Oil Producers Turning To Crypto To Solve Sanctions Problems
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 Geopolitical “Why”
From the Middle East to North Korea, the Dutch 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 market 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 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.
However, the oil-backed cryptocurrency by Venezuela is very important. And it’s why attaching a rumor to Russia makes sense. Who do you think put this idea in President Maduro’s head, anyway? Martians? No, it was Putin.
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, 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 need of 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 since it the crypto-Ruble was predictable tax consequences.
Moreover, since the crypto-Ruble will only be taxed at 13%, 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% from the current 20% 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%.
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 2nd largest supplier of oil and 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?
A cryptocurrency is only as secure as its blockchain is. And, the size of the mempool backing that blockchain is the elephant in the room and it has to be big, deep and incorruptible.
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.
I wouldn’t be surprised to see this “Neft-coin” if it’s happening, is employing some form of double-proofing that ties back into the plans for Russian Miner Coin, and the employment of not only the best new Bitcoin mining ASICs but the incredibly cheap Russian electrical grid.
I wrote about this when it was first announced back in August, seeing it as a way to get around sanctions and create a potential crypto-reserve system for the Russian economy.
Not only does Bitcoin get potentially elevated to the level of reserve asset to reside right next to Russia’s enormous pile of gold that represents nearly 20% of M2 in Rubles at insanely depressed prices, but it also furthers the argument for Russia to be a destination for capital as the sovereign debt crisis unfolds.
Capital is flowing into cryptos at an astounding pace. Governments are completely behind the curve in their adoption of this technology. Russia under Putin is moving quickly to remedy this and now fully groks how it can help him acheive his goals for Russia’s financial independence from the U.S.
Lastly, if this proves successful, Russia’s new Bitfury chips that will power this system could see wide demand in the global mining market.
And now you know why Russia is interested in taking over 10% of the Bitcoin mining hashing power. In cryptocurrency mining, he who controls the hashing power controls the network, in essence. Russia wants in on this for the strategic purpose of leveraging it for a number of reasons.
Both a crypto-Ruble and this potential “Neft-coin” can be tied to the Bitcoin blockchain by proxy and insulate it from any number of attack types. For an example of how they could structure this read about Komodo’s delayed-Proof-of-Work system.
The drive to attract global capital away from the existing and (in my opinion) failing monetary and political system is what is driving the creation of these new types of digital assets. Contrary to the opinion of many America Firsters, the U.S. is not capable of militarily taking on the world. It does most of its fighting through the financial markets and political backrooms.
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. Even if Russia isn’t working on a “Neft-coin” because of its relationship with China and its developing a crypto-Ruble, it’s obvious that there is a coordinated effort via the blockchain to secure Russia’s future free from U.S. control.