Venezuela’s economy is in shambles. Crime is rising, and food and medicine are in short supply. To date, the government has offered little by way of solutions, and it is arguably responsible for the growing strife. However, in what appears to be a grasping-for-straws effort to revitalize the economy, the government has introduced a new kind of virtual currency, the “petro,” that they believe can reverse their fortunes. In this post, I’ll examine what got Venezuela to this point, as well as what the petro could mean for investors and countries around the world.
Venezuela, which holds the largest reserves of crude oil in the world, was once awash with cash. Various difficulties, including severe income inequality, corruption, increased oil supply from elsewhere in the world, falling commodity prices, and international sanctions have led to the current political crisis for President Nicolás Maduro and his administration. The country’s currency, the bolívar, has been devalued to the point that inflation is in the quadruple digits, leaving a desperate, increasingly-fleeing population in its wake.
Meet the Petro
Maduro’s administration is banking on the petro, the first virtual currency ever issued by a country, to provide enough income to allow Venezuela to pay off ever-rising debts and import the basic goods its people have been deprived of. The petro is backed by Venezuela’s most-reliable economic resource – its vast oil reserves – but government officials have given very little indication of how, exactly, oil and petro prices will be linked. Venezuelan officials are also hoping for an additional benefit – using the privacy inherent to cryptocurrencies to navigate around American sanctions, which outlaw business deals with Maduro and other senior officials, as well as banning the purchase of Venezuelan-issued securities in American markets.
Much of the international community blames Venezuela’s economic situation on mismanagement by the Maduro administration – the same administration and political party that, in advance of April elections, will only be competing against itself, as the three major opposing parties were banned from participating. Consequently, response outside of Venezuela (especially in America) has been largely negative. US Senators Marco Rubio and Robert Menendez reached out to Treasury secretary Steven Mnuchin, asking him to monitor the situation to ensure enforcement of American sanctions, and a Treasury Department spokesperson issued a warning in January that investing in the currency would have likely legal repercussions.
Prospects for Success
Lack of trust in the Venezuelan government, coupled with rampant corruption, means analysts are giving the petro little chance of success. Cynthia J. Arnson, director of the Latin American Program at the Woodrow Wilson International Center for Scholars, characterized the introduction of the petro to the New York Times as “…a desperate move by a regime that is increasingly isolated and has an economy that has spiraled out of its control”. Other governments around the world have experimented with the idea of a government-backed cryptocurrency, including China and England, but both have significantly stronger economies, and neither have rolled out anything on this scale. Experts are especially interested in the petro’s success at evading sanctions, though they aren’t the only ones – other nations under US sanctions, like Iran and Russia, will be watching closely to glean lessons from even the smallest victories on this front.
For most investors, confidence in the petro is ultimately inextricable from confidence in the Venezuelan government. Skepticism may reign internationally, but Maduro and senior officials believe this is the “cryptocurrency to take on Superman”. Time will tell if the petro is Venezuela’s economic saving grace, or another misstep in a long list of them.