Venezuela Mafia Offer to India

There is a famous quote from the movie Godfather. The quote is about “making an offer that the other party cannot refuse.” This quote became wildly popular because of the movie. As a result, any offer which was too good to be refused came to be known as a mafia offer.

This is the kind of offer than India has received from Venezuela in the past week. Oil is a strategic commodity which is often imported by almost every country. A discount of even a few dollars on a barrel is considered to be a good deal given the fact that the supply of oil is concentrated with a handful of countries. However, Venezuela has offered India a whopping 30% discount on oil prices! This is certainly too good to be true and can go a long way in reducing the import bill of this developing economy. However, Venezuela has laid down one condition. It wants India to make payments for its oil imports using Petro, the cryptocurrency which has been launched by the Venezuelan government. In this article, we will have a closer look at the petro and also how India should react to this offer.

What Is The Petro?

Venezuela has been facing several economic problems.

  • Firstly, the economy of the country is highly dependent on the price of oil. This means that the substantial drop in the price of oil from $120 to $30 has severely impacted the economy. The Venezuelan GDP is now less than half of what it used to be
  • Secondly, there have been allegations of human rights abuse against the Venezuelan president Nicolas Maduro. As a result, the Trump regime has levied economic sanctions which are further crippling the GDP of Venezuela.

Both the above factors have led the Venezuelan government to issue the Petro. The Petro is an oil-backed cryptocurrency. It is the first cryptocurrency which is being issued by any sovereign nation. However, because the financial situation is so bad in Venezuela, very few people are willing to invest their hard earned money in this digital currency. The digital currency is the last frantic bet being made by President Maduro in order to save the ailing economy of Venezuela.

India’s Response to the Offer

Prima facie the offer seems to be too good to resist. However, the Indian government has not responded directly to the offer. Hence, it can be assumed that India is not planning to accept the offer. This has come as a surprise to many who are aware of the oil prices situation in India.

The Indian government is facing a full-blown oil crisis because of the rapidly increasing price of oil in the nation. The taxes levied by the government on the oil are said to be the main reason behind this draconian price hike. The problem is that if the government rolls back these taxes, it will have to cut down aggressively on expenditure as well. This would mean that the government would have to stop funding many welfare schemes. This decision will make the government politically unpopular. Therefore, the Indian government can’t afford to cut taxes. On the other hand, if fuel prices are not dropped, food inflation will rise rapidly. Rising food inflation is also likely to kick up a political storm in the country.

The Indian government finds itself in a catch 22 situation and Venezuela seems to be offering a viable solution. Yet, the offer has not been accepted.

Reasons behind Non-Acceptance of the Offer:

Venezuela’s offer seems to be too good to be true. This is making Indian authorities cautious. The last thing they want is to be caught up in a scam.

  • Venezuela wants India to make payments in Petro, i.e., the cryptocurrency offered by Venezuela. Hence, to make these payments, India will have to hold on to reserves of the Petro. The problem is that Venezuelan government is in complete control of the Petro and can manipulate its market value as and when required. Also, given Venezuela’s track record it is very likely that this currency will also lose value rapidly. Hence, if India’s reserves are invested in the Petro, India will also lose money when the Venezuelan economy goes down. Also, the Petro has no real liquidity. If India wants to liquidate its Petro holdings without buying oil from Venezuela, it is unlikely to find any buyer in the open market.
  • The United States is an important strategic ally for India. The United States does not want India to trade with Venezuela. Hence, bypassing the US would mean risking billions of dollars of exports. As a result, ignoring Venezuela’s offer seems to be the best recourse available to the Indian government as of now. If India does team up with Venezuela, it will be able to buy cheap oil in the short run. However, in the long run, it stands to lose money one way or the other.

To sum it up, the offer made by Venezuela to India is a desperate financial move of a failing economy. If India were to accept the offer, it would end up tying its fortunes with the failing economy.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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