May 23, 2022

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How the conflict with Russia is affecting the Brazilian economy

Reports of the possibility of a Russian invasion of Ukraine raise fears of negative consequences not only in Europe and the United States, but also in other countries that maintain political and trade partnerships with both countries. Brazil is on that long list.

But the first big impact felt in the country was positive with the fall of the dollar. The US currency recorded its fourth consecutive fall against the real currency on Tuesday and closed at 1.09%, trading at R $ 5.0511.

The movement, according to analysts, is not only the result of the central bank’s increase in the celiac rate, but also the influx of foreign capital into times of high risk.

Despite the expectations of economists about the relocation of assets to safer markets, Brazil has become attractive for its potential as a viable alternative supplier for certain agricultural products produced in Russia and Ukraine.

“The current conflict is affecting countries that are major producers of agricultural inputs, grains and minerals, and products found in Brazil,” says Rachel de Sa, economist at Ricoh Investmentos.

But the indirect implications for Brazil of a possible war are not positive. According to experts consulted by BBC News Brazil, these effects could also affect the national economy in the form of rising inflation and higher prices for oil and its derivatives.

The crisis could also affect Brazil’s ability to import fertilizers and agricultural inputs, which currently top the list of products imported from Russia, and harm the national agricultural sector.

Politically, Brazil will be affected by the position it takes in discussions at the United Nations Security Council, where the country has occupied a permanent position since the beginning of this year.

Rising inflation, driven not only by the crisis in Eastern Europe but also by other external and internal factors, could further affect the outcome of the planned presidential election in October.

Dollar and financial market

The impact of the crisis in Ukraine was first felt directly in the financial markets in Brazil.

According to Rachel de Sá, geopolitical conflicts tend to increase uncertainty in the world economy and, as a result, lead to an increase in risk aversion. This means that many investors want to move their assets to safer markets such as the US, Japan or China, and may abandon emerging markets such as Brazil.

“Emerging countries like Brazil are more vulnerable to risk-averse hate situations, with reactions to the exchange rate, stock market and other assets,” says the economist.

Nevertheless, what is currently being seen in Brazil is a massive influx of foreign capital. According to Rachel, this is primarily due to the high cellular rate, which seeks to stem the central bank’s price rise, which guarantees investors higher returns.

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At the same time, as a major commodity manufacturing market, Brazil is attracting companies and investors looking for alternatives to Russia.

“Brazil produces a number of products that are an immediate alternative to those produced in Russia and Ukraine, especially in the agricultural sector,” says the economist.

All this has led to the fall in the value of the dollar against the Brazilian real dollar in recent days. As a result, the US currency closed at $ 5.0448 on July 1, 2021, the lowest level since Tuesday.

Petroleum

Economists interviewed by the report say that in addition to the impact on the financial markets, the main immediate effect of the rise in tensions has been an increase in the prices of oil and its derivatives.

With a production capacity of 10 million barrels per day, Russia is currently one of the largest oil producers in the world. The country is still the largest supplier of natural gas in Europe, accounting for 40% of the continent’s total supply.

In addition to the possibility of a military conflict, the imposition of sanctions on Russian banks, companies and merchants could freeze the production and export of goods.

The United States on Tuesday announced sanctions against Russia. These measures affect two Russian financial institutions – VEB and PSB Bank, including 42 subsidiaries – and prevent the trading of new Russian public bonds in the market.

Britain has previously announced fines against five Russian banks and three billionaires, and other Western powers have threatened to take similar action in the coming days.

“An invasion must be met with tougher sanctions than is currently in place. Fuels In Brazil “, economist and former finance minister Mileson da Nobreka told BBC News Brazil.

On Tuesday morning, after announcing Moscow’s decision to recognize the independence of the Ukrainian secluded territories of Donetsk and Luhansk, the price of a barrel of Brent was already close to US $ 100 (R $ 509).

“In Brazil, rising prices of a barrel of oil will not only push up the price of petrol, but also increase the cost of oil derivatives such as ethanol and cooking gas,” said Rachel de Chao, Ricoh’s economic head.

Swelling

The rise in oil prices has had a direct impact on world inflation, and as a result, Brazilian inflation has been rising since last year.

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“Fuel price hikes in Brazil are having an impact on inflation and it is difficult for the central bank to push prices towards inflation targets,” says Mailson da Nóbrega. According to the economist, this requires accepting higher interest rates in the long run.

Rachel de Cha recalled that in addition to oil and derivatives, Russia is a hub for the research and production of many commodities, such as minerals and grains.

Exports of these products will be hampered by the blockade, causing further damage to already shaken global production chains. This, at the same time, can put pressure on prices due to limited supply and strengthen the global inflation wave.

“We have already experienced for a year the strong movement of global inflation driven by a major trade stimulus since the end of the epidemic. This movement is further strengthened by the crisis in Ukraine and the uncertainty surrounding the sustainable growth of barrels.

According to the former finance minister, the end result of rising inflation is to slow the growth of the Brazilian economy. “The economy is not going to grow this year and may fall even a little bit. And the situation could get worse with rising oil prices and inflation,” he says.

All of this could have a direct impact on the outcome of the October presidential election.

“The environment of severe inflation will have a very negative impact on the presidential election campaign. Jair BolzanoBecause whatever the origin of inflation, here or anywhere, it always counts on the head of government, “said Mileson da Nobreka.

Agribusiness and the domestic market

Economists also point out that sanctions against Russia will indirectly affect the national market, especially Brazil’s agribusiness.

In 2021, Brazil was the sixth largest destination for Russian exports. Fertilizers and fertilizers dominate the list of imported goods, accounting for about 60% (US $ 3.5 billion) of the total US $ 5.6 billion.

Russia is still the most important source of fertilizer for Brazil, accounting for 25% of total imports by 2021. With economic lockdowns, it can be very difficult to buy these products.

“Even with sanctions or the loss of Russian export capacity, fertilizers are becoming more expensive and the profits of Brazilian manufacturers are falling, which affects the ability to expand supply in the coming years,” Mailson da Nóbrega estimates.

According to Igor Lucena, economist and member of the Saddam House – The Royal Institute of International Affairs, the domestic market in general can also be approached in a more sensible way.

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“All economic ties with Russia should be reduced. Russians make up only 0.6% of Brazil’s exports, which is small, but in a complex situation like the current one, there is no risk of Brazil losing any kind of consumer market,” it says.

Lucena also noted that sanctions could prevent Brazil from operating as a trading post for Russian ships and ships in South America.

“Under the risk of fines, Russian ships will not be able to stop supplying and buying goods in Brazilian ports, as happened on Iranian ships after US sanctions,” he says.

Foreign policy

Politically, Brazil ranks second in controversy. Nevertheless, he has gained more prominence since gaining a permanent seat on the United Nations Security Council in early January.

“The Brazilian tradition in such cases has always been to maintain a ‘neutral’ position, so we can first imagine that Brazil will not take a clear stand, even if Russian actions openly violate international law and the sovereignty of Ukraine.” Fundação Getulio Vargas (FGV), Professor of International Relations at Oliver Stuenkel. However, as a member of the Security Council, the country cannot be left off the radar.

According to the analyst, the position that Brazil now adopts will affect the opinion of the international community more than any of President Jair Bolzano’s visits to Moscow last week.

After his meeting with Putin in the Kremlin on Tuesday, the 16th, Bolzano avoided mentioning Ukraine, but stressed the commitment of Brazil and Russia to peace.

“We teach peace, we respect all those who act in this way, and this is for the benefit of all of us: peace for the world,” he said. At another time, the President of Brazil also highlighted the closeness of values ​​nurtured by the two countries.

Bolsanaro’s statements went against governments such as the United States and, according to analysts, the arrival at a very tense time may have caused discomfort.

On Friday, the 18th, White House spokeswoman Zhen Zaki said that Brazil “seems to be on the opposite side of the majority of the world community” in relation to the conflict between Russia and Ukraine.

However, for Oliver Stevenkel, as the threat of an invasion has become more urgent, Brazil has new opportunities to establish itself. “The vote on the Security Council will depend on Brazil’s behavior,” he said.

Experts expect Brazil to take a more neutral stance, away from movements against Russia after the invasion of Crimea in 2014. America “, he estimates.

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Image: UOL