Maduro’s cryptocurrency scam will fail with or without sanctions

On Monday, President Trump issued an executive order banning all U.S. entities from engaging in financial activities related to the “petro” — the cryptocurrency created by the Venezuelan government a few months ago.

But the truth is that with or without sanctions  — on bonds or now on cryptocurrencies — the Venezuelan government won’t be able to finance itself any further: its own incompetence is the worse sanction of all.

{mosads}The idea of the petro looked like a scam to begin with. After years of profound mismanagement, the Venezuelan government accomplished the impossible: It turned an oil-rich country — once the rising star of Latin America — into possibly the most distorted economy on the planet.

Following the large cut in both oil prices and in the oil production capabilities of the highly-indebted country, the Venezuelan government has defaulted on many of its sovereign debt obligations.

In the absence of external finance, the government turned to a fake lifeline: printing currency. This brought about devastating hyperinflation that has destroyed the purchasing power of Venezuelans, particularly the poorest of the poor. 

The newest attempt by the Nicolas Maduro government to gather some external funding was to create and sell this cryptocurrency to foreign actors.

While the Venezuelan government never explicitly acknowledged that the real purpose of this stunt was to circumvent the sanctions put in place by the U.S. Treasury Department on debt issuance through traditional channels, it was obvious that this was the real reason. The latest sanctions will attempt to close that loophole.

But don’t let the Venezuelan propaganda fool you. The sanctions are not playing a role in keeping the government from financing itself.

President Trump has signed an executive order banning US citizens from buying Venezuela’s newly created cryptocurrency, the petro — the world’s first sovereign digital currency https://t.co/KIYJ3kZ3F6 pic.twitter.com/tGTtDPErHf

— CNN International (@cnni) March 19, 2018

Even without those sanctions in place, who would lend money to a government that manages an economy in free fall and with no ability or willingness to make the necessary fixes? No one would, regardless if you call that loan instrument a bond or a petro.

But there are more reasons why the petro is a scam. First, the government claims that each petro is backed by the value of a barrel of oil, which as of today in international markets is about $60.

But the truth is that the cost of extracting a barrel of heavy oil — the type found in Venezuelan soil — could be quite significant. Thus, if you were to buy a petro for $60, and if the price of oil remains unchanged, you are losing money to begin with.

Second, according to OPEC’s latest numbers, Venezuela is producing about 1.6 million barrels of oil per day, less than half of what it was producing a decade ago. This is not the result of sanctions of any kind, but simply the lack of professionalism and competence of the government-appointed personnel of PDVSA, the state-owned oil company.

Venezuela’s oil-producing capabilities will likely keep shrinking. Thus, if your petro is backed by a barrel of oil that is underground, implying it requires additional exploitation investments, how much is it really worth? 

Third, if –and this is a big “if”— there is a change in government, it is not clear whether a new government led by today’s opposition will recognize debt issued by the current government that circumvents the legal requirements established in the constitution, such as the approval by the sidelined opposition-controlled National Assembly. 

Lastly, what kind of investor will buy a cryptocurrency — or any other kind of asset for that matter — from a government that lies about its finances: Maduro claimed that they were able to raise $735 million through the petro, but showed no valid proof. 

As Maduro has shown limitless creativeness in attempting to remain in power forever, he has also showed boundless evil by ignoring the humanitarian crisis that have brought tragedy and despair to millions of Venezuelans, many of whom have almost no choice but to flee their country in order to survive.

Make no mistake: The problem is not the sanctions, and the solution is not removing them. On the contrary: The problem is Maduro and his government, and the solution is to have free and fair elections.

Dany Bahar is a fellow in the Global Economy and Development program at the Brookings Institution. An Israeli and Venezuelan economist, he is also an associate at the Harvard Center for International Development. Follow him on Twitter @dany_bahar.