For Latin America, political risks overshadow economic gains from Ukraine crisis

Countries that rely heavily on imported food and energy face the greatest risk of social and economic crises due to the disruption caused by Russia’s invasion of Ukraine. Yet even those who are themselves major producers of these essential products are suffering the fallout of war. Rising commodity prices in many parts of Latin America, for example, are testing governments that are already struggling to manage high public frustration caused by pandemic hardship. We asked the Eurasia Group expert Yael Sternberg to explain how it happens.

What was the initial impact in the region?

Although countries like Brazil and Colombia are big food producers, they now have difficulty getting the Russian and Ukrainian fertilizers they rely on. Similarly, although the region has large reserves of crude oil, it sources most of its diesel, gasoline and other fuels from European refineries. As these companies avoid Russian oil, they have less diesel and gasoline to sell in Latin America. Argentina already suffers from a severe shortage of diesel, an essential fuel in transport and agriculture. The same problem looms for Brazil.

What will be the economic and political consequences?

Latin America is still reeling economically from the pandemic, which has exacerbated inequality and fueled rapid inflation. The fallout from the Ukraine crisis is further aggravating inflationary pressures, as rising fertilizer and fuel prices drive up the cost of food and other goods. Wary of the unrest, leaders are offering subsidies for many of these items despite already strained public finances. Many are also backtracking on plans to rein in pandemic-era stimulus programs. Chile and El Salvador have both announced new support plans in recent weeks that include subsidies and tax breaks. The Chilean administration was able to integrate its plan within its already approved 2022 budget. But El Salvador, which already plans to use a controversial financing strategy of issuing Bitcoin-denominated bonds, will have a harder time financing the new spending.

Have there been any troubles?

Yes. Argentina and Peru have both experienced significant episodes of unrest. Activists recently camped out on Buenos Aires’ main avenue to demand increased social spending, and Argentinian truckers staged a nationwide strike in response to rising diesel prices. Peru has sparked even more violent protests across the country over rising inflation, prompting President Pedro Castillo to impose a 24-hour curfew in the capital, Lima, only to revoke it hours later , further demonstrating his erratic political tendencies and lack of experience. The crisis comes at a bad time for Castillo, who is struggling to hold on to power after two impeachment attempts.

Is there a silver lining in the rising prices of the commodities the region produces?

Latin America is a major exporter of agricultural products, petroleum and many metals, so higher international prices for these items will support local producers and generate more tax revenue for governments. Ecuador, for example, benefited from higher oil revenues. Yet, as mentioned, local consumers will suffer from rising prices, creating pressure on cash-strapped governments to cushion the blow. So while the rise in commodity prices has boosted incomes in some countries, the drop in political risk will be greater.

How are these developments likely to affect the upcoming elections?

Like the pandemic, the effects of the conflict in Ukraine and the resulting inflationary shock have heightened political headwinds for the incumbents and added momentum to a leftward shift in politics in the region. It means trouble for Brazilian President Jair Bolsonaro, who faces an uphill re-election battle in October against left-leaning former President Luiz Inácio Lula da Silva, and an extra boost for Colombia’s Gustavo Petro ahead of the election. May there. Polls suggest that Petro is on course to become Colombia’s first leftist president.

What are the geopolitical consequences in terms of relations with Russia, China and the United States?

Most countries in the region are aligning themselves with the United States, except for those that abstained during the March UN resolution condemning the Russian invasion. These included leftist-ruled countries Venezuela, Bolivia, Cuba and Nicaragua, in addition to one apparent outlier: populist-ruled El Salvador. President Nayib Bukele now appears to be leaning towards Russia and has taken to social media to attack the credibility of the United States in the face of the crisis – potentially in an effort to bolster crypto as a funding and development prospect. adding to his already contentious relationship with the Biden administration. Other countries that have enjoyed good relations with Russia in the past, including Brazil and Argentina, are now being forced to tread carefully if they are to avoid diplomatic and economic repercussions from the United States and Russia. ‘Europe. Moreover, if Western sanctions push Russia closer to China (further), Beijing’s interest in cementing economic ties with Latin America is likely to grow given China’s extensive economic diplomacy efforts and funding offers. attractive to many left-wing leaders in the region.