Economist Luis Salas looks at the impact of the Petro crypto-currency on the de facto dollarisation of Venezuela.
By Luis Salas
The main problem in answering whether or not the Petro will work is that, to tell the truth, no one seems to know for sure exactly what it is supposed to do.
Let us recap. A couple of years ago, the Petro was born as a cryptocurrency, backed by oil reserves and allegedly to be used to circumvent the blockade and the hegemony of the dollar. On top of this, it was claimed that it would defeat the economic war, but then we were told that we could also use it to buy bread at the bakery.
Later, it began to be used as an accounting unit to reference various values, including the minimum wage. It was also claimed to be a crypto-asset, to “save money,” taking as a reference point the variations of the foreign exchange market.
Now, it is being used to pay Christmas bonuses and taxes, just as it has been used to pass funding to governors and mayors. And so on, with a variety of uses.
The issue of the Petro’s multiplicity of functions and tasks is not necessarily one of variety. Rather, they are the multiple contradictions that arise when you look at it all together. The functioning of a cryptocurrency is already an issue in itself, and this one brings further contradictions as it is backed up by oil and is intended to be used as a currency, all raising the level of complexity. Yet at the same time it will be used as an accounting unit and crypto-asset while trying to become legal tender, presenting a real challenge for our understanding.
In this sense, everything indicates that the main characteristic of the Petro, as someone cheerfully said once, is that it tries to be two opposing things at the same time, and so it’s very difficult to know whether it will work or not.
But where it certainly seems to be two opposing things at once is in its relationship with the US dollar. In principle, in theory or discursively speaking, the Petro is the counterproposal of the Venezuelan government to the US dollar and the antidote to dollarisation.
In practice, however, things don’t look so clear.
The Petro and the dollar
In this regard, the date of November 29, 2018 is key, marking an exact year since the Petro was anchored to the dollar and unpinned from the oil barrel, all of which was done as part of the application of the “correction factors” to the Recovery Plan launched in August 2018.
Well, while many still opine that the Petro is anchored to the barrel of oil, it is not in reality. Or it is only partially and nominally. In reality, and since November 29 last year, the Petro’s anchor is the US dollar through the official bolivar-dollar exchange rate.
This is immediately verifiable if we stop to look at how the Petro gets its price in bolivars (BsS), the [so-called bolivar-valued] petro crypto-asset, which is used for savings and to buy and sell, and which sees its price vary daily.
Mercantile logic indicates that the price of the Petro in bolivares should result from the supply and demand game of the exchange market where it is traded, but it actually gets its value from the variations in the official exchange rate, currently under the “liberated” system of the interbank exchange tables.
For this purpose we can take a small sample: the price in bolivars of the petro crypto-asset at the close of operations on November, 28 was 2,292,253.25 BsS. The previous one, November 27, was 2,204,027.97 BsS, while November 26 was 2,128,236.84 BsS.
If the Petro’s exchange scheme were that of August 2018 [when it was pegged to the price of a barrel of oil], such values would be impossible for the simple reason that this schema was established on the basis of a fixed anchor, because the idea was that the bolivar would not be devalued.
So, in August 2018 the Petro was worth US $60 based on the price of the barrel of oil in the Venezuelan market. Establishing an exchange rate of 60 BsS per dollar, the Petro in turn was valued at 3,600 BsS. That is why, when the minimum wage was set, there was talk of half a Petro, which was 1,800 BsS then.
What was done on the night of November 29, 2018 and which makes it impossible for that to no longer be the case?
Due to the impossibility of maintaining the fixed exchange rate and avoiding the devaluation of the newborn sovereign bolivar, the fixed anchor on the barrel of oil was removed and the Petro was passed to a sliding anchor, taking as its reference the official exchange rate, at that time called DICOM.
Thus, the Petro rose to value the equivalent of 9,000 BsS (from the initial value of 3,600 BsS), which represented a devaluation of the bolivar against the Petro of 150 percent. The bolivar, on the other hand, was also devalued against the dollar by the same percentage, from 60 to 150 bolivars per dollar.
Why do we say that the new anchor for the Petro – and therefore the bolivar – became the official exchange rate? Because the numbers begin to work out when it is understood that the initial formula was modified as follows: 1 Petro = Official exchange rate (TCO) multiplied by 60.
TCO is multiplied by 60, which we assume is still the same US $60 for a barrel of oil. Oil prices are now no longer the marker but only an element of the equation which includes the variation of the official exchange rate.
On November 29, 2018 the exchange rate became 150 bolivars, which, when multiplied by 60 gives the 9,000 that went on to be the value of the Petro. That relationship is maintained to this day, as we can see by performing the same operation with the last values of the Petro crypto-asset.
Consequences and perspectives
|Date||Official Exchange Rate (TCO)||“Average” price of a barrel of oil||Petro crypto-asset price|
In an editorial on the economics page of [Venezuelan news portal] 15yultimo.com published on December 16, 2018 entitled “The Petro: Financial Sovereignty or Dollars by Other Means?” we warned about the implications and consequences of adopting this schema.
We will reproduce a summary of what was written then:
- Final elimination of exchange mechanism DICOM and its replacement by an unregulated market where the exchange rate is determined by the exchange traders, limiting the Central Bank (BCV) to being a simple advertiser of the price.
- Definitive abandonment of the (“sovereign”) bolivar as the currency of national circulation. This has already happened in practice, both as a result of hyperinflation and devaluations, as well as with the monetary consent of the government and the BCV in authorising the use of cryptocurrencies. Likewise, the ambiguities of the repealing of the law of illicit exchange [July 2018] which left grey areas concerning if one can purchase items directly in foreign currency in without going through officially authorized channels. The dollar is already used as a direct exchange unit for smaller trade, and other currencies are used in some parts of the country (the peso on the border with Colombia, the real on the border with Brazil). The use of crypto-currencies is becoming increasingly popular.
- Monetary-exchange rate anarchy. What is also happening with several exchange rates and several currencies in circulation is that it becomes impossible to retain authority and sovereignty, and indeed even impossible to make economic policy. It is worth saying that this anarchy is transferred to the entire economy, affecting everything from pricing systems to productive activities.
- Deepening a new kind of inequality: a monetary inequality. It’s happening, too. To the extent that multiple currencies and crypto-currencies circulate, those who have access to the most valuable and liquid ones impose themselves on those who do not. At present, all those who receive their income in bolivars are at a frank disadvantage against those who receive remittances or collect foreign exchange income.
- Abandonment of productive activities in favour of speculative activities. Given the exchange rate manipulation that is no longer only in the black market but the government has now joined in. In practice it is cheaper and less cumbersome to import than produce domestically. Moreover, it is obvious that the main incentives are being directed to the monetary-financial field, including the possibility of “saving” in Petros and then transforming them into hard currencies and extracting them from the country, at least in the case of those who can acquire them in large quantities.
- Paralysis of economic activity. In our view, the Petro’s artificially inflated promotion as a speculative crypto-asset is intended to contribute to the restrictive monetary policy that the government has been pushing in its fight against hyperinflation, whose origin is an “excess” of liquidity, in the eyes of the government.
It has already been shown that this hypothesis does not apply for Venezuela. But beyond the theoretical disquisition, what matters here is the result. In a hyperinflationary scenario like the one we live in, with permanent devaluation, monetary restrictions (constricting printing of bolivars, levelling out of pay scales, budget cuts in institutions), which not only directly affect the majority through a violent contraction of consumption but also have a direct effect of strangulation, or rather of shrinking, of the economy, what can be expected is a greater closure of businesses, except for monopolies and oligopolies. This, among other things, means an increase in unemployment, which will add to the large number of workers who are leaving the public administration, with it being expected that many more will leave en masse between the end of this year and the beginning of 2019.
- Dollarisation of the economy. If the sovereign bolivar is to be definitively abandoned, we may be left in a Zimbabwe-like scenario of monetary anarchy or Cuban monetary duality. Of course, the option of Petrolisation is also present, i.e. the sovereign bolivar being replaced by the Petro. In our view, government policy points in this direction, but it doesn’t seem likely to be a sustainable project over time. If other, deeper, non-monetary problems (such as the gigantic drop in foreign exchange income, largely due to the fall in oil production, as well as the weight of external debt) are not solved, all that will really be done is to displace the problems we have in bolivars to a scenario where we would have them in Petros.
So, it looks increasingly likely that at the end, this whole story of the Petro cryptocurrency, born to fight against the financial hegemony of the dollar, ends up paradoxically ushering in a definitive dollarisation of the economy, kind of following Friedman’s rule that only a deep crisis makes it possible for the politically impossible to become politically inevitable.
The probability of this scenario is premised on two fundamental factors. Firstly, that there are powerful interests pushing in that direction. Secondly, as the dollar remains the main world-class currency, accounting unit, and value of reserves, in hyperinflationary processes it operates as a “spontaneous” refuge for economic actors of all levels. The pinnacle here is that the artificial manipulation of the Petro by anchoring it to the dollar via DICOM is also pushing in this direction. Maybe those in charge don’t know they are doing it, but they are.
We said all this last December, when the measures were taken. Only the final elimination of the bolivar and the possibility of a legal or official dollarisation that reinforces the de facto and unofficial one seem to be missing from this list. It’s almost certain that the first of these will happen at any time, and we already know that the higher echelons of government do not see the dying of the bolivar badly, and even thank God for it. Anyway, in the months to come, we’ll know.
Luis Salas is an economist at the Bolivarian University of Venezuela as well as briefly serving as Economic Vice President in 2016. He is co-editor of the news portal 15yultimo.com.
Featured image: Venezuela’s Petro cryptocurrency has caused much debate amongst economists. (TatuyTV)