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Considering the ongoing trade war, the soaring oil prices, the Emerging markets’ dilemma, it’s safe to say that 2018 hasn’t been such a great year for India. Yet, we have managed to muddle along. In such a situation, where movements like “Bharat Bandh” are being led by the opposition against the oil price hikes, the Indian government made a bold move to decline a 30% discount offer on oil by Venezuela. Seems absurd, doesn’t it? Well, that is until their clause steps in. Venezuela recently introduced its “oil-backed cryptocurrency”(if such a thing exists!) called Petro and wants India to deal in the same, hoping it would provide Petro with legitimacy, in wake of the criticism this venture has received from the Western and European economists, some even calling it a scam. Petro has already raised $4 billion and is considered to be Venezuela’s last resort to raise funds when no one is willing to lend. This theory is strongly supported by the fact that the oil that is apparently backing Petro is yet to be extracted. So, what made the once shining Venezuela resort to such tactics?

Historically, Venezuela was a very rich economy with its entire revenue dependent on the oil reserves. The discovery of the world’s largest oil well in 1922 heralded the beginning of the Golden Age of the country. With this tremendous discovery, began the blissful voyage of Venezuela under the leadership of Juan Vicente Gomez. The country then embellished itself with the title of Republic by adopting its constitution in 1953. Before the nation witnessed high GDP, it went through many ups and downs like external debt crisis and hyperinflation as the world supply of oil far exceeded the world demand leading to fall in total revenue of the economy. To deal with such predicaments, the oil-based economies formed the renowned OPEC and as per its regulations, the economies were provided with certain quotas that restricted supply in a manner that maximized their collective revenue. But the next few decades saw the world witnessing many internal conflicts in the Middle East and the energy crises of the 70s, which clamped the oil prices low. The members decided to restrict supply to raise the prices but this approach of OPEC members backfired when their share nosedived to just a third of the world supply.

1976 was a crucial year for Venezuela as it marked the birth of the behemoth, PDVSA, the world’s largest state-owned oil and natural gas company.

The 1999 Venezuelan elections brought about a major change as the socialist party MBR 200 came to power with Hugo Chavez leading the front. Since his regime started in 1999, the world forces were in favour of the oil-based economies. 1990s was that phase of the world economy when regional major powers like China and India were in full-force to take their flight of becoming a developed nation, creating huge oil demand. The world-economy had also stabilized and OPEC was once again a success as the members were able to maintain their respective quotas. Consequently, the oil prices rose and thereby assisted Venezuela in building up its economy. Chavez started utilizing this revenue in propagating socialism in order to gain confidence of the citizens. Just like other Venezuelan presidents, he did not focus on diversification of the economy. As a result, the Venezuelan economy was highly vulnerable to oil prices since 90% of the government revenue was based on PDVSA.

Chavez also didn’t focus on the deteriorating relations of Venezuela with USA due to his friendship with Fidel Castro, the leader of the communist state of Cuba. In an age where the world is dominated by US policies, Venezuela remains under its embargoes.

He also began using PDVSA as a political tool, which created a load of unnecessary burden on the company. PDVSA was forced to employ people that it didn’t require, this curbed unemployment by 50% but quite obviously lead to negative returns to scale. He managed to pay these overemployed people due to the huge PDVSA revenues, without caring for how this short-sighted strategy might backfire, if not for him, then certainly for his successors.

Chavez passed away just in time to be remembered as the usherer of the golden era of Venezuela for as soon as he passed in 2013, oil prices plummeted more than ever and were left to be dealt by the new and equally corrupt president Nicholas Maduro.

Maduro followed in the footsteps of his predecessor Chavez but he stopped all the social benefit schemes that were run by the previous governing body because the oil prices had plunged and the state revenue was not enough to bear the costs of these extensive projects. This step drastically affected his goodwill and people resented him. Maduro also fixed a lower exchange rate for the Bolivar for his friends and they began to sell them at the market exchange rate (which was 10,000 times the rate at which they were bought). This led to increased black marketing and public exploitation. He even replaced the panel of supreme court judges, to avoid any kind of opposition interference.

There could have been many solutions to the inflation caused by import shortage due to falling revenue from oil but deficit financing was definitely not one of them. Deficit financing resulted in the inflation rate skyrocketing and is very likely to touch 1 million by the end of this year. Most of this also happened because of Chavez’s approach to overemploy additional labour simply because of the availability of profits. These people were laid off when the oil prices fell and many were left no option but to immigrate which has created resentment against the nation due to the surge in number of migrants. It’s neighbours Columbia and Brazil, that were once generous have shown xenophobic inclinations. Commoners expected relief when Maduro recently announced a 3000% wage hike that is not viable for the industries and will eventually, result in a cost-wage spiral that pushes them further to the verge of collapse. Their external debt has also piled up to about $140bn, approximately 30% of GDP which they must honour in order to keep credibility intact in international eyes. To keep on repaying, less of these funds are directed towards imports, thus defeating the initial purpose of borrowing itself! Failed attempts to refinance and restructure the repayment process have been made under the pretext of “fighting financial persecution” (referring to the U.S. sanctions).

With the disastrous course these policies have taken, there’s no option left but to seek external assistance and that is a bigger predicament in the year of trade wars. Considering its soured relations with USA, Maduro is now reaching out to its “Big Sister” China that has loaned it approximately $50 billion over the past decade. The recently introduced Sovereign Bolivar, which did nothing but slash out 5 zeroes from their currency, was also an apparent attempt to seek international validation on Maduro’s “revolutionary” endeavours. Petro is also another such venture. Although it’s being greatly defended by blockchain enthusiasts, it’s necessary to know that a cryptocurrency has no governing body and isn’t backed by assets, which is not the case with Petro. It will be subject to both oil price fluctuations and Maduro’s manipulations, which is the reason why most economists have shunned it. It also partly justifies why India rejected the much alluring offer. Accepting it would also have been hypocritical on part of RBI which has avoided association with banks dealing in cryptocurrency.

The old adage “Don’t put all your eggs in one basket” fits well with the Venezuelan scenario. Only if the leaders had better perception to diversify the economy in time or atleast maintain a sovereign wealth fund, the situation would have been better. Venezuela is in a state of collapse, with its capital Caracas being the world’s crime capital, it is facing humanitarian and immigration crises. Its attempts to help itself out, though, are feeble.

By Tanya Tekriwal and Riya Kaul


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