In a recent Wall Street Journal article, Mary Anastasia O’Grady writes that Venezuela’s “National Superintendency for the Defense of Socio-Economic Rights is reportedly pressuring stores to accept the government’s new digital fiat currency, the petro.” The Venezuelan government claims its digital currency, which launched in early 2018, is backed one-for-one by a barrel of oil. The petro is also intended to circulate at a fixed exchange rate with the bolívar soberano, the latest iteration of Venezuela’s fledgling currency.
Ms. O’Grady quotes me summarizing some of the work I have done with Josh Hendrickson and Thomas Hogan, which shows that a government can get its citizens to use its preferred money so long as it is sufficiently big or is willing to levy sufficiently large punishments. But she leaves another question unanswered: why would the Venezuelan government prefer the petro? Three reasons stand out.
Avoiding U.S. Sanctions
Venezuela relies heavily on oil revenues. According to OPEC, oil revenues typically account for around 99 percent of Venezuela’s total export revenues. And, historically, much of those oil exports have gone to the U.S. However, its oil exports fell by a third in 2019, in large part because of economic sanctions levied by the U.S.
To fully appreciate the nature of the problem, it is useful to make a distinction between primary and secondary sanctions. Primary economic sanctions levied by the U.S. government prevent Americans from purchasing oil from Venezuela. However, the U.S. government has also announced that it will impose sanctions on anyone else trading with Venezuela. And these secondary sanctions have been pretty effective.
Why are U.S. secondary sanctions so effective? J.P. Koning is certainly correct when he writes that most companies and countries do not want to risk losing access to U.S. markets. But he probably goes too far in claiming this “has very little to do with the U.S. dollar” functioning as the world’s reserve currency. The U.S. government has a much easier time monitoring international transactions executed in U.S. dollars.
International transactions executed in U.S. dollars are typically cleared in a New York bank. Those banks know their customers and are obliged to hand over transactions data to the U.S. government when subpoenaed or if they suspect a crime is being committed.
If the international transaction is executed in some other currency, like euros, the information is a little more difficult for the U.S. government to access. Of course, most European banks will refuse to clear the transaction as well since the U.S. government can require they hand over the relevant transactions data, in which case they would be found to have violated sanctions by processing the transaction, or they would lose access to U.S. markets on grounds of non-compliance; and, since most international transactions are executed in U.S. dollars, a European bank that cannot transfer money to and from U.S. banks will struggle to serve its international transactions-making customers.
Nonetheless, the risk of detection is probably a little lower than it would be if the transaction were made in U.S. dollars. And, as a result, the transaction is more likely to be executed.
The international financial plumbing has a lot of pipes running to and from the U.S. And that gives the U.S. a lot of power to levy sanctions, not just on its own citizens, but also on citizens and companies of other countries interested in international trade.
You can probably see where this is going. If Venezuela were able to create a parallel financial system, one with no pipes going to and from the U.S., it could make and receive international transactions with even less risk of detection than is afforded by other national currencies, like the euro, ruble, or renminbi.
That’s where the petro comes in. As a digital currency, it enables one to send or receive funds virtually anywhere around the world. And, to the extent that those transactions are disconnected from the U.S. financial system, they are much less likely to be detected by the U.S. government.
Again: the sanctions still apply. But, by conducting transactions in petros, they are easier to get around.
Why, then, does Venezuela push the petro at home? Why not just require it for international transactions? For one, few will be willing to accept the petro if there isn’t a very big market for petros. Hence, by increasing the demand for petros at home, Venezuela makes it less risky for foreigners to accept them — if only for a short period of time.
For international transactions, the petro offers those interested in skirting U.S. sanctions some financial privacy not afforded by traditional cross-border electronic transfers. For internal transactions, in contrast, it almost certainly offers far less financial privacy than hand-to-hand currency.
As Josh Hendrickson and I explain in a recent working paper, hand-to-hand currency — cash — affords a lot of financial privacy. There are drawbacks to using cash, to be sure.
Cash does not bear interest. It is easier to lose and easier to steal than balances held at a bank — and less likely to be insured due to loss or theft. It is more cumbersome for high-valued transactions, since one must carry many notes, and odd-amount transactions, since one must provide the correct denominations. And it typically requires the sender and receiver to be physically present in the same location when funds are transferred.
But, for relatively small, local transactions where financial privacy is important, cash is still king.
It is easy to imagine, then, why the Venezuelan government might want to push its citizens to swap physical bolivares for digital petros even in the absence of international sanctions. The petro makes it much easier to monitor transactions — and punish those conducting transactions inconsistent with the prevailing government’s objectives.
It is difficult to mount much opposition without funding. And it is difficult to raise funds for an opposition movement if would-be contributors worry they will be caught and punished. By requiring petro use, the Maduro regime tightens its grip on power.
Finally, widespread petro use would presumably help Venezuela with another one of its self-inflicted problems: cash shortages.
When the money supply (i.e., cash and deposit balances) increases, as it tends to do quite rapidly in Venezuela, the purchasing power of that money falls. As a result, more cash is needed to make routine transactions. But Venezuela does not print its bolivares notes. And, for obvious reasons, the private companies willing to crank out its ever-increasing supply of bolivares notes are not willing to receive payment in bolivares.
This has led to some amusing headlines. In April 2016, Bloomberg reported that Venezuela Doesn’t Have Enough Money to Pay for Its Money. In July 2018, the Economist reported that Venezuelan cash is almost worthless, but also scarce. The reality on the ground is far from amusing, though. The inability to make routine transactions leads to a decline in production, leaving ordinary Venezuelans even poorer than they already were.
There are two solutions to this problem. The first (and probably more benevolent) solution is to manage your money well. In the absence of hyperinflation, you don’t have to continuously print up vast quantities of ever-larger denomination notes. But managing your money well first requires getting your fiscal house in order. And that can be difficult to do when you are trying to maintain a populist winning coalition.
The second solution is to convert transactions executed in cash into those conducted with digital balances. By reducing the reliance on cash in normal times, you also reduce the absolute increase in demand for cash balances as the broader money supply increases. In the limit, where no one uses cash, you eliminate the need to print notes altogether.
If the National Superintendency for the Defense of Socio-Economic Rights is successful in pressuring stores to accept the petro, it would serve the Maduro regime well. By making it easier to avoid sanctions, the petro enables the government to regain some of its lost oil revenues. By making it easier to monitor domestic transactions, the petro aids efforts to stamp out political opposition. And, by reducing the need to print up so many new notes during periods of hyperinflation, the petro reduces the likelihood and magnitude of cash shortages.
Alas, in helping the Maduro regime maintain power, the petro seems unlikely to improve the lives of ordinary Venezuelans.