South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
rgentine President Cristina Fernández’s jokes were lost in translation when she sought to win over a group of bemused Russian businessmen during a visit to Moscow last week, but her central message was clear: their investments would be welcome in Argentina.
But although Russia’s commercial interests in Latin America have grown over the past decade, they remain limited and are trumped by a need for political allies as the crisis continues in Ukraine, and Moscow suffers from US and EU sanctions after its annexation of Crimea last year.
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“Russia needs friends, not only in trade but also at the UN, and it is looking for them wherever it can,” says Diana Negroponte, a Cold War specialist at the Wilson Center, pointing out that Argentina’s own rocky relations with western powers such as the US and the UK make it a perfect ally.
In Moscow, Ms Fernandez thanked a smiling Vladimir Putin, Russia’s president, for his support in her government’s legal dispute with “holdout” hedge funds, which have hindered foreign investment inArgentina, and in its claim over the disputed Falkland Islands. In return, Argentina abstained in a UN vote last year calling on member states not to recognise Russia’s annexation of Crimea.
But a memorandum of co-operation signed betweenYPF, Argentina’s state-controlled energy company, and Russia’s Gazprom to develop the Vaca Muerta shale formation in Patagonia, which holds among the largest shale oil and gas reserves in the world, was vague and non-committal.
That is despite it being Argentina’s top investment priority, since its development would enable a costly energy deficit that will require investments of some $200bn, mostly from abroad, to be reversed.
“It’s very strange that Gazprom, the largest gas producer in the world with a lot of gas that it can’t sell, would come here for gas,” said Daniel Gerold, an energy consultant in Buenos Aires, suggesting that there may be a political motivation behind the deal. “I would be very surprised to see sizeable investments materialise in the short term, to put it politely,” he said.
Mr Gerold said that a Russian-financed $2bn hydroelectric plant and a contract for Russian firms to build a new nuclear power station were of greater significance — if they happen, he cautions.
Indeed, according to local press reports, executives who met with Ms Fernandez — as well as being puzzled by her joke that she would forgive her German-descended tourism minister “in spite of [Angela] Merkel” — were swift to express their concern about Argentina’s strict currency controls. They are behind dozens of complaints made against Argentina before the World Trade Organisation by countries including the US, the EU and Japan.
Russia has found markets in Latin America for its arms industry — until oil prices started falling, Venezuela proved to be its best, if most controversial, client in the region. But the country has also turned to Latin America more recently to boost food imports, especially from the agricultural powerhouses of Argentina and Brazil, after sanctions have prevented it from importing from its traditional trading partners in Europe and the US.
Russia needs friends, not only in trade but also at the UN, and it is looking for them wherever it can
Russian trade with Latin America has leapt from $3bn in 2000, when Moscow began to rekindle relations with the region a decade after the fall of the Soviet Union, to around $24bn in 2013, according to Ms Negroponte. But that remains small change for Russia, and pales in comparison to the $260bn in trade between Latin America and China, while the US remains the region’s top trading partner.
Vladimir Davydov, director of the Latin America institute of the Russian Academy of Sciences, said that Russia was “acting as a counterpoint to the US” in the region. “Latin America now considers itself more independent [of the US]. They want to decide their own affairs, not only in economics, but in matters of defence, of foreign policy,” he said. “And we in Russia applaud this.”
Ms Negroponte observed that, as well as Argentina, Russia is most actively deepening ties with countries that have a long history of antagonism with Washington: Cuba, Nicaragua and Venezuela.
Speculation that Russia will lease Argentina 12 Soviet-era long-range bombers in exchange for beef and grain exports has even triggered concerns in the UK government that Buenos Aires poses a “very live threat” to the Falkland Islands, where the UK ramped up spending last month to reinforce defences.
“What for? Argentina doesn’t even have any aircraft or ships that could attack [the Falklands],” said a source at the foreign ministry, who emphasised that Argentina is firmly committed to resolving the dispute through diplomatic channels.
Meanwhile, Jorge Castro, a specialist in international relations dismisses the idea that Ms Fernandez may have “pivoted” towards countries such as Russia and China away from more traditional allies. “This government doesn’t have a foreign policy. It is constantly subordinated to the needs of internal political conflicts,” he says.
Aldemir Bendin says Petrobras is not going to take the corruption scandal lying down
For a tense period on Wednesday evening, those gathered for the press conference of Brazil’s corruption-plagued Petrobras began to sense a feeling of déjà vu.
The state-controlled oil company had announced it was planning to release at 6pm its long-delayed audited financial results for the second half of last year. But as the minutes ticked past the appointed hour, some journalists began to fear a repeat of January, when the company kept them waiting until 4am before releasing an unaudited version of the same figures.
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Then at 7.30pm, Aldemir Bendine, the new chief executive of Petrobras handpicked by President Dilma Rousseff to rescue it from its problems, finally appeared with the board in tow. “Thanks for your patience,” he said.
Since November, when Petrobras revealed its books were suspected to be so tainted by a huge corruption scandal that PwC, its auditor, had refused to sign off on them, Latin America’s largest country has been on tenterhooks wondering what would become of its most important company.
The country’s dominant oil explorer, refiner and importer of fuel is at the centre of a corruption scandal in which former executives allegedly colluded with contractors and politicians to loot billions from the company.
Failure to produce independently audited for figures for the final two quarters of last year by the end of this month would have violated some of the covenants of Petrobras’s large borrowings — it recorded net debt of $106.2bn at December 31. Missing this deadline would have set Petrobras on a path towards a possible technical default and created a systemic risk for Brazil’s national accounts.
That threat was at least averted on Wednesday when Mr Bendine unveiled financial results that he said had been audited without qualification by PwC.
“The likely avoidance of debt acceleration at Petrobras would remove any near-term need of extraordinary support for the company, an event that would have increased the government’s financial challenges,” analysts at Moody’s, the rating agency, said.
But any euphoria about the aversion of bankruptcy was swiftly replaced in Brazil by appalled wonder at the scale of Petrobras’s losses. The company recorded a total one-off hit of R$50.8bn ($16.8bn) — of which R$6.2bn directly related to continuing corruption investigations into the company and R$44.6bn of impairment charges connected to delays at its refinery projects and falls in the global oil price.
These charges drove the company to a net loss of R$21.6bn for last year compared with a profit of R$23.6bn in 2013. Once trusted by retail investors for its regular dividends, this year there would be no payout to preserve cash.
“Petrobras billions in the red is the biggest admission ever of corruption and bad management for a Brazilian company. [This is] a historic date,” said José Roberto de Toledo, a columnist for newspaper O Estado de S. Paulo, on Twitter.
Mr Bendine said the financial results represented a conservative estimate of the company’s losses. The corruption figure could grow, however, if the investigations reveal further schemes.
“If some credible revelation comes up that significantly alters [this value] of course we will have to review it,” he added.
Mr Bendine seemed to backtrack on government promises that Petrobras would not sell off part of its crown jewel — the so-called pre-salt oilfields in the deep waters of the South Atlantic that the company discovered to much fanfare in 2007.
Petrobras has ruled out selling pre-salt assets already in production but is open to taking on partners for those in the exploratory phase, said Mr Bendine.
“There are situations where we could look for a partner to help us in the exploration of [pre-salt] fields that are high-risk,” he added.
But while Petrobras has painted itself as a victim of the corruption scandal, Mr Bendine said the company was not going to take the matter lying down. He classed the R$6.2bn of losses related to the corruption investigation as “recoverable”, adding that he expected Petrobras to begin to receive part of the money back in May.
The company hinted it might sue some of its former contractors for damages. This would help it offset some of the potential losses it is facing from investor lawsuits in the US, where it has a listing.
Lawyers said the matter was a timely warning to companies of the importance of ensuring their legal compliance was in order.
“We are advising Brazilian companies of all sorts on implementing compliance programmes,” said Andrew Haynes, partner and co-head of the Brazilian practice at Norton Rose Fulbright. “They are being scrutinised by investors as never before.”
Other lawyers warned that with Petrobras co-operating fully with authorities, including most probably those in the US, the investigations were likely to extend to its contractors and suppliers round the world.
“This thing is probably going to grow larger very quickly,” said Richard Smith, head of regulatory and governmental investigations with Norton Rose Fulbright in the US.
hether it is an expensive shampoo or a gourmet chocolate bar, a pair of fashionable sunglasses or the latest smartphone, the new class of Brazilian consumer that has emerged over the past decade loves quality products. But during the past couple of years, the country’s taste for top-of-the-range goods has been checked by economic reality. Brazilian families have found growing difficulty in servicing their debts and, as a result, what consumer goods companies sometimes refer to as premiumisation has come under relentless pressure. Since the beginning of this year, as the economy slides into recession and unemployment rises from recent record lows, growing numbers of urban consumers have reined in their spending habits to an unprecedented extent.
A new survey by FT research service Latam Confidential (LC) — based on interviews with 6,500 people conducted between February 27 and March 23 in Brazil and five other Latin American countries — gives a good indication of the extent of the decline. In the four categories of products surveyed — clothes, food, personal care products and electronics — more Brazilians favoured cheaper and lower quality items than in the previous quarter.
For example, 698 out of 1,500 Brazilian respondents said quality was the most important factor when buying personal care products in March, while 785 had done so in December. By contrast, the number citing price as the most important factor had risen from 373 to 462. Not surprisingly, that trend has tended to benefit cheaper economy brands such as razor blades made by BIC of France or Colgate’s standard toothpaste, with premium products losing ground. Latam Confidential’s Brazil brand survey (based on the same sample) also showed a decline in preferences for premium brands across 13 out of 14 products surveyed, with chocolate — in which a number of small local companies have made big investments — being the one exception. Considerations such as health and diet or convenience remained important only for a minority of Brazilian consumers.
The broader Latin American trend is a complex one, however. Other regional economies are slowing (regional growth is expected to average 0.8 per cent this year, down from 1 per cent in 2014 and 2.7 per cent in 2013) and retail sales have come under pressure across the region. But although there are wide variations between countries, the evidence from the LC survey suggests a longer term “premiumisation” trend is very much intact.
Take Mexico, for example. Although retail sales have grown only modestly in the past 12 months (with the economy only gradually picking up speed), the LC survey showed more Mexicans put most value on quality when buying consumer products than was the case six months ago. In personal care, for example, 407 of 1,000 respondents prioritised quality in March, compared with 363 in September 2014, with 416 opting for quality in clothes purchases, up from 380 six months ago. In some segments — food and electronics — preferences for quality are still higher in Brazil than elsewhere in spite of recent declines. But in others, premiumisation appears to be stronger in the faster growing Andean markets. In the most recent LC survey, Peruvians, Colombians and Chileans were all more likely to favour quality personal care goods. And in clothes, Brazilians were the least likely of all six nationalities surveyed to favour quality.
Our conclusion: the Brazilian consumer is undoubtedly under pressure and consumer goods companies looking to advance their market share by promoting higher quality products may need to re-evaluate their strategies. Yet the trend is by no means region-wide. In spite of the economic slowdown, consumers in most of the region are no longer quite so price-led as they once were.
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A rapprochement with America is part of his plan to save socialism from itself
he more things change, the more they can stay the same. Last week, Raúl Castro launched into a long speech against the US. Addressing a regional summit in Panama, the Cuban president listed a century of complaints, from US usurpation of the 19th century wars of independence up to the embargo of the current day. Then the revolutionary leader abruptly changed tack — and apologised.
Barack Obama, who was listening, is an “honest man”, Mr Castro said. The 83-year-old former general, wearing a dark suit and tie rather than military fatigues, had even read “parts” of the US president’s biography. Mr Castro added that he had “meditated deeply” about these words, repeatedly removing them from his speech and putting them back in. “I am satisfied with that,” he said.
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The compliment, and Mr Castro’s subsequent formal meeting with Mr Obama — the first between the two country’s presidents in more than 50 years — are the latest steps in the delicate process of rapprochement that began in December that aim to end the 53-year-old US embargo, and turn a last page on the cold war. It also contains a potent symmetry. What began as an ideological confrontation between an ageing US general, President Dwight Eisenhower, and a young and charismatic lawyer, Fidel Castro, has evolved into a respectful conversation between a charismatic black lawyer from Washington and an ageing white general from Havana.
The rapprochement began as back-channel talks two years ago, shortly after Hugo Chávez died of cancer. Venezuela’s socialist president had provided Cuba with billions of dollars of subsidised oil and the Castro brothers recognised that Chávez’s death presaged chaos in Caracas, ultimately threatening Havana. Fidel, the elder brother, had stepped down as president in 2008, suffering from ill health. Mr Castro replaced the cabinet and started liberalising Cuba’s Soviet-style economy. In the past four years, he has slimmed the state sector, allowed self-employment and a free market in homes, and courted foreign investment. By turning to capitalism, it seems, he aims to save Cuba’s socialist revolution from itself.
The prospect has unleashed a carnival of US business expectations. Although only a market of 11m people, similar in size to the neighbouring Dominican Republic, Cuba enjoys the mystique of forbidden fruit. Netflix and Airbnb are opening; big banks say they are interested. Tourist agents have capitalised on the giddy mood, urging people to visit before the Yankee floodgates open; visits reportedly rose 16 per cent in January.
Like Fidel, Mr Castro was born on the family farm in eastern Cuba. Their father, Angel, a Spanish immigrant, was a wealthy landowner; their mother, Lina Ruz González, a maid who became Angel’s second wife. Both went to Jesuit schools. For many years Mr Castro literally lived in his elder brother’s shadow — he is eight inches shorter. Yet he is also an accomplished man. In more than five decades as defence minister, he built the army into a formidable force that won multiple African military campaigns in the proxy conflicts of the cold war and now controls the heights of the economy.
At times ruthless — he was prominent in the campaign against General Orlando Ochoa, a popular soldier and possible rival, executed on corruption charges in 1989 — Mr Castro shares the same ideology as Fidel. Yet their styles could not be more different. Mr Castro is more pragmatic, known to be a family man and less austere than Fidel, who reportedly drained his swimming pool during the dark days of mass rationing that followed the Soviet Union’s collapse. He has four children with Vilma Espín, the daughter of a lawyer of the wealthy Bacardí family, who died in 2007, and lives in a compound on the outskirts of Havana, screened by vegetation and metal fencing. Jovial in private, his favourite pastime is said to be playing dominoes over a bottle of rum with friends, and in public he is known for his wry wit. When Hugh Thomas, the British historian, asked during the charismatic early days of the revolution if he had a message for England, Mr Castro replied: “For whom in England?”
Mr Castro’s allies and family have followed him into government. Nine of the Politburo’s 14 members are uniformed military, as are five of the seven Council of Ministers. His only son, Alejandro, an interior ministry official, was at the meeting with Mr Obama in Panama. Luis Alberto Fernández, who was once married to Mr Castro’s daughter Deborah (they are rumoured to have divorced), is a colonel and manages military business interests. Deborah’s son, Raúl, is often at his grandfather’s side in public, apparently as bodyguard.
The US popular mood has swung behind Mr Obama’s move. In the latest step, Washington on Tuesday moved to drop Cuba from its list of state sponsors of terror, opening Havana’s access to sources of international finance. Yet removal of the embargo, which requires an act of Congress, is still a long way off.
Washington’s bet is that the gradual opening will foster change. Mr Castro’s is that Havana can control it, “perfecting” socialism. He is set to step down in 2018 and be replaced by Miguel Díaz-Canel, the civilian vice-president. But dissidents warn Alejandro will remain the power behind the throne for time to come. “No one should have any illusions,” Mr Castro said in Panama. The US and Cuba “have many differences . . . we need to be patient, very patient”.
The writer is the FT’s Latin America editor. Additional reporting by Marc Frank