NOT EVEN CRYPTOCURRENCY CAN SAVE VENEZUELA
Petro coin trick isn’t much of a solution to dire economic crisis, JoeChidley says.
As tricks go, pulling a coin out of thin air isn’t that difficult, or so the interweb tells me. A few minutes on a helpful website, a bit of following instructions with a coin of your choosing, then some time in front of a mirror to perfect your sleight-of-hand — yup, with dedication and practice, you too can be a master at creating money out of nothing.
Or you can do it the even easier way, and just issue a cryptocurrency. Like Venezuela is doing.
Earlier this week, the Venezuelan government launched the pre-sale phase of a digital currency backed (or so it’s claimed) by the country’s vast oil reserves. Socialist President Nicolas Maduro announced the so-called “petro” last December near the height of the bitcoin craze, making Venezuela the first country in the world to officially launch a cryptocurrency.
Applause for innovation all around. But let us pause for a moment and note the ironies here. Given the libertarian urges underpinning crypto — you know, the view that folks should be able to buy goods and services free from government oversight or monetary manipulation — isn’t it kind of strange that the first sovereign offering is from an authoritarian regime with a track record of anti-democratic behaviour and civil rights abuses? On the other hand, given those same antigovernment roots, isn’t it kind of fitting that the first sovereign crypto-coin is being issued by a state gripped by dysfunction, humanitarian crises and seemingly inevitable collapse?
Oh, well. Maduro has been peddling the petro as a “big answer” to what he sees as (or says are) the country’s big problems: the hegemony of the greenback, U.S. sanctions, rapacious capitalist pigs aligned on its borders, and so on.
Other observers might point to other problems: inflation that the International Monetary Fund expects to hit 13,000 per cent this year; an unemployment rate that’s probably around 25 or 30 per cent (the government stopped publishing jobless figures in 2016); rampant shortages of food and medicine.
More specifically, they might note a few wee issues with the Venezuelan oil industry that’s effectively backing the petro. Production — which accounts for 95 per cent of the country’s exports — has declined to its lowest level in 15 years, as infrastructure deteriorates and foreign capital dries up. Venezuela and its state-owned oil company are now in default on about US$1.7 billion in debt payments.
Even with the semi-rebound in the price of oil since the 2014 collapse, the economy under Maduro has not recovered, and won’t anytime soon: The IMF expects GDP to shrink by 15 per cent this year. If that holds, the Venezuelan economy will have contracted by 50 per cent in five years.
And so, of course, the desperate point of the petro is to raise money to keep the lights on.
If you’re interested, here’s how it works, according to a 22-page white paper from the Superintendent of Cryptocurrency and Related Venezuelan Activities (SUPCACVEN, for short). A total of 100 million petros will be issued, their value pegged to the price of a barrel of Venezuelan crude, which sits at around US$60. In the pre-sale, which runs to March 19, 38.4 million petros are being made available to private investors in a series of tranches with de-escalating discounts; the first 3.4 million, for instance, were pegged to sell at a 30-per-cent haircut to the reference oil price. The initial offering begins on March 20, and is open to the public. Forty-four million coins will be available for purchase, and SUPCACVEN will hold on to the remaining 17.6 per cent of the total issuance. It’s still unclear where or how the petros will trade; the Venezuelan government has pledged to honour them as payment for taxes and other public transactions, so there’s that. Apparently holders won’t be able to redeem them for a barrel of oil, sadly.
Theoretically, the whole value of the issuance, at current oil prices, would be about US$6 billion, but with discounts it might end up raising a couple billion, give or take, for the government. SUPCACVEN claims in its white paper that 45 per cent of funds raised — which might amount to a billion dollars — will be spent on “the continuous technological development of Petro and its ecosystem in order to promote its massive adoption.” (It’s hard to see how a billion-dollar crypto ecosystem will improve the lives of Venezuelans much, or satisfy holders of Venezuela bonds, which are now trading at around 20 cents on the dollar. But anyway …) The other 55 per cent will be “destined to the Republic for the support given to the use of the Petro,” and placed in a sovereign fund. Details are scarce, as is typical; auditing will be left up to the blockchain (of course).
Anyway, Maduro has already hailed the pre-sale as a great success, claiming, without any supporting evidence, that it raised US$735 million in the first 20 hours.
Even if the claim is true — and that’s a big “if ” — his petro coin trick won’t bring Venezuela back from the brink, or even help it access financial markets through the back door. U.S. authorities have already said that buying petros amounts to an extension of credit to Venezuela, which contravenes sanctions.
With (rigged) elections slated for April (spoiler alert: Maduro will win), it doesn’t look like much is set to change for Venezuela, its citizens or its creditors. They can only hope that, sooner or later, the president tries another magic-act chestnut: the old disappearing trick.
Of course, if that happens, the petro will be worthless. But it already is, isn’t it?