Instead of bolivars, the central bank of Venezuela is increasingly distributing euro banknotes to its own banking sector. As a result, the euro is gaining market share in domestic payments, at the expense of the virtually worthless bolivar. Since mid-October, the large banks in Venezuela receive €1 million in cash, while small banks receive €500,000 a week. This is twice as much as before. The banks distributes the money to companies, so that they can pay suppliers and staff.
The Venezuelan economy almost came to a standstill due to hyperinflation. In just a few years, the bolivar became almost worthless, causing the population and the banks to look for alternatives. In the past, the US dollar usually took over the function of the national currency, but now the euro is the preferred currency.
If the central bank of Venezuela continues to pump euros into the economy at this rate, it will take only a few months before the euro will take over the role of the bolivar as the most widely used currency. This is despite the fact that it was illegal to use foreign currency in Venezuela until mid-2018.
Sanctions and euros
Venezuela entered a crisis in 2014 as the price of oil plummeted, halving its income and preventing it from paying for the import of goods. The situation was further exacerbated by US sanctions, which restricted access to dollars. As a result, the country can no longer borrow in dollars or do business with American banks. The Washington government also imposed restrictions on the export of oil and gold, the main sources of income for Venezuela.
The country quickly found a solution to the lack of US dollars. Earlier this year the state oil company PDVSA started paying for its oil in euros. As a result, more and more euros found their way into the Venezuelan economy. Russia also sent millions of banknotes by plane, a significant proportion denominated in euro. These cash shipments are probably financed by the sale of gold, although this has not been officially confirmed.
It is clear that the American sanctions have not produced the desired outcome and that Venezuela has not been isolated. Instead it got support from Russia and China, and the euro appears to be the big winner.