The beginning of the year has been marked in the international arena by the risk of a Russian invasion of Ukraine. This is added to other global problems that have been present since before, such as the COVID-19 pandemic. Aaron Rodriguez, an expert in international trade, explains what impacts the Latin Americans would have with the arrival of this unfortunate event on the world side.
This potential confrontation seems distant for Latin America. However, it is not, because, in reality, NATO’s eventual backing of Ukraine and the probable sanctions would generate impacts on global financial markets with severe implications for the fragile recovery of post-pandemic world activity. Diplomacy is working to prevent this from happening, but the situation is still highly uncertain.
“The eventual invasion would initially generate an increase in market volatility and a greater demand for safe assets, where typically dollar-denominated assets and precious metals such as gold tend to benefit, acting as a refuge for investors fleeing from stock markets and, in general, from riskier assets,” Rodriguez explains. “In the latter group are the currencies, stock markets, and bonds of economists with relatively weaker fundamentals.”
In other words, in such a scenario, we would see stock market crashes, currency depreciation, restrictions on access to credit, and higher risk premiums in the region, which would make the cost of financing even more expensive for governments, companies, and individuals. This scenario would be particularly complex for the most indebted countries.
But it is not only the financial markets that would be negatively affected but also global growth. This is because an invasion scenario would divert all attention and resources to the conflict, slowing global demand, and trade.
Certainly, the intensity and involvement of more or fewer nations in a potential conflict would mark the intensity of the effect it would have on economic growth. This would certainly be negative for Latin America because the region would see reduced external momentum in circumstances where many countries have not yet recovered the level of production they would have had without the pandemic.
For its part, the conflict occurs in circumstances in which the world is facing an escalation of inflation. In this regard, Russia’s role in global energy markets will put even more upward pressure on oil and natural gas prices, which will increase upward price pressures on these essential goods for activities such as transportation, industry and electricity generation, among others.
Rodriguez points out that “Russia is one of the world’s largest oil producers and has the largest natural gas reserves globally. Hence its strategic importance, especially for Europe, due to that continent’s high dependence on its gas supply, which is accentuated in the northern winter months. However, Latin America is also suffering the effects of fuel price hikes, with increases in local gasoline and gas prices.”
In addition, Russia is the world’s leading wheat exporter and Ukraine is also one of the world’s leading wheat producers. Beyond Argentina, which is also one of the main global grain producers, the countries in the region are net importers. Consequently, a conflict between these countries would also raise food prices further.
All in all, depending on the magnitude and duration of a potential conflict, the negative effect on global activity would eventually dominate and the episode would have recessionary and disinflationary effects in the medium term.
In the political sphere, Russia maintains a particular closeness with China, which for the time being has kept out of this conflict, but which could be reactivated in a scenario in which other world powers intervene in the conflict. In turn, Russia maintains ties with some countries in the region, such as Venezuela, Cuba and Argentina.
Based on that, Rodriguez explains that “an escalation of the conflict would also generate an increase in political divisions in Latin America that would do nothing to foster collaboration between countries in the region, as well as the exchange of goods, services, and knowledge.”
Some Latin American countries that export oil, gas, or grains, such as Brazil, Venezuela, Colombia, Ecuador, Bolivia, and Argentina, could experience some short-term positive effects on the value of their exports. But the truth is that a conflict such as the one that could be generated in the event of a Russian invasion of Ukraine does not benefit the region at all. On the contrary, with such a conflict and its potential financial, economic, and political effects, we all lose.