March 31, 2022
by Carlos Mauricio Ferolla and Marcelo Depieri

March 23, 2022. On Feb. 24, war broke out in Ukraine after the invasion of the Russian army. The war has a global impact on a multipolar international system, hyperconnected and in a critical state, undergoing a process of hegemonic transition from the West to the East.

The military conflict adopts new configurations, what Ignacio Ramonet calls a new type of war, taking the form of an economic, media, cultural, political, etc. war. In addition to the economic effects of the military conflict, there is the global impact of the sanctions imposed by the United States and its allies on the export of products from the Russian Federation. The shock wave of the war will be felt all over the world. It is known how a war begins but not when it ends; and its consequences on a region in permanent movement, such as Latin America and the Caribbean, are uncertain.

From pandemic to war

The social and economic structure of Latin America and the Caribbean has been shaken by the consequences of the COVID-19 pandemic. The deepening of inequalities, the concentration of wealth, the increase in poverty, the food, migratory, health and environmental crises, the contraction of GDPs and the increase in the countries’ indebtedness were some of the main consequences of the pandemic.

According to ECLAC’s Social Panorama of Latin America 2021 report, social indicators are even worse than before the outbreak of the coronavirus. In 2019, in Latin America, 30.5 million people lived in poverty and another 11.4 million lived in extreme poverty. In 2021, 32.1 million people were in poverty and 13.8 million in extreme poverty in the region.

As if this were not enough, the pandemic has been followed by a significant rise in international food prices, which has had an enormous impact on the populations of the countries. At the same time, a few oligopolistic companies benefited from the increase in the value of commodities through exports.

In this context, Russia and Ukraine are major producers of oil and gas, which will have a global impact on the supply and price of energy. They have several metals that are imported by many countries, such as aluminum, copper, iron, titanium, among others. And foodstuffs such as wheat, sunflower oil and corn.

According to estimates made by the OECD (Organization for Economic Co-operation and Development), in a March 2022 report entitled Economic and Social Impacts and Policy Implications of the War in Ukraine, since the beginning of the war, international oil prices have increased by 33% and coal prices by 80%; gas prices rose 85% in Europe, 10% in North America and 20% in the rest of the world; metal prices rose 11%; fertilizer prices rose 30%; and food increased by an average of 6%, while wheat prices rose 90% — Russia and Ukraine account for 30% of world wheat exports.

The Food and Agriculture Organization of the United Nations warned in its report on the food crisis resulting from the war: “Potential disruptions to agricultural activities of these two major commodity exporters could seriously increase global food insecurity, when international food and input prices are already high and volatile.”

The price of food products not only depends on the value of commodities but is affected by rising fuel and especially fertilizer prices, as Russian production accounts for 15% of world trade in nitrogen fertilizers and 17% of potash fertilizers.

In addition, the conflict will have an impact on tourism in the Caribbean region, especially in Cuba and the Dominican Republic, which were destinations for Russian tourists. Other sectors that are being affected by the international economic context are the technology industry — for example, the production of microchips — and the automotive industry, the latter having a certain relevance in the generation of employment and income in many Latin American countries.

Therefore, we observe three immediate dynamics or effects that will have an impact on Latin America: price increases or restrictions on access to imported products; the opening of new markets for food and hydrocarbon exporting countries in the region; and the increase in international oil, gas and food prices, which will generate a rise in energy and food prices in the domestic market. Depending on how these variables intertwine and the policies adopted by governments, we will see how this affects the economies of the countries and their populations.

The pandemic and the war will have a negative effect on the economies of the most unequal countries.

The dilemma of Latin American governments

The countries of the continent do not have a relevant role in the geopolitical dispute triggered by the conflict in Ukraine. Although most governments have taken a position against the Russian invasion in Ukraine, and others have chosen not to take sides, the most interesting thing is to analyze the debates and policies that these countries will have to face in order to cope with the new economic context that is beginning to take shape with the war, which — as we have already pointed out — in some cases are a continuity of the trends present with the pandemic.

International prices are in the spotlight, and concern is focused on the inflationary escalation that this could lead to. The increase in energy, transport and fuel prices, as well as in the price of basic foodstuffs, are setting off the urgent alarm bells of governments.

How to contain the escalation of prices and decouple international prices from domestic prices are at the forefront of the debate, since governments will have to deal with concentrated sectors of the economy. The increase in the price of wheat flour and other inputs has a direct impact on the price of bread, which is affecting several countries. An example is the Brazilian case, which imports more than half of the wheat it consumes. With regard to fuel, significant increases have been detected in recent days in Mexico, Brazil, Argentina and Uruguay, among other countries.

In Argentina, the war is already hitting the pockets of the poor, and the government announced measures aimed at curbing the inflationary escalation: the increase in withholding taxes on soybean meal and oil; and the creation of a wheat stabilization fund to mitigate the impact of the international price increase and guarantee the supply of domestic demand. These policies were adopted after several tensions with the agribusiness chamber of commerce.

Regarding fuels, President of Honduras Xiomara Castro urged the Finance Secretariat to absorb 50% of the increase in diesel to mitigate the price escalation. What is happening in Brazil is very different. Since Temer’s government, in 2016, the fuel pricing policy follows the international price of a barrel of oil. This was exacerbated by the conflict in Ukraine and impacted the increase in gas station prices.

President Jair Bolsonaro and Paulo Guedes (Minister of Economy) did not change the domestic pricing policy, they only exempted part of the fuel taxes, which has a very small impact compared to the price increases of the products.

Venezuela, for its part, besieged by coercive U.S. sanctions, is resisting the increase in food prices, while its oil production has increased in recent days. The search for Venezuelan products is likely to increase if the conflict continues.

Final considerations

The negative socio-economic effects of a war, such as the one in Ukraine, are magnified for Latin American countries. The aggravating factor of the conflict for these countries occurs in the midst of the COVID-19 pandemic, i.e., the war occurs at a time of social and economic fragility, when unemployment, hunger, poverty and extreme poverty levels are very high.

In the midst of so many social and economic problems, the challenges of Our America are enormous, but every crisis also implies an opportunity to deepen debates and generate policies that guide countries toward energy self-sufficiency and move toward food sovereignty, for this regional integration is urgent and necessary.

If the workers of Latin America and the Caribbean are not to pay the costs of the crisis, governments will have to take forceful measures, and the dilemma between being complacent with the 1% or favoring the 99% will have to lean toward the great majorities. In a continent in permanent movement, everything remains to be seen.

Carlos Mauricio Ferolla and Marcelo Depieri write for Observatorio de Coyuntura de América Latina y el Caribe del Instituto Tricontinental.

Source: Resumen Latinoamericano – Buenos Aires