics of the economy, it is, as any Argentine will tell you, a bit more complicated.
DolarBlue.Net does not take these intricacies into account when calculating the basic blue rate. This is the reason that you will never receive that rate, nor even the supposed street prices that they list, which are still merely figures on a website that do not affect real transactions. It does, however, provide a useful guide to the overall movement of the market.
Which leaves the question: if DolarBlue does not set Pablo’s rate, who does?
The Role of Wholesalers
Pablo’s first call of the morning is to his wholesalers, known as mayoristas, to check their rates on a few thousand dollars or a few hundred thousand pesos. These are the numbers that matter, and even among wholesalers, the rate may vary a few cents from one to the next.. “I call two or three wholesalers. Usually, I buy where they give me the best price, but if that is across town, I might buy closer to save time, even if it costs a bit more.”
Sometimes, a customer will balk, holding out for a higher rate because they saw it on the web. “But I have to make a profit,” Pablo says, “or there is no point. They are not taking the risk, I am. If a tourist is caught, nothing will happen to them. I could be in big trouble.”
He certainly could. The unofficial buying or selling of foreign currency can be punishable by up to eight years in prison (for repeat offenders), according to existing currency exchange laws, or even more if deemed to be part of an operation to destabilise the economy. Crackdowns are rare, but they happen. For one entire week during September, shortly after the blue reached a historic high of $16, the arbolitos were absent from Florida. They were soon back – most only earn from commission so business must go on – but trading has again been heavily restricted by a series of raids in the financial district since mid-October.
Most of Pablo’s clients are Argentines who call, each month, to buy dollars with whatever they have been able to keep from their monthly income. Unlike a dealer in other substances, he says he offers a valuable service – protecting their hard-earned savings against inflation.
Is he getting rich? To hear Pablo tell it, no. He works long hours, six days per week, to provide for his family. Trade has been good, up to now, but you never knew when it could change. When the government allowed limited dollar purchases in January, 2014, he was afraid for a few weeks. “It turned out that it did not affect business much at all,” he said. “They made it too difficult to get dollars legally, and then the government knows that you have them.”
And if the government knows that you have dollars, the government can take them away, as they did during the crisis of 2001 – still a painful memory for many people who saw their life savings converted to pesos at a miserly exchange rate.
This is another reason that Argentine citizens turn to the blue market for dollars – it is more expensive than going through official channels, but easier and, in the long run, possibly safer. Of course, keeping it off the books also means away from the reach of the tax office, AFIP.
The High-End Operation
“I would prefer to do everything by the book – that way you sleep easier at night. But they’ve made it impossible with these excessive controls.”
I meet Diego (not his real name) downtown, mid-morning, at a cafe on Sarmiento street. Over coffee and toast – enough, he says, to get him through the day – he speaks openly about the blue dollar. Assured of anonymity, he only lowers his tone when he mentions the ‘parallel market’ by name.
Currency exchange, he tells me, is not his true profession. He runs a legitimate financial company and trading dollars is an additional service for trusted clients and friends seeking to park savings in hard currency and out of AFIP’s reach, whether in or out of the country. (“A lot of money heads to Miami.”)
Diego’s operation is yet another step up in scale and sophistication. At his office, in a modern glass tower, the receptionist calls you by name. Large amounts, or uncommon currencies, are no problem. If you need cash discreetly transferred from an overseas bank account, also no problem. Or if you have surplus pesos, you could drop off a bundle and the equivalent will appear as dollars in New York, or euros in Paris, three days later.
After some small talk, Diego reveals that his office handles around US$200,000-300,000 in currency exchanges per day. It is serious money, yet he still considers his operation to be relatively small in a market that he estimates to move some US$15m daily (others suggest a market double that size, entirely believable when you consider that in October police confiscated nearly US$1m in undeclared dollars from a financial house in Microcentro). “I’m not interested in growing much bigger, because that’s when they come looking for you,” says Diego. “It’s better to remain small, so nobody bothers you and you don’t get pulled into anything dodgy.”
For the same reason, he serves mainly Argentines protecting their savings, and does not accept business from strangers bringing large quantities from abroad or if they cannot explain the origin. “Those who get greedy and try and do too much will end up in legal trouble sooner or later. Everyone has to reach an agreement with the police, but if the gendarmerie come, they will turn your office upside down and take everything.”
Even at his level, Diego has a currency broker that provides a reference rate for daily transactions. There are ten to fifteen of these brokers, who operate in both the official and parallel markets, and each may offer a slightly different rate depending on which group of wholesalers they supply. The brokers, known as corredores de cambio, can connect him with a wholesaler if he needs dollars to meet short-term demand on any given day.
When I ask where the supply of blue dollars comes from, Diego shrugs, and suggests the big banks themselves. I am curious to learn more, but he is either unable or unwilling to explore further. We have been talking for over an hour, and it is time to go.
Knowns and Unknowns
My next stops are with a currency operator and a partner in a real estate firm, both active players in the blue dollar market. Without prompting, they echo many of Diego’s assertions.
First – The big players in the blue dollar market also have legitimate financial businesses which far outweigh their undeclared transactions (“about 10% of the business,” estimates Diego). They see their ‘blue’ side deals as a natural response to tight restrictions and high taxes, and argue that most companies cut corners by underreporting income, paying employees ‘en negro’, or a thousand other tricks to navigate complicated regulations shot through with loopholes and corruption. Police and inspectors are easily persuaded to turn a blind eye. The existence of a parallel currency, illegal but accepted everywhere, makes this even easier.
Second – They all believe that the administration, at some level, condones and regulates the blue market. They cannot eliminate it, since currency controls do not stop the demand for dollars, only drive it underground. Until the most recent crackdown, the government had only closed down a few cuevas, now and then. Squeezing too tightly risks the opposite effect of generating yet more demand for hard currency, and pushing the blue rate even higher.
Though volume on the blue market is a small fraction of the official exchange market, which moves around US$1.3bn daily, the symbolic significance is far greater. A widening gap between official and blue rates adds more pressure to the legal economy by generating expectations of another devaluation. For instance, soy farmers refused to sell at the official rate earlier this year and held out for a better deal, in turn restricting official dollar inflows from exports and increasing the pressure on the domestic economy. Real estate brokers in Recoleta and Puerto Madero, meanwhile, are giving steep discounts for dollars. Since the government cannot intervene officially, the thinking goes, they attempt to regulate via other means. For example, DolarBlue.net still quotes the ‘Dólar Moreno‘ rate ($6.50), named after the former Domestic Trade Secretary who in 2013 would allegedly order cueveros to bring down the blue rate to a more ‘tolerable’ level.
Third – The blue chip swap rate, or ‘contado con liqui‘, may not be as well known as the blue, but it is critically important to the workings of the market. This is the implied rate derived when businesses buy dollar-denominated bonds in pesos, then sell them on international stock exchanges for dollars, which are deposited in an offshore account. It is a legal method to convert large amounts of pesos to dollars, many of which find their way back to Argentina off the books (and into the blue market), or as payment for imports. The conversion rate – also known as the ‘capital flight dollar’ (dolar fuga) – is used as a reference for the blue dollar market, which is why the government has been putting downward pressure recently by flooding the market with dollar-denominated bonds.
Lastly – Several interviewees claimed that the Chinese supermarkets are among the largest players in the blue market, converting the huge volume of pesos they receive in sales to pay debts, or send dollars home, or save. In 2012, economist Alejandro Bercovich, writing in Diario BAE, estimated that they purchased up to US$10m per day. Was there any proof of these claims? None that I saw. Which does not make it false, either.
Is the Blue Market Really a Black Market?
In a standard economy, money is money. Whether you carry a briefcase of crisp hundreds into a bank in New York, or a sack filled with small bills into a branch in Nebraska, the deposit to your account will look exactly the same. The commodity (money) has a single value – the amount printed on the bill.
Not so in Argentina’s blue dollar market. New hundreds will always command a better exchange rate than old, wilted twenties and tens, which are more of a problem to move or to pass along inconspicuously. Like other commodities, volume also matters. On a recent afternoon on Lavalle street, while DolarBlue.Net listed the buy rate at $13.5, arbolitos were offering anything from $13 for US$100, which rose to $13.2 if you were willing to sell US$1,000 in a single trade.
Likewise, tourists short on pesos in Patagonia, or the far north, will receive an unpleasant shock if they are used to rates in Buenos Aires. One money changer I visited in a small southern town looked up the official rate, then the blue rate, then split the difference. I refused. He just shrugged. When you are the only game in town, you can set your own terms.
Currency possesses another quality unique among illegal commodities – it does not always remain contraband. A kilo of cocaine will always be cocaine, but blue dollars find a variety of creative ways to return to circulation as legitimate pesos (a laundering process known in Argentina as blanquear). Many property transactions, for example, are documented as a mix of dollars and pesos – only the dollars change hands in reality, but it is a convenient way for individuals or companies to justify their spending of pesos earned on the blue market.
As a result, though blue dollar transactions support legitimate activities, the more you look, the more it appears to work like a traditional black market.
Corredores de Cambio
While researching this article, every conversation eventually circled around to the same place: the corredores (brokers). The number is always the same – around a dozen at the top level, perhaps a few more. Their job is to keep tabs on the need for dollars, and the amount available, and connect the two sides where necessary.
Each has a distinct market serving different wholesalers, and the prices between them may vary slightly. Taken together, they are a series of mini-markets that form a single overlapping market. In Buenos Aires, they all converge in Microcentro, where the competition effectively regulates the rates offered.
So, in a way, the supposition that the rate is a matter of supply vs. demand, is correct. Instead of a computerised exchange, the brokers are where the two sides meet, providing a reference rate for large – as in large – amounts. From there, wholesalers set the best rate they think they can get, depending on volume, geography and the prevailing mood in the economy. When panic is in the air, a rush to grab dollars provides a temporary opportunity to defy traditional market dynamics and set a hefty premium without upsetting demand. This is behind some of the wild daily swings we have seen in the blue dollar market of late.
This, then, is the answer. No single person, organisation or exchange sets the actual rates. Instead, the dozen or so brokers keep tabs on demand in their separate sub-markets and continually adjust the rates to wholesalers to keep dollars and profit flowing.
Wholesalers continually communicate rates to their downstream networks of cuevas and arbolitos, who have some leeway, but are constrained by local competition.
In the big picture, the rate rises and falls in response to demand, driven in turn by currency controls, inflation fears, and speculation (the government says this last factor is the most influential, and blames the opposition media for fomenting expectations of a crisis). There are many other external factors, also, including the contado con liqui and the risk of government crackdowns. (See side article below for more on the impact of these factors)
At every level of the market, it pays to shop around. It pays even more to be one of the big players. Out of the entire structure, the group in the best position to take advantage of the blue market is not the guys working the street; it is the banks and large financial institutions who are legally entitled to move money in pesos and dollars, and have countless ways to keep some extra currency off the books.
Making It In The Blue
Just as a sailboat’s course is the sum total of all forces acting upon it, the various unofficial dollar rates chart major currents in the Argentine economy, including manipulation by the government and other economic powers, plus financial activity and court decisions made thousands of miles away.
Like any underground economy, the rules evolve and there are always opportunities for the nimble, the risk-takers, and the unscrupulous, to profit. The critical difference is that the blue market, though outside the law, is not typically tied to traditional vice. Few Argentines would find it remarkable that, in addition to a hair stylist and local grocer, upscale households and businesses also have a money changer on call.
In this climate, the blue dollar has inadvertently become a viable source of income for thousands of people. “This system makes people seek out ways to make money with financial manouevring and not by producing goods or investing,” one city operator told me, on condition of anonymity. “Many people turn to selling dollars because they can make money more easily than if they run a kiosk or small business.”
And though routine financial transactions, for savings or travel, turn upstanding men and women into “criminals”, when enough people participate, attitudes toward the laws change.
Earlier this week, the government created a new body to monitor external trade transactions, the latest in a series of measures and controls introduced recently to rein in the parallel market. Yet despite their efforts, without a change in the underlying causes, Pablo, Diego, and legions of arbolitos, are in no real danger of their industry disappearing any time soon.