The Petro: Maduro’s Desperate Attempt at Jumpstarting the Venezuelan Economy
By Pranav Ravikumar | April 6, 2018
In December 2017, Venezuelan President Nicolás Maduro stunned the world by announcing the petro, the first cryptocurrency to ever be issued by a country. This was clearly Maduro’s way at creating an economic life jacket for the financial crisis that is currently crippling the formerly-wealthy country, marked by a severe hyperinflation of the bolivar (Venezuela’s currency) and a large treasury debt. A proud Maduro hailed his achievement in December as a “cryptocurrency to take on Superman.”
The idea itself is not entirely new. Central banks such as the Bank of England and the People’s Bank of China have actually proposed experiments with respect to issuing Bitcoin-inspired currency on a blockchain ledger, which allows them to track every pound or yuan as it travels through the financial system in real time, essentially making money more easily traceable. A study by John Barrdear and Michael Kumhof, two research economists at the Bank of England, even hypothesized that a digitalized currency on a ledger could raise GDP by as much as 3% due to its sheer efficiency. But Venezuela has decided to cut the hypothesizing and put its own cryptocurrency to the test.
The petro’s value is determined by Venezuela’s natural reserves. Initially, Maduro issued oil-backed petros, meaning that each petro is worth one barrel of Venezuelan oil. Maduro has since incorporated other indicators into the value of the petro, with “Petro gold” (petro similarly backed by Venezuelan gold reserves) beginning circulation on February 21st. Maduro aims to attract as many foreign investors to buy as possible. Based on the latest price of the country’s oil basket, the total worth of the petros currently in circulation (around 100 million petros) would be around $5.9 billion dollars; were all these purchased, it would certainly help out the struggling Venezuelan. Furthermore, due to the petro being backed by barrels of oil, Venezuela can profit from its oil reserves without any actual oil extraction. Most importantly, the petro aids in bypassing American sanctions that President Donald Trump imposed as a way to protest Venezuela’s autocratic government.
In theory, the petro seems like a fantastic idea. It appears as though it is almost too good to be true. Spoiler alert: it is.
The goal that Maduro would have wanted most to achieve— the ability to avoid US sanctions and encourage Americans to invest in his cryptocurrency— is now absolutely impossible. On March 20th, Trump signed an executive order prohibiting US citizens from buying the petro. Given that one of the only currencies traded for the petro is the American dollar, this was an especially huge blow to Maduro’s hopes for American investment.
Second, there are huge concerns over Venezuela’s ability to properly back up its currency in oil barrels, given that its oil output has recently fallen to its lowest level in nearly 30 years, yet another sign of the country’s terrible economic situation. Crude oil currently makes up 95% of Venezuelan exports; the country has no other major source of foreign income. However, Venezuela’s state-owned oil company, PDVSA, has slowed productivity because of government corruption and the growing debt crisis. It is not clear, as well, whether “petro gold” would be backed by the actual gold reserves in the central bank or undeveloped mineral deposits. The government’s history of poor economic policymaking and hostility towards investors also scares off many potential investors. During his term, Maduro consistently overvalued the exchange rate of the bolivar. Rather than cut spending in response to the debt crisis, the government chose to print more money in a manner akin to Weimar Germany, predictably causing rampant inflation. This economic irresponsibility, paired with the Maduro government’s lack of transparency, is deeply disconcerting for many would-be investors.
The country’s humanitarian crisis presents yet another thorn in the petro’s side. The country is deeply impoverished, experiencing a shortage of medical care and wide swaths of the population nearing starvation. However, Maduro has refused any sort of aid from the United Nations, the United States and his neighboring Latin American countries. Furthermore, the petro can only be bought with US dollars, euros or other cryptocurrency forms such as Bitcoin; this is complicated by the fact that Venezuela has heavy restrictions on buying foreign currency. All in all, Venezuelans are unable to use petros to rectify their horrid living standards.
The petro definitely would have had potential in another time in Venezuela’s history, but with the economy in a tailspin, many criticize the petro as an insufficient solution to massive economic problems. Given its conceptual newness, it is difficult to estimate the effects that the petro will actually have on the Venezuelan economy. However, it alone is unlikely to solve the deep seated structural problems with Maduro’s economy. However, hopefully the petro offers a step in the right direction.