Economic sanctions are possible in a closed, monitored financial system. Economic sanctions become harder to enforce on an open global, censorship-resistant financial system.
Russia identified this and took action to put ~$10 Billion USD into Bitcoin. Bitcoin allows them to side-step international financial sanctions because no one can censor or stop a Bitcoin payment. SWIFT and other international payment systems can be monitored and shut down. The USA doesn’t like this, but there is nothing they can do about it.
Moving forward from that point, Russian economists have developed a taste for cryptocurrencies and have discussed creating an oil-backed cryptocurrency. Russian (former) Minister of Energy, Igor Yusufov, has announced plans this past month for such a currency in Russia.
He is quoted as saying:
“The introduction of a system of settlements in cryptocurrency on the energy market hypothetically allows us to avoid the costs associated with the use of currencies that are not backed up – the unpredictability of exchange rate fluctuations, the commission for currency exchange, trade restrictions. Such a project can make a significant contribution to the development of the Russian and international digital ecosystem and set a new bar for commercial infrastructure, the use of blockchain and smart contracts for non-financial services.
In the current situation of the oil market and the instability of payments in dollars – the logic of the development of the digital economy on a global scale suggests exactly this path of development. After the launch of the cryptocurrency platform, oil-producing countries will be able to maneuver with respect to financial and trade restrictions, which have become too many in recent years.”
“OPEC+ member countries control more than 2/3 of the world’s oil reserves. Such a union in their own interests will be not only logical but also economically justified.”
– Igor Yusufov
Deja vu anyone? Last year the Venezuelan government issued the “Petro”, an oil-backed national currency to replace the Bolivar and to side-step US sanctions. Mr. President Trump forbade any US citizens from investing money into it.
I haven’t heard any news about the Venezuelan Petro in a long while. To be honest, I’m not even sure if it is still operational (maybe it is).
However, despite these oil-rich nations wanting to develop their own oil backed national currencies I see two problems:
- If the currency is backed by oil, it should not be a national currency, since oil is an international, global commodity. What is the difference between one oil coin and another in the backdrop of global oil supply?
- If we refer to my post on Sound Money, you would quickly realize that oil is a bad commodity to use as the reserve for a national currency. Remember stock and flow? Oil is consumed at a high rate and the stock is not very large. Moreover, the flow is huge. So huge that in fact OPEC has to regulate how much oil is allowed on the market. If you recall, some oil-rich nations will, in a political move, “flood” the market with oil and drop the prices globally due to the glut in supply. Imagine what this would do to a currency?
Having an oil-backed cryptocurrency is an example of an unsound currency. The low stock and high flow characteristics of Russia’s proposed oil backed cryptocurrency would be a disastrous store of value. Not to mention the fact that the world is developing better, alternative/renewable sources of energy (hydro, solar, geothermal, nuclear).
In short, I do not believe that creating an oil-backed currency will serve to hold as hard, sound money for long. Oil is too political, too volatile in its supply and has very low stock and very high flow. All terrible qualities for a nation to depend on for a currency.
Markshire Crypto Conclusion on a Russian Oil Backed Cryptocurrency:
Terrible idea. Low stock, high flow. A risk for political manoeuvres with oil supply. I would not want to invest in a Russian oil backed cryptocurrency. No matter which nation was building it actually.
Please leave a comment below with your input, questions or comments!