BY: CLAUDIA A. GONZALEZ
In an attempt to alleviate Venezuela’s current economic, social and political crisis, President Nicolas Maduro recently announced the creation of a new digital currency called Petro. According to his statements, this new currency would serve in facilitating international transactions and would be backed by oil, gas, gold and diamond reserves.
The President gave little to no details on how this new digital currency would operate, but he was quick to mention that the introduction of this cryptocurrency would help the country uphold its sovereignty in monetary terms.
During 2017, Venezuela faced new financial sanctions, which limited the country’s ability to find cash and keep itself afloat during times of economic upheaval. Since oil prices have started to decrease, the chavista government has attempted to secure international financing in the form of debt emission or direct credit lines from countries like China and Russia.
In a society where inflation has risen to 650%, digital currency could be the answer to most problems related to monetary policy. However, thus far the purposes of the Petro currency have been outlined to first be a digital currency operating as a cryptocurrency, and instead of trading the currency exclusively based on trust, it would also be supported by Venezuelan gold, diamond and oil reserves. Secondly, this currency would be adopted to advance in issues of monetary sovereignty.
Through the proposal of using oil, gas, gold and diamond reserves to back the currency, it is evident that Nicolas Maduro’s government understands that their promises are no longer enough to sustain the national economy, and particularly, its credibility as perceived by international financial markets.
Thus, even when the government continues to exploit the country’s wealth to continue ruling its people, the underlying matter continues to be understanding whether or not it would be good business to buy it. One particularly important factor that has not been disclosed by the government is that of the conversion rate and conditions to receiving the oil, diamonds, and gold the government is promising.
Considering Maduro’s government is one used to manipulating the rules of the game to stay in power, one can understand the need to move away from regulated financial markets ̶̶ cryptocurrency, in this regard, has a lot to offer. Subsequently for those who are used to operating in the shadows and have no problem balancing their financial performance with the risk that this would entail, this news could become an affordable option.
On the other hand, bearing in mind that the Venezuelan government has been targeted with financial sanctions, which have limited the country’s access to international financial markets, it is logical Nicolas Maduro would seek ways around the sanctions to continue trading its sovereign debt and other financial instruments. We have recently seen how the government had no problem in announcing a debt restructuring from which still little detail is known as to how it will impact the future debt services.
Cryptocurrency would be the ideal way for Maduro’s government to continue to receive international financing since cryptocurrency is not under the jurisdiction of any country nor is it governed by any central authority. Specifically, with regards to Venezuela, it would be a currency in which the United States can play any part in its regulation or control.
Since no details have been disclosed, it is hard to foresee how such a measure would be implemented, but one thing is clear: this measure is not intended to alleviate the Venezuelans’ grievances.
During 2017, Venezuelans subsisted through skyrocketing inflation that accumulated to 650% throughout the whole year. In the month of November, Venezuela entered a new phase of inflation, shifting from 45% in October to a monthly inflation of 57% November, officially signaling the country’s entry into hyperinflation. It should be noted, however, that Maduro’s government shut down any type of measurement on inflation.
Alongside hyperinflation, Venezuela is experiencing a new foe – a shortage of bills and coins. Seeing the increasing shortage of the latter, cryptocurrency could presumably be one answer to dealing with the lack of cash. Nonetheless, to truly implement this for the sake of the Venezuelan people an immense shift in technological access would need to happen in the country, including provider platforms and individual access to technology, which will take time to take hold.
In addition, Venezuela has barred a currency exchange control since 2003, thus limiting the access to foreign currency to Venezuelans. Some economists have argued that the Petro could become a way in which Venezuelans could gain access to other currencies. For local producers, for instance, access to dollars has become the principal barrier to production, since they can no longer import raw materials and parts for machinery, among various others. But a large investment in technology will be needed to effectively roll out the cryptocurrency, bearing in mind that every other road the government has proposed in the past to deal with the currency exchange control has failed.
More details must be revealed by the Maduro government before the full impact of the Petro can be understood. But considering how little is known about the cryptocurrency, it seems that the intention of Nicolas Maduro and his cabinet is solely to evade the sanctions imposed by the international community in trading its financial instruments associated with Venezuela’s sovereign debt. If this is in fact the case, the international community, including global financial investors, would be wise to study the government’s financial history, and the recent meetings in debt restructuring to better understand the nature of the government and its intentions.
Claudia A. Gonzalez is a Political Analyst with a background in economics. She is currently an Associate at Atheneum and holds a Master’s degree in Political Science. She has attended Pontificia Universidad Catolica de Chile, Universidad Catolica Andres Bello and the London School of Economics and Political Science.
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