At the end of August, the U.S. stepped up sanctions on Venezuela, prohibiting dealings in new debt or equity issued by state oil firm Petroleos de Venezuela SA (PDVSA) or the government. A couple of weeks later Venezuela responded to what it called an “economic blockade” by suspending trade in U.S. dollars and publishing Venezuelan oil basket prices in Chinese yuan.

Analysts believe that although it has close strategic ties to China, Venezuela would mostly just harm itself with the move to “free the nation from the oppression of the dollar,” as Nicolas Maduro put it.

Venezuela told oil traders it will no longer accept or offer U.S. dollars in payment for crude oil and fuels, the Wall Street Journal reported earlier this month, citing sources familiar with the developments. As a result, traders have started converting dollars into euros, and PDVSA’s foreign partners operating in the country may have to switch to euros as well.

Two days later, on September 15, Venezuela started publishing its oil prices in yuan. The move went against earlier reports that Maduro would favor the euro. As it is unlikely that China would ever join the U.S. on its quest to force Maduro to end his campaign to rewrite Venezuela’s constitution in what many see as a step in bringing the downtrodden country closer to dictatorship, the choice of yuan seems a safe one, if nothing else, compared to the European currency.

The European Union refused to recognize the outcome of the Venezuelan vote, but has so far stopped short of imposing sanctions. However, earlier this month, the office of German Chancellor Angela Merkel didn’t rule out EU sanctions on Venezuela.

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Venezuela also started trading its oil and oil products in a basket of currencies.

Maduro’s move to “liberate the country from the dollar” baffled some analysts, who reminded us that this is the currency of Venezuela’s largest trading partner, and exports of oil, including to the U.S., represent some 95 percent of Venezuela’s cash currency earnings.

Nomura debt analyst Siobhan Morden warns, “You can say whatever you want for your domestic propaganda and make it look like you’re retaliating against the U.S. This political posturing will only be to their detriment.”

The “liberation from the dollar” will only complicate dealings and incur more transaction and exchange rate conversion costs to an economy in such a bad state that every penny counts, or should count, in theory.

“You’re imposing self-harm with no practical purpose,” says Morden.

The U.S. sanctions on Venezuela make some exceptions to allow for transactions that would otherwise be prohibited, such as financing for most commercial trade, including the export and import of petroleum; transactions only involving Citgo; dealings in select existing Venezuelan debts; and the financing for humanitarian goods to Venezuela.

U.S. imports of Venezuelan crude oil have been around 700,000 bpd in recent months, but June’s imports—the latest available EIA data—were 616,000 bpd.

Oil production in Venezuela has dropped this year, down to 1.918 million bpd in August, according to OPEC’s secondary sources. Venezuela is below its 1.972-million-bpd ceiling under the cartel’s production cut deal, surely not because it is obediently overcomplying with the cuts. Its economy is in disarray, and its refineries run at less than 50 percent of the available capacity because the state company can’t afford proper maintenance. Related: What Happens If Trump Trashes The Iran Nuclear Deal?

The nation sitting on the world’s largest oil reserves is forced to import gasoline, which many of its people can’t afford to buy due to an estimated 360 percent inflation in 2016, and expected over 600 percent inflation this year.

At the end of August, Fitch Ratings downgraded Venezuela’s sovereign credit rating to reflect its view that “a default is probable given the further reduction in financing options for the government of Venezuela following the imposition of additional sanctions.”

According to the rating agency, gross international reserves have dropped to $9.8 billion as of August.

“Venezuela’s economic recovery is likely to be further constrained by the prospect of continued tight FX financing/liquidity conditions aggravated by the sanctions, declines in oil production and political uncertainty,” Fitch notes.

By Tsvetana Paraskova for Oilprice.com

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