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Could uncertainty and conflict in Europe give Brazil the chance to shine?

4 Min Read

The impact of the war in Ukraine is complex for an emerging economy like Brazil. The interconnected nature of global markets means the conflict is affecting the economy and consumers despite the 10,000km between them.

On the one hand, there are losses with the increase in logistics and transport costs due to the high prices of oil and agricultural commodities. On the other hand, there is a possibility to stimulate the conquest of new markets and investments for Brazil.

Coupled with ongoing economic shockwaves from the Covid-19 crisis, a new landscape is emerging. Is there space in this landscape for Brazil to revitalize its position in the global economy and support markets at home and abroad?

I will look at the factors behind these structural market supply changes in more details, and where they might expose vulnerabilities in Brazil. I will then consider how they might enable Brazil to put new strategies and opportunities in motion.

Where are we now?

Russia is one of the world's largest exporters of commodities, and as such, any unusual situation in the country is enough to make the prices of raw materials and basic goods soar. Reverberations are already being felt on a large scale - the closing of many ports in the regions involved in the conflict has hampered the global flow of exports and imports. Further disruption to production and supply is being caused by lingering outbreaks of Covid-19 in China, leading to the closure of factories and even whole cities and regions.

Everywhere, prices for consumers soared. According to the UN’s Food and Agriculture Organization (FAO) world food inflation is at its highest rate in three decades. Additionally, the barrel of oil has already accumulated an increase of 35% per year, raising the price of fuel for automotive vehicles and energy in general. The two regions involved in the war are major grain exporters which impacts the costs of derived products, such as flour and animal food.

Vulnerabilities in agricultural production

Analyzing the negative impacts of the war on the Brazilian economy, the main vulnerabilities surround agricultural production. Russia is one of Brazil's most important trading partners: they supply at least 25% of the total fertilizers consumed by our agriculture and represent one sixth of Brazilian imports in general.

The uncertainties about the availability of these inputs, as well as the possible extension of the conflict, pose risks to food security in Brazil and the world. With the sanctions, or even the loss of present Russian export capacity, fertilizers became more expensive and the profitability of Brazilian producers fell. Such factors may affect Brazil's ability to continue to expand its supply in the coming years.

Soaring price of oil

Another concern is the soaring prices of oil and its derivatives. Although the trend is to maintain current production, the embargoes against Russia have generated more dispute in the market. Both the European Union and the United States have pledged to eliminate Russian oil imports by the end of this year. To do so, they will have to buy from other producers, which will increase competition. Even with the energy transition underway, dependence on oil is still high. Faced with so many uncertainties, the price of a barrel showed enormous volatility.

Considering the Brazilian parity policy (although we produce almost all of the oil we use, prices follow the fluctuation of the international market and that of the US dollar as well) and the massive dependence on road modals (more than 60% of all transport in Brazil takes place via roads), the impacts will be felt in several sectors, from commerce to services.

Fuel, commodities and inflationary rises

The rise in fuel prices has been putting pressure on inflation rates, generating a ripple effect in the pricing of all products in the economy. As a result, general household consumption has declined and Brazil is at risk of facing an economic downturn.

To contain inflation, the government will have to take on more debt by issuing government bonds, raising the official interest rate – which, on the other hand, may be attractive to foreign investors. However, with the economy already weakened by the effects of the pandemic, GDP growth has been below expectations. Faced with a scenario of high interest rates, credit becomes more expensive, inhibiting the capacity for investment, growth and job creation.

In addition to oil, corn is another commodity that tends to rise in prices. Ukraine, the world's fourth largest corn producer, may have its production in check, which will inevitably lead to a price adjustment for the product. If this threat materializes, the costs for Brazilian egg, poultry and pork producers will rise even further.

Openings for Brazil in agriculture and commodities

Let’s consider now the possible openings that the economic consequences of the war represent for Brazil. Can we become Russia's substitute in the provision of commodities such as agricultural inputs, grains and ores, and can we also serve the markets that Ukraine had been conquering in Europe and Asia with exports of chicken and pork meat?

Agricultural producers, as well as Brazilian companies traded on the stock exchange, tend to benefit from rising commodity prices, as long as the country has enough fertilizers to be able to produce food and develops the right trade policies that enable it to enter global value chains, seeking commercial agreements and opening new markets.

Despite the risks that the war poses to Brazil, the scenario may be less worrying than in other countries, precisely because of the rise in commodities and the flow of global investors leaving Russia and Asia in search of other emerging markets. In this sense, the country will be able to attract investment, in the context of which large industries are trying to reallocate their production chains to avoid the risk of supply disruptions.

Brazil's opportunity for leadership in the international market

There is still an opportunity for Brazil to lead the reactivation of the BRICS bloc, which has been dormant. To do so, it will need to invest in its political-strategic relevance, going beyond its domestic crisis. In response to the sanctions it suffered, there is a tendency for Russia, together with China and India, to accelerate its independence from the dollar, strengthening its regional positioning and in multilateral blocs, processes that had already been initiated before the war. Brazil can be part of this strategy or stay aside, depending on its political circumstance.

To conclude, if our country devises intelligent strategies, it will be able to take advantage of a series of opportunities, accelerating its economic recovery by occupying new spaces in the international market and exercising leadership in this uncertain moment of change. In fact, we have yet another chance to turn our comparative advantages into competitive ones.