Report Nº: 95429/03/2022
The tragedy in Ukraine will have a global economic impact. In principle, Argentina is not so vulnerable because it exports much more cereals and soybeans than it imports gas. But if it keeps utility tariffs frozen, the increase in gas imports will add another destabilizing factor.
The conflict between Ukraine and Russia will generate a lot of damage. On the economic level, a decisive point is that both countries are important world suppliers of grains, oilseeds and gas. The conflict will therefore lead to sharp rises in the international prices of these products. In the case of grains and oilseeds, this pressure appears in a context where prices are already high due to a bullish cycle that started at the end of 2020. In gas, the main pressure will be that the United States and Europe will stop buying from Russia and will dump their large demand on the rest of the international market, pushing prices upwards.
In this scenario, Argentina finds itself in an ambivalent situation. On the one hand, it is an exporter of grains and oilseed products. These goods are already highly favored with high international prices since 2021. With the Ukrainian war, it is expected that the high prices will be maintained or even continue to rise. On the other hand, Argentina is a gas importer, so international price increases will cause economic damage.
How vulnerable is Argentina to these changes in international trade? According to data from the Ministry of Economy, Argentina in 2021:
These data show that, in principle, Argentina’s foreign trade exposure to the Russian-Ukrainian war is not unfavorable. Argentina would have a wide margin to offset gas price increases in the international market with the greater amount of foreign currency provided by exports of cereal and oilseed products. Although the war conflict has a multiplicity of economic impacts, difficult to foresee and summarize, Argentina is not in a situation of vulnerability as other energy importing countries. It could even benefit from a greater capacity to generate foreign currency..
The international context is very important but not decisive. Argentina’s vulnerability may come from its domestic policies. For example, if the current energy policy based on freezing tariffs and sustaining excess consumption with fuel imports is maintained, Argentina’s vulnerability increases exponentially. This was the strategy applied between 2011 and 2015 and the ratio of grain and oilseed exports versus fuel imports was reduced to only 3 times, that is, half of the current ratio. In other words, a strong increase in the international price of gas with the wrong domestic energy policy will cause the war conflict between Russia and Ukraine to have a negative impact on Argentina’s trade balance.
Argentina has natural resources that would have allowed it to be in a much more favorable situation if it had applied more rational domestic policies. In the 1990s, for every 1 dollar of fuel imports, the grain and oilseed complex exported 10 dollars. In the last two decades, agricultural production was discouraged by export taxes and fuel consumption was exacerbated by tariff freezes. With smarter domestic policies, Argentina could have had currently more grain and oilseed exports and be a gas exporter.
Argentines are proud to have a country rich in natural resources. The reality is that it has Vaca Muerta, but imports gas. This contradiction is explained by political, economic and social institutions loaded with demagogy, which lead to consumption without sustainability, while wealth remains under the ground.