Ortega’s Slush Fund Co-op Shaken by US Sanction

Debts become “radioactive”, so nobody wants to buy them, says an expert; adding “you don’t see people withdrawing their funds, but neither do you see them making paying.”

By Ivan Olivares (Confidencial)

HAVANA TIMES – Last week, the clients of the “Valle Sandino” residential complex, located northwest of “Ciudad Sandino,” received a letter in which an official from the Office of Follow-up and Payback of the National Rural Fund (CARUNA), indicated how to make their debt payments, after they were sanctioned by the US Treasury.

The Trump Administration sanctions also affected the Attorney General, Ana Julia Guido, and Daniel Ortega’s private secretary, Paul Oquist. By including CARUNA, they caused a financial earthquake so big that it will force the last financial arm of the regime to substantially limit its operations, if not to close, sources told Confidencial.  

“To create a mechanism that helps our clients comply with their commitments to us, we inform you that all payments and credit payments must be made only in cash, due to the imposition of the National Financial System on you as client, and us as the creditor,” says the letter, without mentioning that the company was the object of an international sanction.

“Between one sanction and another, the Ortega Murillo family is losing hundreds of millions of dollars. The United States gave a succession of blows to the backbone of their business system. That has forced them to look for front men and dismantle their system,” remarked historian Dora Maria Tellez.

Its roll in laundering the Venezuelan funds

CARUNA played a central role in the privatization scheme of the Venezuelan state cooperation with Nicaragua. For a period it was the financial arm of ALBA, until that role was transferred to the Banco Corporativo (BanCorp), in the form of a huge trust of more than 2.5 billion dollars. The funds were then returned to CARUNA when the US sanctioned BanCorp, forcing it to disappear.

The fate of that trust is just one of the big questions posed by sources interviewed to prepare this report. They agreed to talk with Confidencial under the promise to keep their names anonymous.

Another question has to do with the composition of that trust, but also with simpler things. “Why don’t we see lines of people withdrawing their money from CARUNA’s branches, or making lines to pay?” That was asked by one of the sources, an economist who questions the use that was given to Venezuelan cooperation.

“CARUNA is divided into two parts: the cooperative itself, with partners (natural person) who receive loans, etc., and the part that manages ALBA funds, which is huge and was passed by BanCorp. However, we don’t know if it returned to CARUNA when BanCorp closed,” said a senior executive from a microfinance company.

“It is not known what happened to the trust, and what they are going to do with all that cash. Therefore, everything I tell you is just speculation,” warned an auditor. “They can buy bonds and stocks, but there are not enough “papers” in the country to invest all that money.”

From there, he expressed his fear, shared by other sources, about the risk that this cash will increase corruption or be invested in illicit activities. “These are the ‘business’ opportunities sought by the fortunes linked to drugs trafficking. They try to expand their interests towards other economic activities,” said one of the sources.

CARUNA’S debt is “contaminated”

The huge trust that CARUNA gave to BanCorp was, above all, a formidable list of accounts receivable. Loans to state entities including ENACAL, Mayor’s Offices, INE, or the Ministry of Energy, to subsidize electricity tariffs. Likewise, to developers, or ordinary citizens who received loans for consumption, or to buy a house or a car.

The sources also expressed their doubt that CARUNA can sell these debts, considering their value is close to zero.

“I imagine they will try to sell them, like any businessperson in trouble would do. But those debts are worthless,” said Dora Maria Tellez. If they decide on that course of action, “the option is for a third party to appear who runs the risk of getting involved and losing,” she added skeptically.

Tellez added, “There is a key element, the issue of reputation,” which CARUNA decision makers are dealing with right now.

“Goodbye to your reputation. You must close, for this reason, and for an operational issue. You no longer have the possibility of making electronic transactions with the rest of the National Financial System, and that is unsustainable,” explained an executive from a microfinance company.

This executive flatly rejects the possibility that a company like the one he works for, or another in the sector, could buy CARUNA’s portfolio for a fraction of its nominal price, considering that “it is contaminated. It is radioactive. They are papers that contaminate you,” he emphasized.

“Whoever buys them may be subject to a United States sanction. Not only that, the banks could go ahead and close the buyer’s accounts,” said our source. “They would be acting to prevent their bank branches in the US from getting nervous and closing on them.”

Apparently, the ‘contagion risk’ of which they speak would not affect the State… unless the one who sanctions so wishes.

“The trust was comprised of debtors from houses, buses, energy companies, City Halls, ENATREL, and other investments,” said the executive. In the case of state entities, “they will not have a problem. Firstly, because they are debtors, just like those of BanCorp, and second, because they belong to the public sector. If they were private, they surely would,” be at risk, he added.

The auditor we spoke with resolves it in a simpler manner. His informed opinion is that “they (the authorities of the party and government that are involved in the operation) do not care about the contagion effect, because if they did, we would not be experiencing this.”

Another economist interviewed explains that “they are related parties, and it is not known how they are managing it. There are also loans for several hundred million to private (electricity) generators. However, I suppose that the charge is already included in the rate,” paid by consumers.

“CARUNA has to collect debts with ENACAL, with ENABAS, and the energy sector. Although it is difficult for the US to go against a public institution, the resolution does not make exceptions.” So, there is always room to maneuver against any state entity, explained one of the economists.

What if they don’t pay?

Besides the six-zero debts, CARUNA has a multiplicity of middle-income clients with outstanding personal loans. An example are the clients of “Valle Sandino.” Their debt could have originated from the fact that CARUNA financed the loan to build the housing complex. Or possibly because they took out a personal loan directly with that entity, explained a real estate agent.

The attitude assumed by debtors will mark CARUNA’s financial viability, because most of its assets are accounts receivable. The sources interviewed believe it does not have enough cash on hand to deal with a run on bank deposits.

“I believe they will have problems to pay their affiliates and return the resources to their savers. They will not be able to recover the credits at the same speed,” said Dora Maria Tellez. She warned that it is the poor who may lose their assets.

When consulted, the auditor questions whether the banking authorities will agree to reduce CARUNA’s legal reserve so that it has sufficient cash flow. He also wondered how much cash it  has in its vaults and where it keeps the rest.

“You don’t see people withdrawing their funds, but neither do you see them making deposits,” said one of the economists. He supposes that debtors may be thinking about the convenience of paying a sanctioned entity, for fear of “contagion.” Furthermore, he said there are those who will use it as an excuse for not paying.

“In that sense, this US decision is a measure of wealth redistribution. How many are going to pay? He asked.

The microfinance executive expressed a similar opinion. He predicts that many debtors will not pay, taking advantage of the situation. If CARUNA already had a high default rate, now more than half are not going to pay them. If that occurs, they will not be able to return the savings,” he explained.

Although it cannot be ruled out that the ruling family may use force to collect the debts. The police could execute evictions, or the confiscation of assets financed with CARUNA resources. One of the sources believes that this will be increasingly difficult. They believe the regime continues to lose financial muscle to pay its repressive forces.

The auditor wonders if CARUNA has enough backing to support a massive outflow of savings. “With fewer deposits, they would have to offer fewer credits, and receive less interest, forcing them to cut staff. If CARUNA received remittances, it will no longer be able to do so. Clients will have to look for other entities in the financial system,” he added. This illustrates yet another problem that the company’s administrators will have to face.

Read more on Nicaragua here.