The China Signal - March 4
The political and economic impact of Russia-Ukraine on Latin America
G’day, welcome to The China Signal. This week we change tack and examine the political and economic implications of Russia’s invasion of Ukraine for Latin America, before returning to cover the China Civil Engineering Construction Corporation’s entanglement in a corruption scandal in Peru, Venezuela’s revived oil output, auto company Chery’s plans to open an electric vehicle plant in Argentina, the Argentine government’s interest in combat aircraft from China, plus more. Read on.
But first, please welcome two new interns to The China Signal, Ignacio Albe and Richard Puppin! Ignacio is currently a Yenching Scholar at Peking University, and Richard graduated with honours in International Relations (BA), and his MA in Latin American Studies. Going forward their comments and analysis will be annotated with their respective initials IA, and RP.
Although this newsletter focuses on China’s growing geopolitical interests in Latin America, at its core it is a newsletter providing analysis of evolving great power competition in Latin America. Therefore, it would be remiss to not discuss the implications of Russia’s invasion of Ukraine for Latin America.
Putin’s abhorrent acts incite a variety of political risks for Latin America, including:
Surging commodity prices
An elevated risk of cyber attacks and political influence operations
Opportunistic diplomatic manoeuvring
A potential uptick in laundered Kremlin cash flowing through the region to evade growing Western sanctions
The prospect of greater Russian military posturing - but not necessarily deeper involvement in the region
Overall, it’s important to remain analytically anchored to the material realities at hand. Putin’s Russia seeks to re-assert itself as a power in its near periphery, and as a global power. However it doesn’t have the material resources to maintain a new global order like the United States has, and that China aspires to. Instead it seeks to create and exploit disorder. Within Latin America, Putin doesn’t harbour grand aims to establish Russia as a leader for the region. Rather it will look to leverage opportunities to create discord, disorder, and distractions for the United States.
Surging commodity prices
Elevated oil, wheat and corn prices will increase pressure on social stability in what is already an inflationary environment. The region’s government’s are still reeling from the health and economic toll of the pandemic, and are generally ill equipped to counter further inflation without halting economic growth. In Brazil, Chile, Colombia, Mexico, and Peru, prices increased by 8.3% in 2021, the greatest leap in 15 years. This surge was partly driven by rising commodity prices and supply chain disruptions. The Russia-Ukraine conflict threatens to drive this even more.
Although purchasing Russian commodities such as oil and wheat isn’t banned (yet), high prices and international political and social pressure against Putin may provide an opening for Brazil, Colombia, and even Venezuela increase their oil production and increase their global market share. Argentina, which exports about 5.5% of global wheat exports could see their share increase as exports diminish from Russia and the Ukraine, who together supply approximately 25% of total global wheat exports.
An elevated risk of cyber attacks and influence operations, meddling in the region’s political process
Russia has a history of engaging in cyber attacks and influence operations in Latin America, with the intention to sow discord and anarchy along domestic political fault lines. Colombia’s presidential elections in May will be particularly appealing to Kremlin-backed cyber operatives, as they look to exploit the social and political divisions of a strong US partner in an effort to divert US attention from Europe.
It’s well worth re-reading this Global Americans report on “Measuring the Impact of Misinformation, Disinformation, and Propaganda in Latin America”, published last November, and highlighted in TCS November 19. One of their key observations was that:
While Chinese and Russian government disinformation operations are often similar, there are key differences. Russia lacks the means to properly court deeper commercial opportunities and its disinformation strategy is focused on disrupting social order and political stability at a national level, as seen in Colombia and Chile, two known U.S. allies. Russia also seeks to gain new friends that are preferably disinclined to the U.S. in the hope of expanding their political influence. In contrast, China is the world’s second largest economy, a major trading partner throughout the region, and an important foreign investor. While the Russian government generally attempts to disrupt, the Chinese government’s disinformation strategy tries to position China as the new benevolent hegemon and the dominant international power in the current international system.
Stronger diplomatic backing of the region’s autocracies, while others will continue to leverage Russia’s interest to gain US concessions in their national interests
In this acute stage of the Russia-Ukraine crisis, the United States, the European Union, and other allies are presenting a united front to implement sanctions and ratchet up diplomatic pressure against the Putin regime. Latin American countries will be subject to this pressure in multilateral fora such as the United Nations, while Russia will lean on the region’s autocratic regimes such as Cuba, Venezuela, and Nicaragua. This was signalled by the Kremlin with recent calls between Putin and these respective leaders. Bolivia, Cuba, El Salvador, and Nicaragua abstained from condemning Russia in a recent vote in the United Nation’s General Assembly on Wednesday. Venezuela cannot currently vote, due to unpaid dues to the U.N.
From the Miami Herald:
Cuba, Nicaragua decline to back Russia in U.N. vote on Ukraine | Miami Herald | March 2, 2022
But even close allies like Cuba are cautiously assessing the risks and benefits of throwing their full support behind the Russian invasion. Since the beginning of the war in Ukraine, the Cuban government has been walking a fine line in its public statements, avoiding condemnation of Russia but also staying away from a full endorsement, wary of damaging its relationship with valuable European trading partners. Yet Cuban authorities have made clear they support Russia’s “right to defend” itself and have blamed the U.S. for the conflict.
Russia may also continue to make overtures to Brazil and Argentina following recent meetings between Presidents Bolsonaro and Fernandez with Putin in Moscow last month. Bolsonaro has so far refused to condemn Russia’s actions.
Mexico’s President Andres Manuel Lopez Obrador has ruled out imposing economic sanctions, despite diplomatic pressure from the United States. This follows Russia’s second largest oil producer Lukoil’s recent acquisition of a 50% interest in an offshore oil project in Mexican waters. Lukoil whose leadership has close ties to the Kremlin, became the first major Russian company to call for an end to the conflict on Thursday, as their stock price continued to plummet.
These leaders will opportunistically seek to leverage these tensions between Russia and the West for their own diplomatic advantage. However, the acute diplomatic fallout has been so intense, and the West’s financial sanctions so heavy, that Russia’s nominal allies in the region will be extremely wary of ensnaring themselves in Russia’s sanctions, at the risk of their own access to the global financial system being restricted.
The Americas Society is tracking the response of Latin American leaders, which you can view here.
A potential uptick in laundered Kremlin cash flowing through the continent to evade growing Western sanctions
As the United States and the European Union’s coordinated sanctions block Russia’s access to the global financial system, the Kremlin will pursue ways to move capital through existing opaque networks and Russian-backed front companies in the region. One interesting corner to watch is in cryptocurrencies, as James Bosworth of the Latin America Risk Report notes:
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.
Secondly, the region’s autocratic regimes will feel financial pressure as their access to foreign capital via Russian financial intermediaries is stymied. Bosworth again:
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).
More broadly speaking, more onerous KYC and anti-money laundering requirements will cost firms and consumers, slowing their ability to do business.
The prospect of greater Russian military posturing
We should also expect to see an increase in Russian military posturing in the region, particularly with Venezuela and Nicaragua. While this will attract headlines, it is unlikely to be a substantial shift in Russia’s military presence in the region, as the Kremlin faces greater military priorities - their invasion of Ukraine, and the growing financial burden of Western sanctions. One low probability, high-impact wild card to be aware of however, is any movement of nuclear capable weaponry to the region, triggering a Cuban Missile Crisis type scenario. As the current situation stands in Ukraine, we aren’t close to this scenario yet, but there are scenarios where this can play out.
Russia + China in Latin America
Much has been written about the deepening of the Russia-China strategic relationship on the eve of the Ukraine invasion. I’ll continue to consider the implications for Latin America in the coming weeks, however as I noted above, it’s clear that while both Russia and China oppose a U.S. led global order, they are ultimately pursuing different strategies to counter this - China being more constructive in creating an alternate order, Russia more destructive. This is evident in their dealings with Latin America, and more more broadly.
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Returning to our typical news and analysis…
Corruption Allegations
Peru 🇵🇪
~Paraphrased translation~
As reported by La República, Karelim López accepted the effective collaboration procedure. She did so in a new investigation initiated against her by the Special Prosecutor for Money Laundering... Faced with the possibility of being arrested, she decided to speak out to denounce President Pedro Castillo as the alleged leader of a criminal organization that operated from the presidential palace.
Como informó La República, Karelim López se acogió al procedimiento de colaboración eficaz. Lo hizo en una nueva investigación que inició en su contra la Fiscalía Especializada en Lavado de Activos, a cargo de Luz Taquire Reynoso. Ante la posibilidad de ser detenida, habría decidió hablar para denunciar al presidente Pedro Castillo como presunto cabecilla de una organización criminal que operaría desde Palacio de Gobierno.
The company China Civil Engineering Construction Corporation issued a rejection of the statements of the businesswoman and collaborator Karelim López, who linked the company with the alleged criminal organization that she would have headed – according to her testimony before the Prosecutor's Office of Money Laundering – by the President of the Republic, Pedro Castillo. The Asian firm denied having a link with the head of state.
“Our company… categorically denies the published statements made by Ms. Karelim López, who would have said that she knows, without any proof, that we would have links with the President of the Republic, Pedro Castillo.
La empresa China Civil Engineering Construction Corporation emitió un comunicado en el que rechazó las declaraciones de la empresaria y aspirante a colaboradora eficaz Karelim López, quien habría vinculado a la compañía con la presunta organización criminal que estaría encabezada –según su testimonio ante la Fiscalía de Lavado de Activos– por el presidente de la República, Pedro Castillo. La firma asiática negó tener un vínculo con el jefe de Estado.
“Nuestra empresa… por medio de la presente negamos tajantemente las afirmaciones publicadas que serían de la Sra. Karelim López, quien habría dicho que sabe, sin prueba alguna, que tendríamos vínculos con el entorno del presidente de la República, Pedro Castillo.
Oil & Gas
Venezuela 🇻🇪
Venezuela’s Diminished Oil Industry Mounts an Unlikely Recovery - February 24, 2022
But Venezuela has recently worked out a new formula: importing light-oil from Iran to help it thin out its thick crude, working with local contractors to keep the oil flowing and selling it to China through middlemen. As a result, PDVSA is now producing about 800,000 barrels a day, around 60% of what it pumped before the U.S. oil sanctions went into effect in January 2019.
One key factor fueling the turnaround is the help of powerful allies. China buys the majority of Venezuela’s production and Iran provides the condensate the country needs to mix with its heavy crude. The diluent is key to the Orinoco Belt. The tar-like crude drilled in the wide open plains in eastern Venezuela makes up around 70% of the country’s output; without condensate to mix with it, it can’t be pumped to PDVSA’s exporting port 300 kilometers away, as it clogs pipelines.
Automotive
Argentina 🇦🇷
Chinese automaker to build new automobile plant in Argentina | Global Fleet - February 15, 2022
Chinese automaker Chery is planning to produce battery electric vehicles (BEV) in Argentina, starting with a production target of 50,000 units annually.
This is in line with the third-best selling brand in the country, Fiat of which 50,364 units were sold in 2021.
Although Chery began marketing its brand in Argentina in 2008, the company’s current chairman Yin Tongyue started to show a real interest in new investments in the country in early 2021.
According to Alejandra Conconi who is executive director for the Argentina-China chamber of commerce, production, and industries, Chery is planning to build an automobile plant in Santa Fe province. The statement was made during an interview on Buenos Aires radio station Radio Mitre.
As the vehicle output will be used for both the domestic market and for exports, the Santa Fe facility will be operating similar to the Chery plant in the Brazilian city of Anápolis (Goiás state), currently the only Chery factory in South America.
Vaccine Diplomacy
Ecuador 🇪🇨
GLOBALink | China's Sinovac to help Ecuador build vaccine plant-Xinhua - February 24, 2022
*Xinhua is a Chinese state sponsored media outlet.
The Ministry of Health of Ecuador and the Chinese biopharmaceutical company Sinovac Biotech have signed a letter of agreement in Quito on Wednesday to build a vaccine manufacturing in Ecuador.
China to help to manufacture vaccines in Ecuador - Prensa Latina - February 14, 2022
In this respect… [Ecuador’s Minister of Public Health Ximena Garzón] said that the idea is to finish all the legal aspects by the end of the first semester of this year and to start the construction of the factory in the remaining six months.
With this goal, in a year and a half the authorities expect to start producing vaccines, which will not only be against Covid-19, but also against other diseases.
“Our intention is to be suppliers of vaccines at the regional level”, said the head of the company.
Defense
Argentina 🇦🇷
Argentina to send military team to China to discuss arms deal — MercoPress - February 14, 2022
The Government of Argentina is planning to send a military team to China in March to broker the purchase of combat aircraft, for which over US $ 600 million have been allocated as per the 2022 Budget bill, it was reported.
Argentina is said to be considering five offers, with China's JF-17 Thunder-Block III topping the list following President Alberto Fernández's recent meeting in Beijing with Xi Jinping, Infobae said. The South American country was planning to purchase some 12 units of that model, the newspaper also said.
Buenos Aires' ambassador to Beijing, Sabino Vaca Narvaja, has already held meetings with the China National Aero-Technology Import and Export Corporation (CATIC), to move on with the negotiations, the report added.
The 2022 Budget also features some US $ 20 million for the purchase of additional equipment, such as flight simulators, Infobae said.
Argentina is also planning to buy 8x8 vehicles for the Army, a polar ship for the Antarctic campaigns and rescue helicopters. However, none of the estimates specified details of origin, brand and model of the equipment…
Vaca Narvaja also met with Jiao Kaihe, president of China North Industries Group Corporation Limited (NORINCO), a Chinese state-owned company with which Buenos Aires is working on a project that includes the possible acquisition of 88 armored vehicles as well as the creation of a production unit in Argentina. The Argentine government wants NORINCO to share technologies and develop a dual-use vehicle manufacturing unit.
Trade
Brazil 🇧🇷
Brazil-China trade hit US$135 billion record in 2021 - The Rio Times - February 16, 2022
Trade between Brazil and China reached US$135 billion in 2021, the fourth consecutive record-breaking year.
Brazilian companies sold US$87.9 billion in products to China, up 29% over 2020. Brazilian imports reached US$47.6 billion, 37% more than the previous year.
According to the Brazilian Ministry of Economy, trade between the two countries has increased by over 130% since 2016, maintaining China’s position as Brazil’s largest trading partner, ahead of the United States.