Photo Jonathan Blair

Tuesday, September 20, 2011

Latin American DIS-integration: Brazil's contribution

In previous posts, I have insisted on the structural dynamics and policy initiatives that are taking South America's Pacific countries away from the rest of the continent. Well, all the fla-fla around Mercosur and UNASUR notwithstanding, Brazil is also doing its part in the dis-integration of the continent.

Two illustrations: 

1) Petrobras, Brazil'soil giant, has just announced that they would build the Ipojuca oil refinery, in the northeastern state of Pernambuco, alone, i.e. without PDVSA, Venezuela's national oil company. On the surface, nothing is more justified as the Venezuelans have still contributed nothing to the joint project. Now, dig just a little bit and things get more interesting: PDVSA is being bled to death by Chavez, with its own domestic investment programs paralyzed, its production down, and its future bleak. How could it invest non-existing funds into the joint venture? Well, by borrowing, which is just what it tried to do, going to the biggest player in Latin America, Brazil's very own development bank, the government-controlled BNDES. The latter, however, judged a few months ago that PDVSA did not offer sufficient guarantees or repayment, and turned down its request, leaving the Venezuelans with... nothing. By the way, who is financing Petrobras' investment in the refinery? Yes, you are right, the BNDES.

Adding insult to injury, Petrobras has announced that the refinery would not use Venezuela's heavy crude, which is more expensive to refine than Brazilian oil. In other words, there is no point building a pipeline between the two countries, because nobody in Brazil could even use what Venezuela has to sell.

2) The Council on Foreign Relations, in its recently published report on "Global Brazil and U.S.-Brazil Relations," points out that "Brazil is escalating investment and trade throughout [South America]" (p. 56). Well, this is true, but extraordinarily misleading. I have been doing a bit of research on Brazil's global stock of investments, using data from the Banco Central. The numbers are truly interesting and they tell a very different story:

In 2010, South America as a whole represented 7.8% of Brazil's total stock of investments abroad, well after... Austria (22%), the Cayman Islands (17%), the British Virgin islands (8.7%), and the Bahamas (7.3%), all places best known for keeping banking secrets and not taxing much the capital that lands on their shores. With $5.1bn in Brazilian investments (3% of the total), Argentina is the only country of South America to make it to the top 10. In other words, Brazil's investments in the region are growing, but they don't matter much for Brazil. 

Two caveats: 

1) Nobody ever said that Chavez' PDVSA was a good credit risk and Brazil probably did what Canada, France of the US would have done. But that is the point: regional integration works when the biggest player is willing to pay, and Brazil clearly is not. Moreover, refusing to even set up a capacity to refine Venezuela's oil deepens that country's dependence on refining installations in Colombia and especially in the US: not much of a contribution to energy and infrastructure integration, leaving aside the bad blood.

2) Brazilian investors are doing what everybody else is doing: sending their money abroad to avoid paying taxes. Canadian investments in the region are also parked overwhelmingly in a few Caribbean tax havens, notwithstanding the big lie that one can read on Foreign Affairs website and in many "experts" writings pointing to the large and growing importance of Latin America and the Caribbean for the Canadian economy. Still: nobody seriously argues that Latin America is Canada's main foreign policy priority, while this is a song one hears a lot in Brasilia.