Monday - May 27, 2019

Russia may join Venezuela with an oil-backed criptocurrency


A new rumor suggests Russia should issue an oil-backed cryptocurrency to combat U.S. defense of the petrodollar

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by anonymous

Last week, Venezuela announced it would develop a national cryptocurrency backed by its oil reserves, the Petro.  Now there is a report that Russia is considering the same thing.  Iran will likely follow suit.

As of right now this is just a rumor, but it makes some sense.  So, let’s treat this rumor as fact for the sake of argument and see where it leads us.
The U.S. continues to sanction and threaten all of these countries for daring to challenge the global status quo.  There is no denying this.  And so much of what we see in the geopolitical headlines are knock-on effects of this challenge.

The geopolitcal “why”

From the Middle East to North Korea, the Danish changing their laws to block Nordstream 2 to the Saudis breaking off relations with Qatar, everything you read about in the news is a move on the geopolitical “Go” board.

Because at the heart of this is the petrodollar. Contrary to what many believe, the petrodollar is not the source of the U.S. dollar’s power around the world, but rather the U.S.’s main fulcrum by which to keep competition out of the markets.

It is a secondary effect of the dollar’s dominance in global finance today.  But it is not the main driver.  Financial markets are simply too big relative to the size any one commodity market for it to be the fulcrum on which everything hinges.

It was that way in the past. But it is not now.  That said, however, getting out from underneath the petrodollar gives a country independence to begin building a financial architecture that can be levered up over time to threaten the institutional control it helped create.

U.S. foreign policy defends the petrodollar along with other systems in place – the IMF, the World Bank, SWIFT, LIBOR and the central banks themselves – to maintain its control.
The main oil producers, however, can escape this control simply by selling their oil in currencies other than the U.S. dollar.  That’s not enough to dethrone the dollar, but, like I just said, it is where the process has to start.

Therefore, any and all means must be employed to defend the dollar empire by keeping everyone inside that system.  So, it looks like the petrodollar is all-important, but only in the long-run.  In the short run, monetary policy, diplomacy and political stability are far more powerful actors on the system.

Russia’s crypto-upside

However, this announcement by Russia is still very important.  Because it deepens Russia’s tools to combat U.S. hybrid war tactics, which include financial sanctions.  They’ve already announced their plans for a crypto-ruble, as well as supporting cryptocurrency research, massive Bitcoin mining operations, and the possibility of a BRICS-Coin as well.
And, most importantly, the legal frameworks under which all of this will operate.  In short, these things create certainty in the minds of companies doing business in Russia that the government will act in predictable ways.  Those ways may still not be profitable enough to lay off other risks and attract capital, but predictability first and fine-tuning second.

Adding in a cryptocurrency backed by their oil reserves which can trade on the open market then only makes sense.  It allows smaller oil and gas companies to avoid the worst of U.S. banking sanctions.  It will help create secondary markets for corporate debt and equity issuance, fast-international clearing without the need for centralized systems like SWIFT, etc.

This can facilitate a shift in the oil supply chain economy away from banks sanctioned by the U.S. and spur development in that space across not only Russia, but the entire region served by the Eurasian Economic Union.

Especially if this potential “Neft-coin”(Neft is Russian for ‘oil’) is convertible into crypto-Rubles and, by extension, Rubles themselves.  There will be no barrier for Russian businesses to use the “Neft-coin” to get around sanctions.

Moreover, since the crypto-Ruble will only be taxed at 13 percent, the capital gains tax rate in Russia, this, in effect, could be a back-door way for companies to lower their corporate tax rate to 13 percent from the current 20 percent Russian corporate tax rate. I am just spitballing here.  But, if I were Vladimir Putin I would consider this, highly to compete with the U.S. pushing their corporate tax rate down from 35 percent.

The other side of the coin

Those are the benefits, but what are the potential drawbacks?

The problem with backing any currency with physical reserves is the fluctuations in value of those reserves.  It’s not like oil is a low-beta commodity or anything.  But, like everything else in the commodity space, price movements are supposed to be smoothed out by the futures markets helping to coordinate price with time.

But the bigger problem is the estimation of those reserves the coin’s value is based on.  First, how do you accurately quantify them?  Can holders of Petro or Neft-coin trust the Russian or Venezuelan governments to provide accurate assessments of their reserves?

Second, there is the ability of the country to pull it out of the ground and sell it into the market at anything close to a fair price.  This isn’t a concern for Russia, the world’s second-largest supplier of oil with a very stable government, but Venezuela is the opposite.  And, its “Petro” would probably trade at quite a discount early on to the dollar price of oil.

It will open up all kinds of arbitrage opportunities.

Moreover, the blockchain that backs this “Neft-coin” is subject to hacking by hostile actors… I wonder who those will be?

Don’t think for a second that various U.S. ‘intelligence’ agencies are not developing ways to attack anything crypto-based that either of these countries put in place.  And, as well, don’t think that the Russians, masters themselves of cryptography, aren’t thinking of ways to combat this at a fundamental level.

Bitcoin solves other problems

Now, there are schemes emerging in the blockchain space that can mitigate this possibility very simply.  And it all depends on the architecture of this “Neft-coin” or Venezuela’s “Petro.”  Tying either of these coins to a massive proof-of-work based blockchain like Ethereum or Bitcoin would be the right way to do this.

Like I said at the outset, this is purely speculation on my part, but it’s important to ask these questions now to see what shakes out.

Moves like this and assets like Bitcoin itself happen because of that very natural human desire to be free from external control which enriches the few at the expense of the many. 

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