Brazil Reigning in Argentina

Brazil Reigning in Argentina

By Andrés Cala

I’ll stop short of calling it a turning point, but some clues are certainly encouraging. A combination of factors -economic, geopolitical, and political- are starting to force inevitable reforms of disastrous economic policies in Argentina. More importantly though, Brazil appears to be taking an instrumental role in prodding its southern neighbor.

While Latin America has undergone a formidable economic and political transition toward stability in the last two decades, it’s setbacks like Argentina’s neopopulism that make many wary of putting money in. You also still have Hugo Chavez of Venezuela and his block, but as it turns out, their movement climaxed years ago and now they are all either backtracking, revising, or simply trying to survive the storm.

Cristina Fernandez de Kirchner is a belated protagonist of the neopopulist wave, and as South America’s third largest economy, it’s sowing uncertainty over the region’s destiny. She imposed trade barriers, import curbs, and currency controls. She also expropriated the country’s biggest oil company YPF, refuses to pay many of its debts, and implemented a long list of policies that is threatening not just Argentina’s economy.

And it all happened with apparent complacency from Brazil, the regional power and supposed stewart, with more vested interest in Argentina than most other countries. South America’s powerhouse has also been going through its own economic slowdown and was perhaps distracted by more pressing issues.

Indeed, Argentina’s policies and Brazil’s inertia have been simmering into real concern. But Brazil appears to be finally exerting its regional power status. A week ago President Dilma Rousseff, after numerous other ministerial meetings that did little to address mounting problems, led a high level delegation to Argentina.

Publically she lent support for an embattled Fernandez de Kirchner facing growing popular frustration, but privately she defended Brazilian exports and investments suffering under Argentina’s populist regime. Rousseff had alread shown her more assertive side earlier in November when she travelled to Spain for an Iberoamerican Summit and used a big part of her mic time to scold Europe for its handling of the crisis.

Whatever Rousseff told Fernandez, it appears to be working. Argentina is finally showing signs of reform, no doubt because policies have backfired and even its South American neighbors are increasingly frustrated.

The inevitable reforms

Back to Argentina, the populist wave is crashing as a result of failed economic policies, as is always the case. This time around, the catalyst is the energy sector. Argentina’s demand is rising fast, but production is also falling as a result of serious underinvestment and price controls.

In fact, Fernandez justified YPF’s expropriation blaming Spain’s Repsol for not doing enough to reverse production declines. It’s true Repsol underinvested and mismanaged its business in Argentina, but it’s also true that Argentina’s energy policies limit profits and investor appeal accordingly.

Repsol this week filed a complaint in the World Bank’s arbitration body. Repsol also sued Argentina in a US court and a Spanish and a US court have agreed to consider a separate suit against Chevron for its preliminary deal signed with YPF to develop the country’s largest oil and gas basin, Vaca Muerta, which Repsol discovered.

Argentina this week also retaliated against Spain, the European Union, and the US by filling a complaint in the World Trade Organization for “impeding free commerce” of beef, lemons, and biofuels.

Argentina also barely avoided a second default last week after a US appelate court gave the country more time to plea its case after a ruling that would have forced it to pay more than 1.3 billion to creditors who didn’t accept to restructure their debt. Without the reprieve, Argentina would have probably defaulted yet again.

The point is Argentina’s economy cannot survive without serious reforms, and its energy sector is probably the most desperate considering the country’s rising deficit.

Fernandez’s populist regime and her inherited Peronismo movement, are seriously injured and mass protests are testing her regime. She knows her legacy and her movement will not survive without more investment and access to credit.

Even before the US court reprieve, she admitted Argentina would have to honor its debts eventually, which while common sense to most, was a welcome retraction.

Argentina finally is trying to negotiate a long list of pending debts and expropriations, including that of YPF.

More importantly, Fernandez trippled wellhead natural gas prices for new investments in an effort to develop its huge Vaca Muerta oil and gas rich basin, which makes up the bulk of Argentina’s shale oil and gas potential. It will pay companies $7.50 per million BTU, compared to $3.50 average currently, and to $13 MBTU it pays to import Bolivian gas.

It’s the most telling example so far of Argentina’s backtracking. But deals will remain slippery, if nothing else because of Fernandez’s track record when it comes to honoring terms.

Brazil’s steps in

That is where Brazil comes in, to the benefit of all. Brazil, and Rousseff specifically, cannot risk more silly politics from Buenos Aires. It’s not only the $40 billion in bilateral commerce that both countries share, but that Brazil’s inability to reign-in Fernandez’s radical and suicidal economic policies have already hurt Mercosur, South america’s economic block led by Brazil that is vital to its global aspirations.

Rousseff, shy to geopolitics so far, and arguably too slow to react to Argentina’s moves, finally showed the teeth she earned in internal Brazilian politics. Her demands are the same of every other investor with interests in Argentina: security of investment guarantees.

Rousseff gave Fernandez the ultimate nudge, or perhaps she privately imposed it. Rousseff was pressed to act for herself and for her country. Political support and talk of regional integration, in exchange for real reforms. Brazil needs them a lot more than any other country. After all, Brazil is a lot more exposed to Argentina than any other country.

Of course, Fernandez might come back to bight, but for the time being it appears Brazil will be more closely prodding Argentina to play fair, and with little other friends nationally or internationally, Argentina has no choice.

Pity Argentineans have to endure the excesses of Fernandez’s populism before she acknowledges the obvious, but at least Brazil is now taking the helm.

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