In the three months since our last issue, disaster has befallen Europe. Russia’s invasion of Ukraine has led to thousands of deaths, millions of displaced people and plunged tens of millions around the world into poverty. Together, Russia and Ukraine account for 25% of the world’s wheat exports, 25% of gas reserves and – if you include fuels like LPG – are the largest exporters of oil products in the world. In other words – they provide us with the commodities we need to eat, heat and move.
The developed economies can pay more money to secure these scarce supplies – albeit at the cost of higher inflation – but many in poorer countries will simply go without. Recent protests in Pakistan and Sri Lanka are harbingers of the political upheaval this scarcity will cause around the world.
With luck, the conflict will end soon and normality can return to a world economy that was only just recovering from the pandemic. Yet, and hopefully this doesn’t come across as too ghoulish, the war highlights several strengths of Latin America. The region is a net exporter of wheat, oil and countless other commodities linked to the food and petrochemical industry – for example sugar and rubber.
The value of the region’s exports has surged since the start of the war, with Capital Economics estimating that Brazil’s commodity shipments earned 35% more than in the same period last year. Not all countries in the region are oil producers but nearly all are net commodity producers that will be able to ride out the inflation better than importers like Pakistan and Sri Lanka. As a result, most Latin American countries have seen their currencies and capital markets increase since the start of the conflict.
Pax Latin Americana
But this war does more than give commodity exporters a quick bonus. It also highlights Latin America’s peaceful nature. If you omit small skirmishes between Peru and Ecuador, the last comparable, major conflict between two Latin American countries was the Chaco War between Bolivia and Paraguay in 1932. The global drugs trade has cursed Latin America with narco cartels, but you don’t get tanks rolling across the plains or children being bombed from the air.
Investors often complain about political risk in Latin America but it is more peaceful than Eastern Europe and more democratic than most of Asia or Africa.