Friday, June 26, 2015
Thursday, June 25, 2015
Rousseff hopes for domestic boost from US trip
Joe Leahy in São Paulo
When China’s premier Li Keqiang visited Brazil last month, the two sides announced a rash of extravagant infrastructure-related deals worth about $50bn.
By contrast, a planned trip to Washington by Brazil’s president Dilma Rousseff starting this Sunday is expected to be much lower key.
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The meeting with her US counterpart, Barack Obama, is the first attempt at rebuilding a relationship that was hit hard in 2013 when Ms Rousseff cancelled a planned state visit to Washington after former US National Security Agency contractor Edward Snowden revealed his country had spied on Brazil.
At the time, Ms Rousseff was near the peak of her popularity, but she will now be coming to the US keen for foreign policy successes to make up for plummeting approval ratings at home with Brazil’s economy contracting and corruption scandals mounting.
“She will be making this visit at a very tough moment for her,” said Carlos Melo, political scientist at Insper in São Paulo. “She needs somehow to recover some of her support base, above all in the middle class.”
The US and Brazil, the two giants of the western hemisphere, are continent-sized democracies with a common history based on slavery and European immigration, huge agricultural sectors and a taste for unabashed consumerism.
But their relationship has often been characterised by suspicion. Brazil distrusts what it sees as US military and commercial hegemony while Washington is unnerved by Brasília’s friendships with countries such as Russia, Iran and China and its trade protectionism.
In spite of often prickly official relations, commerce between the two countries has traditionally been strong. Two-way trade in goods and services has risen sharply over the past decade to $110bn last year, according to the US Census Bureau.
While China is interested in Brazil’s commodities and natural resources, the US is an important market for Brazil’s advanced manufactured goods, such as aircraft produced by Embraer, the world’s third largest commercial jet maker.
She will be making this visit at a very tough moment for her
- Carlos Melo, Insper
“The fact that business thrives between the two countries in spite of government not because of government puts pressure on the governments to catch up,” said João Augusto de Castro Neves of Eurasia Group.
During Ms Rousseff’s trip, the two sides are expected to try to make headway on easier visa access for tourists from both countries, US officials say. They are also expected to revive defence co-operation agreements that will allow easier sharing of information and technology.
The fact that business thrives between the two countries in spite of government not because of government puts pressure on the governments to catch up
- João Augusto de Castro Neves, Eurasia Group
The US will be hoping to find common ground with Brazil on climate change efforts ahead of UN talks in December in Paris that will try to strike a long-lasting agreement on reducing emissions.
In addition, Mr Obama will seek a common plan on dealing with the political meltdown of Venezuela. Ms Rousseff’s Workers’ Party has been traditionally sympathetic to Venezuela’s leftist rulers, including the late former president Hugo Chávez. But growing authoritarianism in the country with the jailing of opposition leaders is challenging Brazil’s ability to remain a quiet bystander.
Of the two leaders, Ms Rousseff has the most to gain from the visit, according to Mr Melo of Insper. Brazil’s urban middle classes tend to look favourably on the US so any effort to improve relations, especially in practical ways such as easier visa access for tourists, could help lift her failing popularity. “The trip could be very important if she can succeed in using it to improve her image,” he said.
Most analysts in Brazil agree, however, that anyone expecting a large number of “deliverables” — or important announcements — during Ms Rousseff’s US visit — especially large commitments to invest, similar to the sort that characterised Chinese Premier Mr Li’s visit to Brazil — will be disappointed. “The main deliverable is the visit itself,” said Mr Neves of Eurasia Group.
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Wednesday, June 24, 2015
Changing the Way Brazil Exploits Its Oil
- A proposal to amend Brazil's pre-salt regulations appears to have enough votes to pass the upper house of Congress, but not enough to clear the lower house, ensuring substantial political wrangling in the months to come.
- The politically influential Democratic Movement Party of Brazil backs the proposed changes, which are likely to pass, but Petrobras, the Brazilian Congress and the Energy Ministry will have to negotiate to work out the details.
- Even if they pass Congress, Brazilian President Dilma Rousseff may ultimately veto the reforms.
- Loosening Brazil's pre-salt regulations will provide investment incentives, but Brazil's high local content requirements and the unresolved Petrobras scandal could still deter future investors.
Brazil is gearing up for a legislative contest over energy regulations. On June 30, Brazil's Senate will begin discussing a proposed modification to the regulatory scheme governing exploration and production of the country's offshore pre-salt energy deposits. The new regulations would remove the requirement for state-owned energy firm Petroleo Brasileiro, or Petrobras, to have a 30 percent stake in each pre-salt project. It would also remove or amend legislation mandating Petrobras to be the sole operator of each project.
As Petrobras deals with the fallout from a corruption scandal and as the political clout of the ruling Workers' Party (PT) visibly weakens, most of the government's political opponents have chosen to move forward with the proposed regulatory changes, the most significant challenge to the country's pre-salt regulation since it was enacted in 2010. The bill's proponents are still short of the necessary votes in the lower house to pass the law, and there will likely be political wrangling over the coming months as the opposition attempts to gain votes. Loosening Brazil's relatively restrictive regulations governing the exploitation of pre-salt deposits could incentivize more companies to invest. But Brazil's high local content requirements and the unresolved Petrobras scandal remain, potentially deterring future investors.
Reasons for Change
The proposal slated for Senate debate, introduced March 23, is the result of longstanding opposition to Law 12.351, which mandates that Petrobras be the sole operator and hold a 30 percent stake in each pre-salt project. A previous bill, introduced by a legislator from opposition party Democrats in 2013, tried to reverse the production sharing schemes governing pre-salt exploration by converting them to concessions, but did not receive the necessary votes for approval. The current proposal, which was introduced by Jose Serra, the leader of the opposition Social Democratic Party of Brazil, will keep the production sharing contract scheme for pre-salt deposits intact but will remove Petrobras' mandatory stake in projects and its exclusive right to operate them.
According to proponents of the bill, Petrobras lacks the funds necessary to efficiently search for and produce hydrocarbons from Brazil's strategic pre-salt fields. Cash flow problems at Petrobras rig supplier Sete Brasil and the freezing of contracts following the Petrobras corruption scandal have, in fact, delayed the company's investment plans. The legal change intends to address this investment bottleneck by slightly easing restrictions on investment.
But many in the PT, including the president, are opposed to the regulatory changes. Under the current scheme, Petrobras has influence over how and where it partners with foreign firms for pre-salt production, which is a key source of funding for the education and social programs that have underpinned the popularity of the ruling government. What makes the proposal a viable threat to the regulatory scheme is the all-important Democratic Movement Party of Brazil (PMDB), the second-largest party in the lower house of the Brazilian Congress and the largest in the Senate.
The PMDB has been more successful in garnering support for its proposal this time around because of the Brazilian government's diminishing fortunes. The PMDB's support was crucial to securing PT's re-election in the 2014 presidential election. But the PT-PMDB alliance is increasingly strained ahead of the 2018 presidential election. As the popularity of Brazilian President Dilma Rousseff drops because of the Petrobras corruption scandal and the country's economic downturn, PMDB is likely reassessing its political strategy ahead of the next election. Major PMDB officials, such as senator Eunicio Oliveira, have said the party intends to contest the 2018 election independent of the PT. Though PMDB stood by the PT and resisted calls for Rousseff's impeachment earlier this year, the party has diverged from the ruling party on pre-salt regulation, even helping bring the proposed changes to a congressional vote.
The drop in global oil prices and the delay of investment plans have turned a once limited opposition plan to liberalize the pre-salt regulations into reform that could plausibly be passed. It has even gained traction among the president's former allies. If approved, the changes will not significantly reduce the Brazilian government's control over the energy sector; Petrobras will continue to be a major source of state revenue and the state will retain its influence over the company's activities. Instead, the changes will offset the heavy financial burden currently hampering the company.
What Change Could Cost
Though pre-salt fields raised Brazilian oil and natural gas production to 885,000 barrels per day in April 2015 from 504,000 barrels per day a year earlier, Petrobras has acquired massive debt, now around $170 billion, to finance exploration and production. Removing the operator requirement could offset some of the financial burden. It could also reduce Petrobras' monopoly over pre-salt production. Petrobras' experience with discovering and exploiting offshore energy deposits could, however, lead foreign firms to partner with it in offshore activities even if the legislature amends the law.
But removing the operator requirement will not completely solve Brazil's problem attracting foreign capital into the pre-salt areas. Furthermore, it does not appear that the coalescing congressional front is concerned with altering local content laws, even though high domestic content requirements have previously curbed foreign direct investment into Brazilian offshore oil deposits. An effort by the energy ministry earlier in the year to loosen local content restrictions for an auction of conventional offshore energy deposits in October 2015 did not receive regulatory approval.
Brazil's changing electoral landscape and Petrobras' mounting financial losses have apparently provided the opening needed for the PMDB and several opposition parties to amend the pre-salt regulatory model. To pass the legislative proposal, its proponents need a simple majority of the votes in both houses, which is 41 senators and 257 congressmen. The votes available to traditional opposition parties, assuming all of PMDB's lower house congressmen vote for the measure, total 243. In the Senate, the proposal has 59 potential adherents — well above the necessary total. The PT is firmly opposed to amending the pre-salt legislation and could try to use its position as the most popular party (albeit by a slim margin) in the lower house as well as its alliances with smaller left wing parties such as the Socialism and Freedom Party, Democratic Labor Party and the Brazilian Communist Party to oppose its passage.
Moreover, the president retains veto power, which requires a two-thirds vote from Congress to override. Over the coming months, the bill's proponents will continue negotiating to raise the likelihood of passing the law. Such negotiations could work compromises into the legislation. For example, a solution proposed by Energy Minister Eduardo Braga would allow Petrobras to have the option of being the sole operator of a project rather than obligating it. Ultimately, Brasilia will modify its pre-salt regulatory scheme out of necessity, but the details of those changes will be solidified through negotiation.
June 23, 2015 4:56 pm
Buenos Aires market booms as Argentina’s economy stagnates
Benedict Mander in Buenos Aires
While Buenos Aires sleeps, La Salada roars to life. By 3am, shoppers are chaotically barging their way through the narrow passageways of Latin America’s largest informal market, hauling sacks bulging with anything from fake branded clothing to pirate DVDs.
“Look at this, just 135 pesos!” exclaims a satisfied Rodrigo Vega as he brandishes a pair of jeans, explaining that the price, about $15 at the overvalued official exchange rate, is at least a fifth of what they might cost in a more upmarket Argentine shopping centre.
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For Mr Vega, like many other Argentines struggling to get by on wages sapped by double-digit inflation and a flatlining economy, it was worth the seven-hour bus ride from the interior to get to La Salada, which has annual revenues of at least $3bn, according to organisers. Others come from as far afield as Paraguay and Brazil to join the hundreds of thousands that on market days scour as many as 40,000 wire-mesh stalls jammed into warehouses on the banks of a putrid river in the rundown outskirts of Buenos Aires.
Its popularity first exploded during the country’s economic collapse at the start of this century as bargain-hunting Argentines were drawn in by rock-bottom prices of textiles made in local sweatshops. But La Salada is booming once again, its popularity an ironic bookmark to nearly 13 years of presidential rule by Cristina Fernández and her deceased husband, Néstor Kirchner, who came to power in 2003 after Argentina’s 2001 default and subsequent devaluation.
“During the bad times, La Salada took off, but when things got better [during the commodity boom] people had got used to coming here so it kept growing,” said Jorge Castillo, the public face of La Salada and the administrator of its biggest warehouse. He says the market sells at least $20m of merchandise on open days, with annual sales rivalling those of all of Argentine e-commerce of about $4.4bn.
“Now things are bad again, people keep on buying more and more here. Many can’t make it to the end of the month,” added Mr Castillo, complaining ofArgentina’s stagnating economy.
Now things are bad again, people keep on buying more and more here. Many can’t make it to the end of the month
- Jorge Castillo, administrator of La Salada’s biggest warehouse
Although Ms Fernández claimed during a trip last week to Europe that less than 5 per cent of Argentines live in poverty — after the government stopped publishing its much-questioned poverty statistics in 2013 — independent groups estimate that more than 25 per cent of the population had been pushed under the poverty line by last year when prices rose as much as 40 per cent.
As Ms Fernández reaches the end of her presidency, with elections due in October that are expected to produce a more market-friendly administration, she is fiercely defending her political record. It is part of an effort to shore up support among her largely poor power base in order to maintain some influence once she leaves office.
Although La Salada has been blacklisted by the Office of the US Trade Representative because of its counterfeit produce — the logos of brands like Adidas, Nike or Lacoste catch the eye at every turn — its popularity has protected it from the kind of heavy-handed government intervention that is normal elsewhere in the country.
In fact, the government has even invited representatives of La Salada on trade missions to countries like Angola and Vietnam in an effort to export its business model, which reduces costs by cutting out the middle man.
“Now it is a place of progress, not just of survival,” says Sebastián Hacher, the author of a book on La Salada who highlights its “brutal contradictions”, at once epitomising Argentina’s darker side and its flair for creativity in the face of adversity.
It all started in 1991 when a group of Bolivian immigrants first set up stalls at La Salada to sell their manufactured wares directly to consumers. Local merchants were struggling to compete with cheap imports in the early years of the presidency of free marketeer Carlos Menem, who had just slashed trade barriers and pegged the peso to the dollar.
Shortly afterwards, Mr Castillo bought up land at La Salada, so called because it was formerly a saltwater spa that had been spoiled by industrial pollution. It was a canny investment that allowed him to transform from a small-time shoemaker into a powerful business magnate and local political boss.
Mr Castillo dismisses accusations of tax evasion as bad-mouthing by Argentina’s “bloodthirsty” traditional business elites who are simply afraid of losing out on juicy profits. “Argentine businessmen don’t know how to compete. They don’t want to pay taxes, they want easy credit, they want cheap dollars. They want paradise, to live like kings,” he says.
Now, Mr Castillo is hoping to give US businesses a run for their money too, with plans to open a version of the fair in Miami.