Discover more from Latin America Risk Report
Implications for Latin America of Putin's invasion of Ukraine
Commodity prices are soaring, sanctions issues will become even more complicated, and the politics of the region are realigning.
Last week, Russia invaded Ukraine. However, Ukraine hasn’t fallen yet. In fact, they are putting up heroic levels of resistance. The international community has largely united in condemning the invasion and imposing heavy financial sanctions on Russia.
That’s the total of my update on Ukraine here. You don’t read this newsletter for Europe updates.
One month ago, I wrote about the potential impacts on Latin America should Russia-Ukraine tensions escalate. This post provides an update given what we’ve seen over the past week.
Thousands of words are going to be spilled on the diplomatic dances that are ongoing. How are various Latin American governments going to vote at the UN? Who has issued statements to condemn the invasion? Who has supported Putin? Who has remained silent?
Operationally, it doesn’t matter. The statements and UN votes of each Latin American country are the least important aspects of the ongoing conflict. In fact, Brazil’s and Mexico’s complete irrelevance to the situation can be seen by the fact that both governments have given mixed signals about where they stand but nobody outside of some Twitter commentary really cares because neither Brazil nor Mexico have influence over what is occurring.
Longer term, we are seeing a potential realignment in Latin America where countries like Brazil and Venezuela appear to stand on the side of Russia while countries like Chile and Paraguay stand firmly on the side of Ukraine. While each sides’ diplomatic support matters little for this conflict, it does signal potential regional shuffling later for issues on which their positions will matter.
Sanctions enforcement and sanctions evasion
Every financial system around the hemisphere faces new requirements and restrictions to keep out Russian money. Even if governments don’t officially sign on to the financial sanctions applied by the US, EU and others, both governments and the private sector must understand the risks of being hit by secondary sanctions if they continue working with Russian money. In particular, companies in Fintech and cryptocurrencies must be extra cautious as Russian money looks for off ramps into assets that can be hidden.
One particular country to watch will be El Salvador, which plans to issue a Bitcoin-linked bond in the coming months. The potential for Russian actors to move cryptocurrency and cash via the El Salvador bond is a very real threat. If El Salvador fails to implement some form of KYC to prevent Russian money from entering their bond market, it will put other bondholders at risk.
On the flip side, Russia’s financial system has been an important player in the sanctions evasion efforts of Venezuela and Nicaragua in recent years. With Russian financial institutions now cut off, these countries may face additional financial challenges in the coming months. Maduro’s opponents, in particular, could use this moment to increase pressure on the regime if they could get themselves organized (they likely won’t).
Cyberattacks remain on the table
There have not been major cyber attacks in Latin America in the first week of conflict. Ransomware attacks appear right around their normal levels, with no surge based on Russia-Ukraine issue. Nothing overtly political has hit the region with the goal of targeting US interests.
The fact there hasn’t been a major cyberattack in the first week, especially given Russia’s poor overall planning, shouldn’t be a signal that one isn’t coming if this conflict extends on for weeks to come. This is an area where I remain concerned that Latin America is underprepared.
Oil and food prices are up. Latin America was already facing a major inflation challenge and this conflict is going to worsen those conditions. While some commodity-exporting economies may benefit from higher prices over the course of the year, the increased costs will still be a shock to consumers and voters much faster than any benefits that may occur. For commodity dependent countries in Central America and the Caribbean, this is going to be a serious blow that holds back economic recovery.
With global energy markets shaken by the events, it is a great time for Latin American energy producers to opportunistically look for ways to expand their market share. I expect Brazil, Colombia, and even Venezuela (in spite of sanctions) to find ways to benefit in the current environment. Mexico, on the other hand, is stuck with AMLO and his isolationist/nationalistic policies that will almost certainly miss this opportunity.
Venezuela is dependent on imported food in general and Russian wheat in particular. With war, sanctions, and shipment restrictions, Venezuela may see reductions in food imports in the coming two months, something that could harm the population.
Preparing for a consequential year
Putin’s invasion of Ukraine is likely to shake up global politics for months to come and the implications for Latin America aren’t clear at the moment.
At first, the conflict in Europe distracts from the post-pandemic hemispheric agenda. The Summit of the Americas in June can’t be about Russia, but Russia and the implications of the invasion will definitely reshape the agenda. The longer the conflict in Europe drags on, the more important the global scenario will be to the regional debate.
The region will experience the secondary impacts of a weakened Russia, a stronger and more united Europe, and a China that is rethinking how to manage its alliances moving forward. Additionally, the region’s relations will be shaped by the example set by Putin in Ukraine and the examples set by those who seek to punish Putin for his actions with sanctions and arms transfers. The outcome in Ukraine could shake up how the region manages its security and diplomatic challenges including the fights against organized crime and the efforts to help Venezuela overcome its multiple crises. Countries may be willing to take more aggressive actions than in the past and inter-regional conflict could escalate beyond what has been considered quite rare in recent decades.
Thanks for reading
This newsletter is sent for free every Tuesday and Friday. Paying subscribers receive daily updates.