Petro Cryptocurrency: Revival of Venezuelan Economy?
Image Source: https://venezuelanalysis.com/analysis/14747
By: Lucia Pastrana
DISCLAIMER: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the KCL Latin American Society or El Cortao.
What is happening? Economic catastrophe
It is widely known that Venezuela is experiencing a complex and long economic crisis that can be traced back to Hugo Chávez administration. Since Chávez assumed power in 1998, the state has been jeopardizing the economic stability of the country through their polemic policies. During his mandate the former president nationalized foreign assets and significantly reduced public spending. Such as the case of Petróleos de Venezuela (PDVSA), the state oil company. Considering that Venezuelan economy is dependent on 96% oil exports and the PDVSA is now a non-productive nationalized monopoly, it is natural to envisage a shrinking economy. This is one of the main causes of the exponential hyperinflation.
Furthermore, the economic arena is not the only one tumbling. Economic depression goes hand by hand with political tension between Nicolás Maduro supported by China, Russia and Juan Guaidó backed by the United States. It is important to stress how the struggle for political power is underlaying a clash of ideologies between arguably ‘socialist’ ideals coming from Maduro, Russia and China’s political agenda and liberal ‘democratic’ claims on behalf of the Guaidó and the US. Independently of the international forces playing its part in shaping Venezuela’s economic and political future, what is clear is that Maduro is not willing to cooperate with the US. The president’s inflexibility and intransigence has become a challenge for its hegemonic power - but at what cost? A crumbling economy, a migratory exodus of approximately 4 to 5 million refugees, a 150-billion-dollar debt, a 500 000% inflation rate, shortage in basic food, medicines and a collapsing health system. The list of issues can continue endlessly. Unless there is serious willingness to envisage future cooperation with the international community on behalf of Maduro, Guaidó or anyone who assumes presidency, the status quo will remain.
Precedent: Anti-US ideology and International Sanctions
Nevertheless, to understand the current situation it is important to draw back on Venezuela’s economic history and how since 2010 the United States, the International Monetary Fund (IMF) and the European Union (EU) have imposed severe economic sanctions on its economy. On October 2009 Chávez introduced the idea of the Petro by mentioning it would be an ‘international currency' based on the ‘huge oil reserves’ Venezuela possessed. Through his statement, the former president additionally accused the US of its imperialist economic domination on Latin America by calling it the ‘Yankee Imperialism’.
Although Chávez anti-imperialist statement was following a populist rhetoric, it is important to point out that he was addressing a sensitive issue that does not only concern Venezuela, but many Latin American countries. Economic domination by the US has been historically present, creating division and discord in the whole continent. I will not expand on Chávez ideology and political discourse supporting a socialist utopia free of US intervention. However, I do want to stress the fact that Chávez appropriated this discourse to address popular struggles that were exhausted of economic models that have sponsored inequality, elite domination and exploitation of the working class for centuries. The IMF and multinational corporations are part of a system design to concentrate power on the US hands. I am not saying this is necessarily negative, but it is true that the balance is considerably benefitting more the US and the groups that support its ideals, leaving a number of unrepresented groups in the margins of economic development. What Chávez did was addressing these groups and then using the power they granted him to nationalize and isolate Venezuelan economy.
Soon after Chávez mentioned the Petro, the US gradually started to impose sanctions. First Obama administration during 2015 sanctioned Venezuela for human rights violations and public corruption. Later, Trump expanded sanctions considerably: 2017 restricted Venezuelan government form accessing US markets, during 2018 the president restricted transactions with any type of digital currency, on 2019 sanctioned Cuban and Russian vessels and companies that were engaged in oil trading with Venezuela and in 2020 sanctions on PDVSA.
Moreover, the U.S is not the only international actor sanctioning Venezuela’s economy, the International Monetary Fund (IMF) and the European Union follow this agenda as well. While the IMF sanctioned Venezuela on 2019 by cutting $400 million for economic aid, the EU accused the Maduro. administration for violating human rights and sanctioned it by restricting trading. These are examples of how the international system is blocking Venezuelan economy as long as a socialist government remains in power. Since several sanctions were applied on the state oil company PDVSA, the effects that started to unfold were alarming: hyperinflation was the consequence of Venezuelan economy pushed to the limit.
Venezuelan State response: Petro cryptocurrency
Maduro’s desperate response on October 2018 towards the current crisis was the ‘Petro’. Although the idea was previously introduced by Chávez, Maduro’s aim was to institutionalize the Petro as a crypto currency that attempted reviving the economy. This was a serious ambitious strategy since it is the first time a crypto currency is adopted by a state. The price of the Petro is backed according to reserves of natural resources of the country: 50% price of an oil barrel in dollars, 20% gold, 20% iron and 10% diamond. The calculation of these commodities determines the price of the Petro equivalent to 60 USD. The sale and purchase of the Petros can be performed through the Bolivares (Venezuelan currency) and according to the state with any foreign currency that will be regulated by the National Super Intendencies of Crypto actives and Related Activities (SUNACRIP). It aims to incentivize the sale of commodities abroad, facilitating trade, activating the economic capacity of the population and allowing the purchase of state goods such as taxes and public services.
Roughly, it seems like the perfect escape to unlock Venezuela’s economy, but the question is: Is it going to work? To provide an answer is necessary to dissect all the underlying flaws of the Petro that are not mentioned on the official white papers presented by the state.
Petro: Its Flaws
For instance, the Petro shares similar ideological principles with a typical cryptocurrency such as the bitcoin, but the methods it uses are considerably different. Indeed, the bitcoin was created under a libertarian ideology that supported anonymity, decentralization, anti-authority and privacy in the economy. Its main goal was to allow transactions that could not be traced by any means. To allow any user to perform transactions under complete anonymity with no state intervention whatsoever. In the abstract, the bitcoin was a method to escape the power of authority in the economic market. Translating this principle to the case of Venezuela, the country is trying to circumvent the United States authority and control imposed through economic sanctions. The Maduro administration is using the Petro as a desperate attempt to participate in the international economic market by using an alternative system (cryptocurrency) which is not dominated by the US.
However, another principle of cryptocurrency is the idea of decentralization and anonymity. When Venezuela institutionalized the Petro it violated both: Firstly, because the Petro is a centralized state currency regulated through the SUNACRIP, a state institution is directly engaged with regulating crypto activities. Secondly, because Petros are not anonymous whatsoever, they can immediately be tracked to Venezuelan authority. Thus, this represents a contradiction- Why would the Maduro administration introduce the Petro as a cryptocurrency if it does not work as one? There is wide range of answers that might try to predict what the Venezuelan State strategy was planning. Yet, the need to use an alternative mechanism to escape from the US blockade was a matter of urgency. Thus, Maduro is trying to deviate the discourse to sound resilient in front of the international arena by pretending he has a consistent and coherent plan at the forefront of digital economic development.
Nevertheless, Maduro’s discourse might sound like an illusion. Even though the US is maintaining its efforts to invigilate and restrain Venezuela’s arguably socialist government, in reality Venezuela does not possess the means to play under the economic international system game. It is ambitiously attempting to create its own cryptocurrency system to alleviate the demands of a country where epidemic poverty is affecting 90% of its population and over two thirds of Venezuelans a severely starving. Considering the current situation: How is the state expecting to digitalize the economy of a country that is under extreme conditions of poverty? How is the state expecting to ‘increase the financial capacity of the population’ if the population barely has access to satisfy their basic needs?
The international pressures are having a real impact at the domestic level and the Petro is not the answer to alleviate the popular demands of basic products and services for two reasons. These are the main reasons: Firstly, the Petros can only be purchased through three means: (1) with Bolivares, (2) other foreign exchange currencies that have not been publicly declared by the Venezuelan state yet and (3) other Petros. Secondly, the Petros can only be used for state spending. Meaning any commodity or service under the control of the state such as taxes or public services.
On these terms, the state is not considering the capacities of citizens and their priorities. It is out of context for the state to expect that Venezuelan citizens are going to have the capacity to exchange Bolivares for Petros, considering the Petro is 60 USD and the inflation rate is 500 000%. It is out of context for the state to expect that Venezuelan citizens are going to prioritize ‘reactivating the economy’ by spending their limited resources to download an app to exchange Petros when they are starving to the point of malnutrition. It would be almost impossible to exchange devaluated Bolivares for a Petro. People have different priorities and urgently need food, medicines, healthcare, jobs not Petros to pay taxes for services from a dysfunctional state that is not taking care of its people.
A window of opportunity
Despite the domestic limitations, in the international level there is a slight window for the Petro to work successfully as long as the international community is willing to support it. If US and IMF sanctions relax and Maduro or Guaidó are willing to cooperate, the Petro can propose a parallel currency. An alternative strategy for the Petro could be using is as a currency for international trading purposes while maintaining the Bolivares for purposes of domestic currency. This would not be the first time in history two currencies are adopted. Previously a similar strategy was used in 1979 when the European Currency Unit (ECU) was established to stabilize the rate fluctuation across the Euro zone. This currency was not necessarily physical, and it was used solely for trading between European countries. Each country used the ECU for exports and imports while using their national currency for domestic spending. Indeed, this is not the case of Venezuela, but it is a figure of how this strategy could work at the international level.
However, since Trump banned the Petro last year, foreign investment is scared to suffer sanctions for economic association and questions the legitimacy of the Petro. On one side, Trump can continue imposing sanctions if any corporation or country purchases Venezuelan oil through Petro currency. On the other, its legitimacy is uncertain since currently the list of authorized exchange currencies that can be exchange for Petros has not been published. Clearly, it is important to consider that it was recently introduced and the process to include and settle the Petro as the first crypto currency in the international market economy will take time. Time is necessary, but Trump’s actions are not benefiting the future panorama for the Petro. The country is not yet presenting the conditions and the reliability for foreign investment to feel attracted at the moment.
Now is a matter of time to wait if the Petro is going to succeed or not. If Maduro remains in power its administration will have to rely on China and Russia’s loans, black market and - what it is currently attempting- play its own game outside the US led economic system with cryptocurrency. However, if Guaidó rises to power serious reforms in the economic structures of the country will be required. More importantly, serious economic aid from the IMF and the International community will be needed to revive Venezuela’s economy.
The Petro Initiative started as Chávez’s socialist ideological challenge to the US liberal-democratic economic domination and ended being Maduro’s last resource or security exit to escape the economic catastrophe in Venezuela. The crisis that is now being experienced is not about numbers in statistics charts that measure inflation in the world, neither about the demagogic discourses of corrupt leaders performed in the public eye. It is about people, individuals that have lives, families, responsibilities and illusions for the future. Venezuelan people should be the main concern and granting them what is theirs by right – to be protected by the state on which they were born. If the Venezuelan president does not leave aside past conflicts and disagreements with the international community specially the US and the IMF little will change. What Venezuela needs more than a modern and cutting-edge cryptocurrency, is a consistent and coherent plan to seriously re-structure the domestic institutions. This will open diplomatic conversations that will cooperate to re-open the economy for foreign investment. The Petro will remain as an illusion, an optimistic plan without substantial action unless Venezuelan leaders are willing to play under the US-dominated economic system.
Lucia is a first year International Relations student. Her main interest is poverty and economic inequalities specially in Latin America.