Wednesday, March 20, 2013
At the beginning of March, mining giant Vale announced that it would close its massive Rio Colorado potash project in Argentina. The move was justified strictly on economic grounds: even though the company had already invested some $2bn in the project, the size of the investments required and the problems created by inflation and an overvalued currency were said to have forced it to cut its losses and leave. Predictably, Argentina's government was outraged but the move was well-received by markets that saw the whole venture, well, as an expensive adventure. The stock in fact went up after the announcement.
On the surface, in other word, run of the mill behaviour by a run of the mill multinational. The hitch is, Vale is anything but a run of the mill multinational. While formally headquartered in the Netherlands, it is in fact Brazilian and a strategic tool that the Brazil's government is keen to use to project and protect its interests in the world. Through investments by a public sector pension fund it controls (Previ) and by its National Bank for Economic and Social Development (BNDES), and also via its influence over the company's largest private sector equity holder and Brazil's second largest bank (Bradesco), the federal government exerts a tremendous influence on the company. This became clear in 2011, when its then-CEO, Roger Agnelli, was forced to resign by President Dilma Rousseff, following rising tensions about patterns of investments that, she and her predecessor Lula, felt neglected the domestic scene.
The Rio Colorado investment had a strategic quality that went well beyond Vale's typical activities in the iron, nickel, manganese, copper and coal businesses. Potash, with phosphorus and nitrogen, is one of the three fundamental fertilizers on which agriculture depends. It is also increasingly scarce and its production highly localized: 60% of global production is concentrated in only three countries (Canada, Russia and Belarus) and 80% in the top five (with China and Germany added). Brazil, which derives a larger part of its exports from agricultural goods than any other major economies, only produces 1.5% of global output and thus has to import 90% of what it uses. On that increasingly tight market, it competes with the whole world, but especially with China, India and the United States.
Once completed the Rio Colorado project was planned to be under exploitation for 50 years and it would have made Argentina one of the world's four largest potash producers, with about 12% of current global output (4.3/34.4bn tons). For Brazil, it would have represented a secure supply of one of the few strategic commodities it does not have aplenty, and certainly one of the most critical to its present and—given global food price prospects—future export revenue.
And yet, Vale decided to let it go, most probably for good given the reaction the move is generating. Indeed, the Argentinian government is apoplectic and has announced that they would sue for compensation and look for new investors. With Buenos Aires knowing very well that no such decision by the company could have been taken without, literally, presidential approval, the termination of the project will also poison a relationship with Brasilia that is already rocky.
From all this, three issues of note, from where we sit:
1) The economics of the project and the general prospects of the Argentinian economy must truly have looked awful to Vale and Brazil for such a decision to have been taken. And, thanks to years of hyper-inflation and intimate relations with their neighbours, few global investors are as difficult to shake up or as knowledgeable about Argentina as Brazil's. In other words: don't bet your pension fund on Argentina.
2) For Canada, the world's largest producer, this is probably good news. Brazil, already a good client of Saskatchewan's Potash Corp, will be even more dependent on it and the disruption to the project will keep prices high.
3) Finally, this is just further meat for the grinder of people like me, who think that Latin America is really dis-integrating and that behind all the talk of solidarity and converging interests, there is little of substance really going on.
Tuesday, March 12, 2013
Hugo Chavez was a global star. A photogenic and rotund figure with a warm personality, his aggressive self-promotion and bombastic attacks against the United States have made him famous around the world. With his friend Lula from Brazil, he has given Latin America a visibility the region had not enjoyed since the Castro-Guevara duo ruled the waves in the 1960s and 1970s. A self-declared revolutionary trying to sell his ways as "socialism for the XXIst Century," Chavez has been spending much of the country's oil wealth on social programs at home, which made him immensely popular among poor Venezuelans. He has also used Venezuela's oil revenues to build a broad coalition in Latin America and the Caribbean and his diplomacy has courted any world leader willing to denounce Yankee imperialism. While alive, he really made his mark on the world. What of all this will survive him?
The Chavez "model" was about spending money: on food, education and social services. Producing that money was not really part of the picture and the whole endeavour would quickly have run empty without Venezuela's oil wealth. Lacking investments, even the oil sector is now struggling and the rest of the economy is in shambles. The country's massive energy resources, however, could easily draw foreign interest and relaunch domestic production, sustaining further social spending. As a model for a country that does not have the same riches—and that means almost everybody on the planet—there is not much of use in Hugo Chavez' version of socialism.
Oil was also the honey that held together his "Bolivarian Alliance of the Peoples of the Americas" (ALBA). Most of its members were small oil-dependent countries from the Caribbean and Central America and for them, Chavez death is tragic. Most severely threatened is Cuba, which was getting some 10 to 13 billion dollars a year—for a country with a GDP of about $70bn—in subsidized oil and credits from Venezuela. Haiti's annual support, worth $400million, is also at stake, as are the checks going to Nicaragua, Dominica, Surinam, and so on. The rationale for the whole program was tied to Chavez' personal pretentions to regional leadership. Devoid of his charisma and soon to confront strong pressures to keep together a fractious domestic coalition, his successors are likely to put much of this money to domestic use. Neither Argentina, nor Bolivia or Ecuador, the next largest and richest members of ALBA, are in a position to provide glue money. Without much of a joint agenda, it is hard to see a real future for that coalition.
Aside from the predicament of ALBA's retinue of oil-dependent states, could Chavez' death mean trouble for the region and beyond? The consolidation of what is really a new regime in Venezuela will likely be messy. The country is already the most violent in South America, drug trafficking, corruption and nepotism are rife, and Chavez had done little to consolidate political institutions that would exist without him. Political uncertainty, in turn, will not help the economy. The United States, Colombia and Brazil have significant trade with Venezuela. With about 1 million barrels a day, Venezuela is the US' fourth largest source of oil. Colombia and Brazil have large trade surpluses with the country and find there a welcoming market for their manufactured exports. Instability, moreover, could perhaps trickle over the long and poorly controlled borders they share with Venezuela. In a worst-case scenario, deepening corruption and violence could lead to the emergence of a large, rich and messy narco-state at the northern tip of South America.
While the opposition, which could win the April 14 elections, or the new leadership, whose qualities were not given much space to show, could get the country back on track, these are causes for worry. Not about oil, however: if Venezuela exports much oil to the US, it imports a lot gasoline from there as its refining capabilities are meager. Dependence here is a two-way street and there is much more to lose for Caracas in this game. The risks of political instability and criminalization are much more serious and their management the real challenge for external actors. The US would be ill-advised to get too closely involved, however. Brazil and Colombia, with more at stake and, especially for Brazil, much more access and local credibility, will be best placed to lead an international effort at containing the potential ripple effects of Venezuela's difficult times, and to help along the process of de-polarization that the country will now need to go through. Canada, which has little at play in this all game, should probably content itself with a supporting role.
Monday, March 4, 2013
In 2010, Brazil and Turkey made a huge mess after being excluded from the international committee leading the talks on Iran's nuclear program. That committee was called P5+1 because it included the five permanent members of the UN Security Council, along with Germany. It was also called, more euphemistically, the E3+3 because... it included France, Germany and the UK, along with the US, China and Russia. The legitimacy of that little club was challenged, however, by Turkey and Brazil in particular, which at the time were non-permanent members of the Security Council. The little numbers game, in other words, wasn't quite working.
Turkey wondered why it had not been invited: after all, as an immediate neighbour its strategic situation would be massively affected by a nuclear Iran and it would likely suffer ripple effects from attempts to destroy Iranian nuclear infrastructures. The Brazilians were unhappy to be left out. They felt—and still fell—that they are not getting much in exchange for signing the NPT and suspending their own nuclear programs (this is not a typo, they had several). They wondered why Germany was involved while other top candidates to a permanent seat at the Security Council, like themselves, were left out.
So Turkey and Brazil joined force and launched their own little initiative. It did give a degree of legitimacy, however fleeting, to Iran's claim that its program had no military component. Conversely, it weakened the legitimacy of the Security Council's pressures, which really looked like the action of a small group of powerful bullies. In the end, Iran's rigidity helping a lot, Turkey and Brazil voted against the sanctions but announced, somewhat sheepishly, that they would comply with the Council's decision.
Things have apparently calmed down and discussions have proceeded since without any change to the committee's participants. Brazil's relations with Iran may even have taken a turn for the worse and diplomats are keeping discussions alive with regular meetings, the latest on Feb. 26 in Kazakhstan. So, all is fine?
Not quite, and not just because Iran appears to be proceeding with its nuclear program unabated. The P5 may not want to play to the whims of every new kid on the block and, indeed, Turkey and Brazil looked more than a little bit naive when insisting that Iran was really not interested in a military program. But in practice, Turkey has continued to oppose the sanctions, its officials have said that those would not affect the importation of Iranian oil and gas and that Turkey's economic relations with Iran would likely intensify. The problem, however, goes well beyond the case of Iran. The NPT regime is under threat. Current nuclear powers will not fully disarm, contrary to their commitment, and a growing number of countries will acquire the technological capacity to produce their own nuclear devices. If access to the Security Council remains de facto conditional on having nuclear weapons, and if potential nuclear powers can't even have a say in the governance of the regime and in the management of the crises it confronts, what exactly is in it for them?