Creeping Control – AFIP’s Uruguayan Vacation

It’s like hanging out with Greg Mankiw, except with quite a few more catcalls

One of the reasons that I love living in Buenos Aires is that it is quite literally like living in an economics textbook.  You have a very decent example of a trilemma – a central bank attempting to hold a currency steady and maintain independent monetary policy while restricting capital flows.  When asked to give an example of import substitution industrialization (ISI), most economists will throw out an example from the 1970s.  I can tell you about the time I paid US $750 for a blackberry made in Tierra del Fuego to see the screen burn up in under eight months, the time I paid close to US $900 for a pretty average television that after a year just sometimes doesn’t turn on, and my personal favorite – the time I paid an ungodly amount for an air conditioner that broke and cannot be repaired because the parts needed can no longer be imported.

Argentina is the perfect example of trade barriers, exhibiting a tantalizing web of import and export tariffs, quota systems, subsidies, licensing schemes, and local content requirements, all along with a healthy dose of corruption.  In one of my favorite anecdotes, I was meeting the Vice President of a large international oil company who received a telephone call and took off at a dead sprint (while wearing a fine Italian suit) with no explanation whatsoever.  He later emailed me an apology, saying they attempted to turn away some parts at the port and he had to go in person to get them in.

Currently though, Argentina’s most ‘popular’ textbook economic blunder is capital restrictions.  And the best part about that is watching the cat and mouse game that is playing out between the government and the people evading the traps set to suck their money back into Argentina.

Fighting financial crime one dirty bill at a time (Image Credit:

Last week, a very important thing happened in the wonderful world of capital controls – a law that passed a few months ago came into effect in Uruguay.  For a while, the OECD has been putting pressure on Argentina’s neighbor to share tax information, shed its status as a tax haven, and join in the global fight against money laundering!  And as no one advocates international financial crime, this sounds like a good move… unless you happen to be an Argentine with a bit of cash.

According to a BCG report, Argentines with at least US $100,000.00 hold 74% of their wealth offshore.  That is quite a bit of wealth – and you can be sure that even Argentines with less do what they can to move their hard earned pesos into dollars and out of the grasp of AFIP, the Argentine tax agency.  And as Uruguay is a convenient couple hour jaunt across the Rio de la Plata and home to beautiful beaches and the trés stylish Punta del Este.  The convenience coupled with the relative financial security makes Uruguay a hot spot destination for both vacationers and their savings and investment.  But what implications does this law have?

AFIP takes a grab at Argentine savings in Uruguay

I’ve discussed the law with quite a few Argentines, and their response is that it won’t affect anything really.  Firstly, the law is only supposed to apply to transactions that take place after the law took effect, rather than retroactively.  Secondly, AFIP shall only have access to specific cases where they have shown evidence of evasion.  But this line of thinking ignores the importance of businesses and entities that incorporate in Uruguay and are able to take advantage of the proximity and business friendly environment to essentially execute operations between Argentina and the rest of the world.  And while it clearly will not result in a S.W.A.T. team of AFIP agents swarming the homes of Argentina’s wealthy brandishing evidence of tax evasion in Uruguay, it is a creeping step towards more control.

Before the reelection of Cristina Kirchner back in October, I had the exact same conversation with an identical bunch of people regarding the issue of access to dollars.  And from these conversations, two major concepts and lines of thinking emerge.

The first is a queer sort of “wait and see” attitude that to me seems preposterous in an environment where what has been seen in the past was really not worth waiting for.  There exists this tendency to either stay put en masse or to pile into decisions simply because your uncle’s neighbor and your brother in law’s polo teammate is doing it.  I have this suspicion that the due diligence process for quite a few Argentine investment companies probably resembles a list of how many godfathers, brothers-in-law, uncles’ friends, and university chums are also doing it, and the decision to move forward is taken when a critical number of these key indicators has been achieved.

Swans are always white – until one is black

The second is a “black swan” mentality – and not the aspiring psychotic ballerina kind.  Nassim Nicholas Taleb’s book about rare and unpredictable events is so named because at one point in time, it was indisputable fact that all swans are white.  The discovery of the existence of black swans immediately and instantaneously discredited that so called fact.

Argentines believe that because they have seen and experienced a handful of other crises, certain actions that proved beneficial will do so again.  The example of real estate investing is an easy example, but my favorite one is the peculiar habit of Argentines to keep massive amounts of cash in safe deposit boxes (cajas de seguridad) in banks and companies dedicated to the provision of insured safe boxes.  More on these in the future, but these mini- fortresses literally house piles of liquid wealth, and are insured by companies forced to hold Argentine assets.  Yet simply because they’ve never been touched before, they are viewed as safe.  Just like Uruguay.

Buenos Aires Banking – A lot like Gringotts with fewer dragons

Yet when little laws like giving AFIP investigatory scope in Uruguay creep closer and closer to the aspects of security that Argentines take for granted, at what point do you acknowledge that maybe not all swans are white?

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10 Responses to Creeping Control – AFIP’s Uruguayan Vacation

  1. Agustin says:

    there are not few people thinking that one Frfriday AFIP says: ” banks will be closed for a week, we will open all safe deposit boxes and check the content against your tax declaration, whatever is not declares will be in “standby” (stand by the governm.) until you demonstrate the legal source of your money”.. This is why nowadays the most common crime modality is “departments robbery” a lot of people is saving their money “under the mattress” (debajo del colchon) other grandmas recipie…
    I travel abroad Argentina almost once or twice a month, I had twice the permission from AFIP to buy some dollars for my trips… but now as I already went out of the country more than twice I’m not allowed anymore to buy dollars, even if I have all the stamps in my passport.
    Anyway you can still pay with the credit card, then pay your bills at the official exchange rate and if you have dollars sell them in the “blue market”, your trip will have a 25% discount…
    You can also travel to Uruguay or Puerto Rico (where I am now), go to a Casino, buy your chips (?) with a credit card, not play (if you ressist temptation) then change them for bills and earn other 25%…
    So next step could, but difficult to implement, is to set a “credit card” exchange rate…
    Bianca you will learn in Argentina in 6 months more than in an MBA in 2 years, but I’m not sure if good things….
    Great post!

    • Ronald Janesh says:

      Mis Queridas,
      Wait until the April bond market crashes……………..we’ll all be selling apples from
      Rome to Anchorage, AK.

  2. jose artigas says:

    I wholeheartedly concur with your view on echo chambered, group sourced Argentine investment “expertise”. AFIP may be the least of the Argentines’ problems here in Uruguay. Argentine flight capital (largely black money) investment in Uruguayan property during the Christina years has almost completely overwhelmed and distorted the Uruguayan property markets. Whilst it may have historically made sense for an Argentine individual to purchase real estate in stable, boring Uruguay, this logic collapses under a mass inflow of Argentine flight capital into the small Uruguayan property market. Argentine money has largely driven a hugely unsustainable and unstable bubble in real estate prices here which have now largely hit a wall due to the dollar controls enacted in Argentina. The likely outcome is all too reminiscent of the 2001/2 bank crisis here in Uruguay when Argentines pulled their dollar deposits out in mass from supposedly stable, boring Uruguayan banks during and after the corrallito. Only this time, they are stuck with largely illiquid real estate, often purpose built for Argentine real estate speculation and totally unsuited to the local market demand. I expect that the these “clever” Argentine investors will end up losing a lot more on their “investment” than they would have ever paid AFIP in taxes when the Argentine herd moves to realise their supposed safe haven property investments or when Uruguay gives up its first Argentine tax evader.

  3. David Chu says:

    I will go you one further.

    During the 2001/2002 financial crisis, Argentineans saw their peso savings in banks forced devalued against the USD by around 75% almost instantaneously. With the current economic and financial collapses happening in Europe and in EEUU, when will people wake up and realize that maybe their USD (some 20+ trillion printed electronically and sitting with the Banksters since the October 2008 crash) is not worth the paper that it’s printed on? Will the rich Argentineans with fat deposit boxes full of USDs, outside the country of course, one day wake up to find out that their life savings are suddenly devalued once again? THAT is the real Black Swan event. And not just for Argentineans.

    What you are describing above about possible AFIP actions is kind of like Johnny Depp and the Panamanian banking scene in the movie Blow.

  4. Rickety Hat says:

    What an interesting analysis. What factors do you think would be most likely to cause Argentina to embrace more financial openness and fewer protectionist policies?

  5. Laura says:

    D-do you think its time for argentines to start buying gold?

    B- for the past 100 years the dollar has been a safe investment to retreat to for global investors.

    After the 2001 crisis, those argentines with excess capital invested in dollars made a killing after the devaluation. They brought their money back into the country buying bodegas, real estate, and ranches that all of a sudden became very cheap and generated a lot of returns in the following few years.

    The world economy is rather unstable right now, who knows what will happen to the euro, china’s growth is dramatically slowing, Israel may attack Iran, brazil is up in the air, there are many undefined variables.

    Why do you think this may be a black swan moment for an argentine investor who is used to keeping their excess cash in dollars? What’s wrong with the wait and see approach, when the argentine and global economy is so unpredictable,Shouldn’t one wait to see where the wind is blowing before directing the ship? What investment would be a better alternative?

    • David Chu says:

      The short answer is Yes! And silver too.

      Does anyone know where one can buy silver bullion coins like the US Silver Eagle, Canadian Silver Maple Leaf, etc. in Argentina (where in Buenos Aires)?

      The long answer is a bit more complicated. If one is not planning on sticking around in Argentina, it maybe hard and risky to take one’s gold coins out of the country.

      Currently, the gold market or demand for gold in Argentina is pretty much asleep, as it is in other countries. How do we know this? A source in BA where one can buy gold bullion coins like the South African Krugerrand (which I recommend as there are some 50 million ounces in the world and it has the lowest premium typically of all the various bullion coins) is Puente (the other is Banco Piano):!getOroPorCategoria.action

      Right now it’s a seller’s market for gold in Argentina, i.e., no demand for gold, because the buy/sell prices are way below and pretty much near the spot price, respectively ( Currently, the spot price is ~$1615 USD and Puente is willing to sell Krugerrands for $1625 USD?!? Great time to buy!

      But one needs to have a strong stomach, because the Central Banksters along with their key primary dealers are currently suppressing the price of gold and silver below the psychological barrier of $2,000 USD and $50 USD, respectively. Gold can rise due to strong market demand maybe $30 to $40 during a day, but will suddenly fall by 3% to 5% in a hour during a coordinated attack, like during a Bernanke appearance before Congress.

      When gold becomes a buyer’s market, the buy/sell prices will be above the spot price.

      When the gold bubble mania finally occurs, as it will like the real estate bubbles, is when taxi drivers and hairstylists in BA start telling you to buy gold! When you get 3 people telling you to buy gold in a day, it’s the time to sell!

      The problem with the “wait and see” approach is that it’s basically a following-the-heard mentality. That kind of mentality works really well during relatively calm periods of history like during the 1950s, but not during the kind of momentous upheavals we are currently experiencing. Argentineans who made a killing after the 2001 crash were those who did something BEFORE the crash, everyone else, i.e., those who waited and saw, became financial roadkill.

  6. Scott B says:

    The whole definition of Black Swan is becoming more and more twisted. It’s similar to the “Horatio Alger” redefinition about “hard work=success” that is wrong wrong wrong:

    The original question raised by the “Black Swan” allegory is this: “How many white swans do you have to observe, before you can be assured that there are no black swans? Does the observation of 1000 white swans mean there are no black swans? 10,000? What is the number?”

    There is no “appearance” of a “Black Swan” in answer to “What number?” !!

    The point of the Black Swan allegory is to highlight the fact that an erroneous premise (i.e. asking about the number of white swans) can lead you to a fatal conclusion (…therefore, there are no black swans, or heatwaves in Alaska, or..).

    • Thanks for the comment Scott – The black swan allegory is indeed used frequently and in doing so does become twisted. I think it does provide though to the idea that just because you haven’t seen something before, doesn’t provide any evidence to the fact that it can’t happen or exist. How many white swans do you have to observe before you can be assured that there are no black swans? How many red crayons do you have to observe before knowing there are no blue crayons?

      The answer is that it is the wrong question. You have to see all the swans to know what colors there are. Personally I would like a purple swan, it would complement my style most adequately.

  7. Hucklebuck says:

    I don’t, know. My usual response to Mankiw is a lot of catcalls.

    Based on my personal experience elsewhere, when any government says “Don’t worry. This confiscatory law is only retroactive”, it’s time to head for the hills. If the retroactive application produces revenue that will be used as the reason to expand to current and future application. If it does not, than that will be used for the same purpose. Capital controls are always a disaster for the populace in general.

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