In oil terms, Venezuela is arguably the wealthiest nation in the world. Its proven oil reserves stand at 300 billion barrels thanks to heavy tar sands in the Orinoco Belt. That’s larger than Saudi Arabia (270 billion), Canada (170 billion) & Russia (80 billion).
In economics terms, though, it’s now become one of the poorest nations in the world and, through steadfast mismanagement, Venezuela is in the throes of one of the worst crises in Latin American history.
{mosads}The key question now, not just for Venezuela, but for the global oil market, is whether an “oil-backed” cryptocurrency (the petro) is the right tool to bring about the exit from that crisis? And, in particular, can it be done by the same government that has delivered hyperinflation, a deep recession, famine, higher indebtedness and political instability?
In that respect, credibility is one of Maduro’s key challenges. How much trust can be placed in a government that, after devaluing its currency by 99 percent, issues a new currency — in what is arguably a time of maximum desperation?
Venezuela has a long history of expropriating oil assets and dishonoring property rights. With the petro already declared illegal by Venezuela’s Congress, the rights and assets that back this new currency have been on shaky ground even before its distribution.
Indeed, in the event that Maduro is eventually forced from power, as those like him often are, the currency would potentially be worthless.
Even if it’s maintained, though, the petro is likely to eventually fail. Maduro’s white paper, published earlier this month, makes no promise of petro convertibility with oil. Historically, the key cornerstone of successfully run metal-backed monetary systems is the agreement that governments would freely convert paper money with gold (or the metal of the given monetary system).
Maduro’s proposal doesn’t make that offer. Instead, the white paper states that the government will accept petros “as a form of payment of national taxes, fees, contributions and public services” and that they will be “redeemable for fiat money and other crypto assets or cryptocurrencies through digital exchange houses.”
While the petro is “linked” to the value of oil, it’s therefore not truly backed (or “securitised”) by oil and therefore lacks the key defining characteristic of a hard currency. On top of that, Venezuela’s formula for valuing the petro will also use a “discount factor” (as well as the oil price).
That discount factor will be determined by the government and, in that respect, the petro is a de facto fiat currency which is left open to control (and manipulation) by the Venezuelan authorities.
From an international investment perspective, that makes the petro nothing more than an unsecured, zero-coupon government bond (issued in perpetuity). For a country that is about to default, and which has been locked out of international debt markets, the petro is therefore a desperate measure, in desperate times, to raise external/international financing and, with that, evade U.S. sanctions.
Historically, countries in deep crisis usually only recover after a revolution or after they receive a bailout/stimulus package, typically from a U.S.-backed institution such as the International Monetary Fund.
The petro, given that it’s a tool designed to evade U.S. sanctions, not only makes such a bailout less likely, but increasingly looks like it’ll serve to deepen the crisis. Secretary of State Rex Tillerson, for example, has recently raised the prospect of sanctioning Venezuelan oil sales to the U.S., i.e., squeezing one of its last remaining key sources of income.
China and Russia also seem to have little appetite to help. China’s Sinopec, for example, has recently sued the PDVSA, Venezuela’s state-owned oil and gas company, over its unpaid debts, while Russian support has been minimal (it’s accepted delayed repayment on a $3-billion loan).
In the absence of new leadership, the outlook for Venezuela, at least for now, therefore remains relatively hopeless — while risks surrounding oil production threaten to deliver a shock to the global oil market.
Harry Colvin, CFA, is the director and senior market strategist at Longview Economics, an economic research firm.