What’s going on with Venezuela?
Venezuela is trying to create a payment system for its oil that doesn’t use the US dollar. This is because of the sanctions that the US has placed upon that country in an attempt to unseat Nicolas Maduro. Creating a non-dollar payment system for the oil is trivially easy and makes near no difference to anything at all. Creating a payment system that avoids the US banking system is near impossible.
It’s the difference between those two that matters.
That Hugo Chavez and Nicolas Maduro have plunged what was Latin America’s richest country into abject penury is true. That they’ve done it less through socialism than destroying the price system and markets is also true. Whether or not this means that the US should try to unseat the government is something that’s up to you. The people of Venezuela would obviously be better off without such incompetents in command.
However, it’s the actual method which is under discussion here. Venezuela is dependent upon oil exports for whatever money it has these days. The US has insisted that any imports into the US must not be paid for by the money being handed over to the government. Instead, the money must be put at the disposal of the people who claim to be the new government.
It’s the next bit though. The US insists that people cannot us the US dollar to pay for oil delivered elsewhere in the world. This doesn’t actually matter at all although many people say it does. For there are plenty of other ways of paying for anything you like. People could use taka if they wanted to, euro, gold, roses, quite literally anything.
To be slightly more serious there’s no problem at all with paying in yen or euro. The currency markets are large enough, we can see what the USD to EUR exchange rate is any time we like and calculate the amount. It is simply not a problem.
However, that’s not quite what the US does claim nor how it runs these things. Instead, it says that if there are sanctions upon a country then it’s the dollar payment system that cannot be used. The argument is that, ultimately, every transaction that is done in US dollars at some point takes place inside the US. That’s just how the international banking system does work. Transactions in British pounds eventually take place in London, in taka in Dhaka and in dollars in New York. That’s even how the US can apply sanctions.
For they don’t have the power to say that two people in Dhaka cannot pay each other in dollars. US law doesn’t apply in Dhaka, Bangladeshi law does. But as soon as we start using banks to do our transactions then the international payment system is tied into accounts in the home country of whatever currency we’re using. So, dollar payments eventually take place inside the US - where US law does work. Thus they are able to ban certain transactions.
They then, the US authorities, extend this. For just about every bank which has international activities has some such activities inside the US. That’s just where you are going to have an office or two if you have any pretensions to being international. And to have an office in the US you must have a banking licence form the US to have an office there. This becomes something of a hostage.
For what the US then goes on to do - perhaps not officially but in practice, and yes, I’ve seen this happen directly - is say that, well, even though you’re not working in dollars, even though you’re obeying the rules exactly, we’re still not happy. Sure, you’re working in euro but you’re working in euro with - say - Venezuela and we don’t like that.
This business of yours in the US, it would be worth nothing if you lost your banking licence, wouldn’t it? And we think that we’d like to, umm, “review” your licence unless you stop working in euro with Venezuela. You know, nice business you’ve got here, be a shame if something happened to it.
Of course, this isn’t official but it is, I assure you, true and what does in fact happen.
Venezuela tells us that it is looking around to try and build a payment system for its oil that doesn’t use the US dollar. This is easy, trivial even, and could be organized in an afternoon. But what’s it actually needs to do is build a system that doesn’t use any international bank that also has operations in the US. This is near impossible because a useful definition of international banking is that you operate inside the US.
Whether this should be so or not, whether there should even be sanctions or not, is all another matter. That’s the problem that Venezuela needs to overcome, and there’s really no viable solution available to them.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.