Venezuela closes border with Colombia because of FX! Latin America is no place to operate a retail brokerage

The closure of the border between Venezuela and Colombia as a result of contraband 100 bolivar notes (worth less than 2 cents), and their removal from circulation from the government in a nation where connectivity is unworkable and inflation is at an all time high are all reasons why no FX brokerage should venture into the Latin American region

Venezuela, one of Latin America’s remaining communist nations, has closed its border with Colombia as a result of what is believed to be a measure to stem the movement of currency.

Many Latin American nations are governed by strict socialist governments which often impose capital control laws that create a huge black market for currency, and restrict free trade dramatically, Argentina’s former President Cristina Kirschner being a prime example, having made 33 different laws since 2010 to stem the movement of the Peso and outlawing the US dollar which, before she left her seat as President, resulted in Bitcoin having a 15% premium in value in Argentina compared with nearby nations without capital control laws.

Argentina’s repatriation of US dollars (the government in 2013 considered that approximately $160 million was being held in overseas accounts by Argentinian citizens) was not a welcome measure, as faith in Argentina’s leadership and central bank is generally very low, as well as the risk of a 20% inflationary national currency.

Venezuela is one step further down the road to totalitarianism, as it is, instead of a socialist dictatorship, a communist nation.

It is illegal to leave the country without government permission, and taking money abroad is forbidden.

The latest measure by the government to stem this is the closure this week of the national borer with Colombia, accompanied by a move by the Venezuelan government to remove the 100 bolivar bill from circulation.

This created a massive run on the banks, as Venezuelan citizens attempted to dump 100 bolivar bills in fear of their removal from circulation, in a market which is completely closed, leaving members of the public with no alternative currency, in a nation which ranks among those with the highest levels of inflation on earth.

Strict socialist President Nicolas Maduro said the withdrawal of the 100 bolivar bill, which is worth just 2 U.S. cents on the black market, was needed to reduce contraband of the banknotes on the Venezuela-Colombia border.

The 100-bolivar note will be removed in within 72 hours of today according to state owned Venezuelan media, with new, higher-denomination bills due on Thursday this week.

Despite heavy printing of the 100-bolivar bills which amounted to an unbelievable 2.3 billion this year alone out of 6.1 billion in total, they are in short supply. Moreover, Venezuela‘s extremely unreliable telecommunications network means card readers often collapse.

Authorities on Thursday are due to start releasing six new notes and three new coins, the largest of which will be worth 20,000 bolivars, less than $5 on the streets.

Maduro, a former bus driver and union leader elected after Chavez’s death in 2013, said Colombian shoppers and organized criminals were buying up the 100-bolivar bills to go on a spending spree in Venezuela, worsening shortages of basics such as flour and antibiotics.

Venezuela is heaving under its third straight year of recession, pushing millions to skip meals and medical treatment.

Many others are increasingly traveling to Colombia to find supplies. But shops across the border on Monday were displaying signs that they would not accept 100-bolivar bills, bringing business to a halt and sending Venezuelans home empty-handed.

For anyone thinking that Latin America (especially south of the equator) is any place to consider doing business in the FX industry, it is absolutely not.

Research conducted over a long period of time by FinanceFeeds across the Latin American regions deduces that aside from the extremely volatile and unreliable sovereign currencies, the lack of infrastructure, as well as the inability to provide solid and reliable trading services to retail clients in a region where there is absolutely no understanding of the product, as well as potential seizure of assets by governments if a broker from overseas decides to operate there are enough reason not to venture in that direction.

Add that to the inability to transfer client monies to other jurisdictions, the lack of consumer protection as governments in many countries in Latin America see their citizens as subjects and cash cows rather than any movement toward enabling private enterprise, and the insecurity of local banks, and a dangerous conundrum is apparent.

…and that is without considering the horrific inflation which could render a business worthless within 24 hours.

Featured image: Venezuela’s extreme left-wing president Nicolas Maduro

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