Oil Producers Turning To Crypto To Solve Sanctions Problems

Authored by Tom Luongo,

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.

Russia’s Crypto-Upside

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.

Comments

Oracle of Kypseli runningman18 Tue, 12/12/2017 - 06:10 Permalink

I would say then that the WW III that everyone has been predicting will be the crypto war. Death by starvation rather than bullets and radiation.The question again is who will pay the piper of the quadrillion of derivatives which everyone has forgotten? There is no collateral that big. My bet is that the banks will not be bailed out again. 

In reply to by runningman18

Atomizer Tue, 12/12/2017 - 04:16 Permalink

Please be careful, you have no insurance behind you. We have a low level amount. Not a big loss if goes down. I hope everyone understands how this currency is made.Two years back, thought about setting up a farming site in Philippines property. Mrs Atomizer didn't like idea. It's ocean front. Resort property. Life Inside a Secret Chinese Bitcoin Mine - YouTubeThe sound of those servers and fans are computer porn for me. 

Vageling Tue, 12/12/2017 - 04:11 Permalink

Yo, Tommy boy. Ever saw a world map? How the fuck can a Dutch law block anything? You mean the Danish, right? Ya I know, confusing and all. Sjees, there goes the credibility of your article. All to keep that corrupt shithole Ukraine in place and so they can keep collecting transit fees which ofcourse go to corrupt fuckers their pocket. Nordstream 2 would eliminate some eastern countries that can no longer use leverage as they're bypassed. Secondly the US wants to squeeze Europe to pay a lot more for US crap and receive a lot less. Russia is just the distraction to distract from the US greed. 

Joe A Vageling Tue, 12/12/2017 - 04:16 Permalink

Ja Vageling, I never heard of NL changing their laws to block NS2. The only reason I can think of them doing that is to protect the proceeds of selling Dutch gas to foreign countries. But NL is rapidly running out of gas. There is for 30 to 40 years left.Dutch, Danish, Deutsch, it remains a challenge for some.

In reply to by Vageling

Vageling Joe A Tue, 12/12/2017 - 10:27 Permalink

Ah yes, Dutch gas. Which has lowered their production because it fucks up the houses of people who live there. Besides, last time I heard... We're not really making profit on it.It's the Danish. That exclusive economic zone, eh? That 200 nautical miles. More headache for "mutti" Merkel. Now the Danish are acting up. That pipeline would be in their EEZ just like Nordstrom 1. FFS, if Russia wanted to hurt Europe they just close the pipe. We're already dependant in a sense. Logical fallacy. Rather their gas than whatever uncle scam is giving us. And they will use it as leverage. Russia just wants to do business.

In reply to by Joe A

otschelnik olibur Tue, 12/12/2017 - 04:50 Permalink

But the Russians should consider it...  The Dept of Just-us and the US Treasonary / OFAC (Office of Foreign Asset Control) under the Obummer administration blackmailed every bank and gubermint in the world with access to the US dollar exchange mechanism through the Fed, and blackmailing their own citizens with FATCA requirements. There's alotta energy producers who are salavating at some other means of exchange than the usd (Venezuela, Iran, Russia to name a few). 

In reply to by olibur

olibur otschelnik Tue, 12/12/2017 - 05:14 Permalink

This article is used to promote bitcon starting with its title image where bitcon is placed over Russian flag. It’s a primitive programming but it works with the gullible.
I am sure Russia would work out some way to ditch dollah from its trade one way or another and it appears it would be something that has a gold backing.

In reply to by otschelnik

A_Huxley otschelnik Tue, 12/12/2017 - 06:38 Permalink

That will allow many to escape a week of ship trade waiting in a port.  The export, swap is damaged waiting deep in a ship in a port.  With a computer that result of an export can be sent globally to buy anything from anyone using a front company.  No need to hide hard currency, a bank and have a trail that shows origin and destination.   

In reply to by otschelnik

otschelnik A_Huxley Tue, 12/12/2017 - 07:09 Permalink

Roger that.  And think about it.  Gubermints will lose the power to sanction other gubermints.  The necessary evil of banks as intermediary would disappear....Forex rates will no longer be manipulated by central banks or the FED as people will set the rate themselves for virtual currency and domestic currency... gubermint central banks will be forced to set interest rates for domestic currency rigorously in accordance with market demand and not political goals...  no more bail outs for the vastly reduced banking sector.... companies will incorporate in the most business friendly jurisdictions and pay taxes there, forcing gubermints to abandon predatory tax policy...Brave New World, Aldous.  

In reply to by A_Huxley

Fireman Tue, 12/12/2017 - 05:12 Permalink

Dump your barbarous relic and become a virtual zillionaire, everyone's a winner, why not YOU! Fractured fairy tales from the electric tulip garden and why the smart bubble farmer is keeping an eye on the garden gate. The much loved Millennial App and those that bought into it and will never get out (on time) are being tagged by the banksters of the IMF and the BIS, yet most Millennial App-ers haven't got a clue what that means. For the moment Bitcoin is more than a bubble, it is a Psy Op to herd the happy sheeple to their electronic pens for the final fleecing."Greed is god", to paraphrase Gordon Lizzard and nobody knows that better than a Rothschild wolf shepherding his flock of fools to their electronic doom for their inevitable slaughter. Buy more Blipcoin$ by all means! The banksters love it. First the Blip and then the chip!Is everybody in, the show is about to begin. As the computer whizzes whizz away and set up the global infrastructure for their cashless gulag, the banksters and their agents wait in the wings and inflate the shiny bubbles that the brain dead can't resist. This is "wealth" like never before spun from soap and blather; Carlo Ponzi would have been gobsmacked at the simplicity of this fiat fiat to the power of 10, simply gobsmacked.  When the last of the smart phone jabbing crypto herd are corralled in the IRS NSA electronic pen the Blipcoin millennial App is going to get ...zapped. The loyal blockchain gang however, will not escape the paypal gulag that they themselves have embraced and in which they have willingly imprisoned themselves, Fedcon or some such money changer variant will simply and seamlessly replace their beautiful "anonymous" Bitcoin which will be destroyed in a blink with the mother of all NSA slash bankster bred viruses ever to have been unleashed on an uppity mob afflicted with delusions of independence from their chosenite masters. Shlomo Nakamoto say..."not so easy to leave heavenly Blipcoin Temple when one come in...not everybody go out."However, contrary to the usual hubris and arrogance of Western banksters and so-called €conomist$ the future of money is being decided by those countries that actually have physical reserves and resources and the power to control them. That future does not include a "global reserve currency" dominated Fedcon style or Blipcoin owned by the money changers and globally imposed as the Pentacon Kissinger Saudi Mercan IOU petroscrip dollah was, whatever about being imposed on USSAN and Europeon debt slaves only too happy to exist in their cashless, electronic gulags "all watched over by machines of loving grace." In a world of NSA slash CIA hacking gone mad how the hell can an APP like Blipcoin be "wealth" and how in God's name can gold be purged from the human DNA simply because the banksters in the West no longer have any?For Russia and China "reserves and resources" does not mean the unpayable debt that so-called Western capitalists imagine "wealth" to be. One gets it or one doesn't as the case may be but the anglozionazi centric world is already a thing of the past.https://www.silverdoctors.com/gold/gold-news/bill-holter-oil-for-yuan-sh... A very smart Granny explains it all below in words that even snowflakes with their thingies hiding in mommy's basement can understand.https://www.youtube.com/watch?v=wcOM1e9blBI Coinbase ordered to give the IRS data on users trading more than $20,000 https://techcrunch.com/2017/11/29/coinbase-internal-revenue-service-taxa...  

bshirley1968 Tue, 12/12/2017 - 05:54 Permalink

It would be better for Venezuela and Russia to use an existing crypto like Ethereum. ......IMHO. I understand the openness of any blockchain based currency,  but the perception will still be that the government that issues a crypto will "control" that crypto.  Who wants to invest in anything controlled by Maduro or any government for that matter.Governments need to stay out of the crypto creating business.  The world is looking to get away from the dollar because it is federal reserve/government controlled.  Creating another government run currency and calling it crypto doesn't change anything.

Easyp Tue, 12/12/2017 - 06:08 Permalink

As the article mentions it depends on whether you trust Russia or Venezuela.....  Not for me just yet but one day trusted cryptocurrencies will blow the politicians and banksters away!.

GreatUncle Tue, 12/12/2017 - 06:22 Permalink

Crypto remove the concept of "renting FIAT" from the banks.Rented because you never actually own the FIAT the bank does and now tries to make it so it can never be removed like "cash".

Ink Pusher Tue, 12/12/2017 - 06:42 Permalink

The only reason they are going to oil rather than gold is they were not able to secure enough gold to pull it off because the chinese are hoarding it all to back the yuan. Dumping the USD is proving to be more costly than previously anticipated.Watch out for the real psychos; whom will be pushing for a crypto based world reserve currency in 2018.

Last of the Mi… Tue, 12/12/2017 - 07:10 Permalink

I've said it before this is the fall of the petro dollar hegemony. Why in the hell would you pass though the dollar when you can crypto around it? Same goes for the Fed and it's devalue you fiat for the economy (read corporate welfare) bullshit game. Once these things go offshore become semi stable the Fed is dead. Long live the Fed.

fattail Tue, 12/12/2017 - 07:15 Permalink

How many electric and self driving cars will it take to get on the road to kill the oil market.  The brent curve drops off fast, is pretty flat, and not pricing in much supply decline or demand growth.  You can't kill the neft-coin or the petro, without killing the petro dollar.Personally I can't wait for the death of oil.

Mike Masr Tue, 12/12/2017 - 07:20 Permalink

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The world’s most insolvent nations in full decline using economic sanctions as a weapon. 

JibjeResearch Tue, 12/12/2017 - 10:20 Permalink

Mr. Putin, ...create a crypto and allow other crypto to stake (PoS) claims.  You will have access to the whole crypto market.  Life will be so much better leaving the USD in the dust.

gdpetti JibjeResearch Tue, 12/12/2017 - 11:28 Permalink

Putin isn't stupid enough to play our crypto game.. blockchain is just digital accounting, no biggie... any crypto they setup will be targeting their new digital SDR, which is what China is focusing on... our fake crypto game will just be allowed to disappear like those infamous tulips.... the flowers remained, just their mania left... same with the crypto craze... once the momentum trade moves on, reality will reassert itself.. but most of those traders need to focus on their exit point.

In reply to by JibjeResearch