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Russia and Ukraine: what effects can the Russian invasion have on the economies of Latin America - Fintech Morning

Russia and Ukraine: what effects can the Russian invasion have on the economies of Latin America

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Banana exporters in Ecuador, meat producers in Colombia and fertilizer importers in Brazil face a similar problem: Russia’s invasion of Ukraine has put their businesses at risk.

Although Russia’s volume of business with Latin America is low compared to other regions of the world, there are certain productive sectors that are being affected by the war.

Moscow and kyiv used to buy almost a quarter of the bananas that Ecuador exports, but with the devaluation of the Russian currency and the economic collapse, they fear that their business will face harsh consequences.

Brazil imports more and more fertilizers to grow soybeans and other agricultural products. As their two big suppliers are Russia and China, if they keep only one, they will have a lot of difficulties getting the product in other markets.

Tacos in Mexico.

In recent days, the Brazilian manufacturer Embraer announced that it is suspending its maintenance service, repair of parts and technical support in Russia, while the Mexican Grupo Bimbo, one of the largest bakeries in the world, said it has suspended sales of its products. in Russia, as well as investments in that country.

On the other hand, there are cases of small companies throughout the region that have been left without customers to export to Russia and Ukraine.

But the truth is that trade volumes are low .

banana
Before the war, Russia and Ukraine bought almost a quarter of the bananas that Ecuador exports. Now the producers are in deep trouble.

“Trade with Russia and Ukraine represents less than 1.5% of the total exports and imports of goods of the main Latin American economies,” Nikhil Sanghani, an economist specializing in Latin America at the British consulting firm Capital Economics, tells BBC Mundo.

Russia exports more products to Latin America than it imports.

Last year Russia exported US$11 billion to the region, while Latin America sold products worth US$8.5 billion, according to the Observatory of Economic Complexity (OEC), a platform that analyzes trade data. international.

What does Russia sell to Latin America?

The bulk of Russian exports to Latin America go to Brazil and Mexico, the two largest economies in the region.

Last year the main products that Russia sold to Latin America were fertilizers, steel, refined oil and Sputnik vaccines , according to the OEC.

Steel plant in Cheropovets, Russia.
Russian steel is the second Russian product that Latin America imports the most, after fertilizers.

Far ahead is fertilizers, a sector that concentrates 40% of Russian shipments to the region.

Steel ranks second among the most exported Russian products to Latin America and Mexico is the country that buys it the most.

However, unlike what happens with Brazil, Mexico imports the product from different markets and Russian steel occupies only a part of its total imports.

In this sense, Mexico is less exposed to the economic blows of the crisis.

What does Latin America sell to Russia?

The most exported products to Russia from the region are fruits, vegetables, meat and fish.

piece of meat
The most exported products to Russia from the region are fruits, vegetables, meat and fish.

Among the countries with the greatest commercial links, Brazil sends them soybeans, meat, tobacco and coffee; Mexico exports cars, computers, beer, and tequila, while Ecuador sells it bananas, flowers, and shrimp.

The indirect economic impact

“The impact of the war is not direct, it is more related to the effects of this crisis on the global economy,” says Daniel Kerner, director for Latin America at Eurasia Group, a political and economic analysis consultancy.

With the war, the prices of raw materials have skyrocketed, especially oil, agricultural products and metals.

At first glance, this benefits oil-producing countries such as Brazil, Colombia and Ecuador, and grain-exporting countries such as Brazil and Argentina.

Workers of the Mexican company "Grupo R" and Pemex in oil exploration tasks.
Rising inflation is one of the biggest indirect effects of the war in Latin America.

“If you look at economic history, in general, when commodity prices are high, Latin America does well,” says Kerner in a dialogue with BBC Mundo.

In fact, it usually generates great fiscal relief. The problem is that this time the rise in prices is accompanied by inflation and low economic growth, and therefore, the scenario is different, explains the expert.

“Like the dog that eats its tail”

Gilberto García, chief economist at the Observatory of Economic Complexity, says that, without a doubt, the increase in the price of energy and agricultural products will affect Latin America.

“Although trade between Latin America and Russia is low, the war will have an impact,” he tells BBC Mundo.

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Tractor in the field.  Brazil buys fertilizers from Russia.

Even for those countries that export oil, for example, the benefits in the medium term can evaporate, considering that when crude oil rises in international markets, there is an effect on the entire production chain and that means that the products that the consumer buys end up being more expensive.

The same with food: those who export soybeans at a better price, then import more expensive food products.

“In the end, it’s like the dog that eats its tail and feels good, that is, you sell more commodities and you feel that you are receiving more money, but at the same time, you have to use those same commodities to manufacture or import other products to a higher price,” he explains.

A good example is Mexico, a country that exports oil, but imports a significant amount of gasoline.

“Inflationary Contagion”

Juan Carlos Martínez, a professor of economics at IE Business School in Spain, is concerned about rising prices in Latin America and the rest of the world.

” Evidently there is going to be an inflationary contagion in the Latin American economies that already had high inflation.”

Indeed, long before the war, inflation had been on the rise in the region.

Russia exports oil.  Rising prices drive up inflation.

To try to control it, the central banks had been rapidly raising interest rates, that is, the cost of borrowing money.

But now, that rate hike is likely to continue to gain momentum.

“We already know that rates that are too high slow down the economic growth of a country,” says Martínez.

The risk for Venezuela

Venezuela is an exception in trade with Russia within the regional panorama, says Daniel Kerner of Eurasia Group.

” For Venezuela Russia is important because the country has been isolated from everything by economic sanctions”, which weigh on the government of Nicolás Maduro.

Nicholas Maduro and Vladimir Putin
Nicolás Maduro and Vladimir Putin have maintained a close relationship.

“And since Venezuela’s relationship with China is cold, then Russia is one of its main allies and a source of arms sales,” adds the analyst.

What could be the political effects of the war in the region?

Kerner argues that before the war, the region had been facing enormous social discontent with the governments in almost all countries, due in part to the effects of the pandemic.

” Political price increases are always bad for governments. And this is happening in a context in which people were already upset,” he says.

Benjamin Gedan, deputy director of the Latin American Program at the Wilson Center and professor at Johns Hopkins University in the US, argues that governments that have shown greater proximity to Russia will suffer greater consequences.

“The pariah regimes in Latin America that depend on Russia will be harmed by the invasion of Ukraine,” he says in dialogue with BBC Mundo.

Countries like ” Cuba, Nicaragua and Venezuela depend on Russia to evade US sanctions, and those financial links are complicated by the sanctions that Washington has now imposed against Moscow.”

And, on the other hand, Latin American governments hoping to deepen economic ties with Russia “will have to freeze those plans.”

Alberto Fernandez and Vladimir Putin.
Alberto Fernández visited Putin before the start of the war. Fernández announced that Argentina would become Russia’s “gateway” to Latin America.

Just before the start of the war, the president of Argentina, Alberto Fernández, had visited Vladimir Putin in Russia.

In addition to thanking him for sending Sputnik vaccines in the worst moments of the covid-19 pandemic, Fernández announced new economic ties and said that Argentina would be Russia’s “gateway” in Latin America.

In a similar vein, Brazilian President Jair Bolsonaro offered his country’s “solidarity” with Russia.

In the current scenario, it is not known how trade and political relations between Russia and these two South American countries will evolve.

Gedan agrees with Kerner is that inflation can have a strong political impact, especially with rising food prices.

“There is strong discontent in the region,” argues Gedan. “Large-scale protests could apparently break out anytime , anywhere.”

Link: https://www.bbc.com/mundo/noticias-60741690

Author:

  • Cecilia Barria
  • BBC News World
Author avatar
Edinson Love
https://fintechmorning.com

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