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Author: Kiven Singh, Phua Ying Isabel
Research Director: Keeven Cheong Aik Wei
Introduction
Over the past few weeks, the world has been increasingly gripped by the Russia-Ukraine situation, glued to the news as it devolved from a threat to a crisis, and to an all-out invasion, marking a rapid escalation of the Russo-Ukrainian War that began in 2014. The economic and political effects of this, however, reverberate far beyond just eastern Europe. As a critical link of the increasingly global supply chain, any shock waves in Russia will impact the rest of the world. Latin America is especially vulnerable to economic and political shocks through channels such as fuel prices, commodity shortages, and more.
Russia and the Global Economy
The roots of the current crisis can be traced back to the Cold War when Ukraine was part of the Soviet Union (USSR). Upon the split of the USSR in 1991, Ukraine gained independence, along with the ability to form deeper economic and socio-political links to the western block. Deepening ties between the North Atlantic Treaty Organization (NATO) and Ukraine have been a long-standing thorn on Russia’s side (NATO, 2022). Russia vehemently rejects the possibility of NATO membership for Ukraine, which it sees as a western ploy to bring military troops closer to Russia’s borders and hence threaten its security.
On 24th February 2022, Russia began a full-scale invasion of Ukraine. Since then, global commodity prices have spiked, especially that of oil, a key Russian export (Verdonck & Sharples, 2022). Uncertainty around the viability of Russian oil has increased, with customers and financial institutions avoiding Russian oil due to reputational risk, the possibility of becoming mired in sanctions against Russia, and the difficulty transporting such commodities through a war zone (Dareen, 2022). Fuel forms the backbone of the global supply chain. Tight supply and hence, high global commodity prices will affect both producing and consuming countries alike. With potential American oil import sanctions on Russia, global supply may tighten even further (Edmondson & Krauss, 2022). Latin America is home to countries that are major fossil fuel importers; volatility in the fossil fuel industry will have wide-ranging implications for the region.
Furthermore, the West has started imposing economic sanctions on Russia. Western governments froze the assets of the Central Bank of the Russian Federation, halting its access to US$630bn of dollar reserves; the UK has additionally excluded major Russian banks from the UK financial system, thus restricting Russia’s ability to transact in or access the pound (British Broadcasting Channel [BBC], 2022). This has greatly affected Russia’s ability to trade and transact with other countries, including Latin American ones.
Latin American Oil: Boon or Bane?
As the third-largest oil producer and second-largest gas producer in the world, the Russia-Ukraine invasion has resulted in a sharp increase in the prices of both fossil fuels (Prince, 2022). As seen in Figure 1 below, the price of crude oil soared from an already high price of around $89.00 to hit another high of US$125.05; while the price of natural gas similarly soared from the price of $3.90 to a high of $5.09 (Trading Economics, 2022).
Figure 1: Price of Crude Oil and Natural Gas in USD from 6th February–7th March 2022
Source: Trading Economics, 2022
This is a boon for Latin America’s major oil and gas producers, such as Brazil, Mexico, Venezuela, and Colombia (Carpenter, 2019). In 2020, Brazil produced 2.94 million barrels per day of crude oil and condensate, making up about 10% of its gross domestic product (GDP) and the majority of investments in Brazil (U.S. Energy Information Administration [EIA], 2021; International Trade Administration, 2021). Across Latin America, governments have sought to use their mining-revenue windfall to boost the economy and recovery from Covid-19, with countries like Chile successfully doing so (Dholakia & Holzman, 2021).
In addition to higher prices, the output is increasing too: Latin and Central America are poised to increase the number of wells drilled by 17.3% in 2022 (World Oil, 2022). Output growth is even higher in select countries, with Brazil forecasted to increase drilling by 18.7% in 2022 (World Oil, 2022). For fossil fuel producing countries, oil and gas revenues as well as government taxation from these revenues can further spur a virtuous cycle of spending and economic growth, thus helping these economies out of the Covid-19 slump. This is a boon for a region that had only been projected to grow by 2.4% in 2022 (Goldfajn et al., 2022).
However, there may be negative consequences too: high oil and gas prices may further increase inflation. In 2021, the region collectively saw headline inflation of 8.3%, higher than other emerging economies; in countries like Brazil and Chile, core inflation was 7.2% and 6.4% respectively (Goldfajn et al., 2022). The oil and gas price boom will likely exert upward pressure on prices, especially since fossil fuels are a key input for almost every industry (Montenegro et al, 2022). While producers may benefit from a large portion of the commodity windfall, all consumers will bear the price of higher inflation squeezing their dollar.
Disrupted Global Food Supply
The Russia-Ukraine invasion will also have the effect of disrupting the global food supply. Russia is a major global producer of fertilizers and related raw materials, and the world’s largest exporter of fertilizers: it is the largest exporter of ammonium nitrate, NPKs, ammonia, and urea (Figure 2) (Heren, 2022). For other fertilizers like potash, Russia is also a top producer.
Figure 2: Russian Export market Share of Select Fertilizers (2021)
Source: Heren, 2022
Russia had already been cutting fertilizer exports even before the invasion. For example, it imposed a two-month ban on ammonium nitrate exports earlier in 2022 that severely impacted Brazil’s food production capacity (Gro Intelligence, 2022). The country has become even more reluctant to export fertilizers after the invasion started, with the Ministry of Industry and Trade recommending the suspension of fertilizer exports until normal transportation to and from Russia is re-established (Elkin, 2022). This was a retaliation against the suspension of transportation by some major container shipping companies, which the Russian state news agency calls a “sabotage” (The Brazilian Report [TBR], 2022).
This will be a headache for Brazil, which imports 96% of potassium chlorate from Russia (TBR, 2022). Brazil is also the biggest importer of ammonium nitrate from Russia, as seen in Figure 3 (Gro Intelligence, 2022). Peru is the fifth biggest importer (Figure 3).
Figure 3: Major Importers of Russian Ammonium Nitrate (tons)
Source: Gro Intelligence, 2022
Russian restrictions on fertilizer import will greatly impact the food production capacity of Latin America, chiefly Brazil, which is the region’s (and the world’s) largest food producer (Mano, 2022). Although Brazil has been trying to explore producing fertilizers domestically on indigenous land to diversify its sources, the bill was met with strong opposition and is stuck in the legislature, making Brazil still highly dependent on Russian fertilizers in the meantime (BNamericas, 2022). Decreased supply, coupled with rising prices—on top of already-high prices before the crisis (Figure 4)—means that Brazilian farmers will suffer, producing less and/or lower quality output at a higher cost (Baffes & Wee, 2021). This will further squeeze the incomes of Brazilian farmers, who already saw agriculture returns fall in 2021 due to higher production costs, with some fertilizers more than doubling in price in 2021 (Colussi & Schnitkey, 2021).
Figure 4: Fertilizer Prices, 2006–2021
Source: Baffes & Wee, 2021; data from World Bank Group, 2022.
The disruption in the food supply is not only limited to fertilisers. As of 2022, Russia and Ukraine are the world's largest and fifth-largest wheat exporters - a collective of 29% of international annual sales (The Economist, 2022) The war provides an opportunity for grain-producing economies in Latin America like Argentina, Brazil, and Paraguay to capitalise on the sudden demand for an alternative supply of grain. However, this isn't the case for all. Argentina - the world's sixth-largest exporter of wheat - might not be able to experience the same benefits. On March 3rd, in response to rising international commodity prices, the Argentinian government introduced a trust fund where grain exporters have to donate 1% of their proceeds - a move that will discourage production. This move is done on top of already high taxes imposed on Argentina's agricultural sector.
Conversely, importers like El Salvador and Costa Rica, are the biggest economic losers in the region. The high commodity prices would most likely put pressure on their respective governments' fiscal accounts to overcome the shortage of these food necessities.
As certain industries like fossil fuels boom and others like agriculture struggle, inequality within Latin America may increase, exacerbating the pockets of poverty within countries and the region.
Financial Woes
As the world denounces Russian imperialism, Russia still has a few authoritarian allies. In Latin America, Russia may count Venezuela, Cuba, and Nicaragua among them (Miller, 2022). All three countries are politically aligned with Russia and economically dependent on it too.
These countries may not be able to depend on Russia as much as they have in the past. For example, from 2005 to 2008, Venezuela purchased US$4 billion worth of weapons on Russian credit (Herbst & Marczak, 2019). With western governments freezing the Central Bank’s access to Russian dollar reserves and the war resulting in a large domestic demand for weaponry, food, and other resources, it is unlikely that Russia will be able to offer much aid to the three isolated and economically-reliant countries.
Banking and trade sanctions have made it increasingly difficult to transact with Russia, especially the exclusion of seven Russian financial institutions from SWIFT, the backbone of the global digital financial transactions network (Deutsche Welle, 2022). Russian military sales to foreign countries are not exempt from sanctions; sales denominated in the dollar, which forms the majority of Russian transactions, may be subjected to sanctions too (Sullivan, 2022). Agreements signed between the countries, such as Nicaragua’s memorandum of understanding with Russia to promote nuclear technologies, may ultimately become less viable without the dollar or other western currencies like the euro as a medium of exchange (Nuclear Engineering International, 2021). Yet the ruble has been too volatile since the invasion (Figure 5), it is unlikely that either of these countries would agree to denominate contracts with it.
Figure 5: Ruble to US Dollar, 13th February 2022 to 7th March 2022
Source: Xe, 2022
Thus, regardless of the Latin American countries’ intentions, they may not be able to financially transact with Russia. This would cause a severe drag on the countries’ economies.
Latin America’s Prospects?
Latin America can expect some economic growth, but this may be outweighed by higher inflation, squeeze on agriculture incomes, food shortages, and difficulties transacting with Russia. In a region characterized by economic volatility and still recovering from the Covid-19 pandemic in fits and starts, the Russia-Ukraine war will certainly add more volatility to Latin America.
In the political realm, for most countries in Latin America - except for obvious political allies - Russia remains a distant, foreign country with limited political influence in the region. Despite this, the war may further incentivise Russia to deploy low-cost military assets to anti-US populist regimes to substantiate its threats against the US (Ellis, 2022). This isn't the first time Russia has threatened the US in its very own backyard. In 2008, in the aftermath of the Russian-Georgia war, Russia sent Venezuela two nuclear long-range bombers and a naval flotilla for military exercises (Economist Intelligence Unit, n.d). And again in 2018 when Russia sent two nuclear-capable aircraft to Venezuela amidst tensions with the US (Ward, 2019). However, with the high cost of deploying 190,000 troops to Ukraine and the airtight control of media within Russia on top of Western economic and financial sanctions, the possibility of Russia sending anything across the world to Latin America remains low (Runde, 2022).
The mishmash of political and economic implications further increases volatility in the region. Under economic stress, the impending threat of Russian influence in the region and the expected international crackdown on Russia, leftist regimes like Mexico and Brazil may find themselves in a difficult position to adopt harsher stances towards Russia - stand with or against Russia.
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