Ukraine-Russia war: how will it affect Latin America and the Caribbean?

While culture and geography separate Latin America from the Ukraine-Russia conflict, there are still important economic implications for the Latin America and Caribbean (LAC) region due to its sensitivity to commodity prices.

After the sanctions imposed by the United States and Europe, we can expect interruptions in global supply chains, this can translate into product shortages and price increases due to social and political instability.

We do not know the full extent of the impact, this will depend on two main factors – access to food and access to oil.

Unlike other regions of the world, LAC is characterized by large oil-producing countries coexisting with net oil importers. Oil is the main export of Colombia and Venezuela, and represents an important part of the fiscal income of Guyana, and Mexico. However, it is also the main import of Peru and Chile.

The sanctions imposed on Russia – the world's third largest oil producer with a 12% market share – are expected to keep oil prices high, which could benefit oil producers and affect the fiscal balance of net importers.

The conflict is also likely to affect the price of food and agricultural staples, as Russia is the world's largest wheat producer, while Ukraine is the third. Export restrictions due to conflict and sanctions are likely to significantly affect the prices of these commodities.

Consider the case of Venezuela, which is a net importer of oil and an exporter of food. In this case, the macroeconomic impact will be determined by the relative magnitude of each of these effects, particularly as the country comes out of a hyperinflationary cycle.

In this context, there are at least three areas of impact of Russia's invasion of Ukraine on the Latin America and Caribbean region.

Inflation
We can expect an increase in LAC inflation. Since 2021, most countries have exceeded the inflation targets set by the central banks. Rising food and oil prices will likely drive inflation even higher. It is important to consider that food prices represent around a quarter of the average consumption basket in Latin America and the Caribbean. With households still recovering from the pandemic, a rise in food prices could result in a further exacerbation of poverty and hunger.

Although Russia is not an important trading partner for the LAC region – except for Venezuela, Nicaragua, and Cuba – Russia does represent a significant part of China's trade balance. China, for example, is the second largest importer of Russian crude oil and a major importer of aluminum, platinum, and palladium.

With China being a critical trading partner for Latin America and the Caribbean, disruptions to China-Russia trade are also likely to be felt in the region, in the form of disruptions to supply chains, shortages of consumer products and, ultimately, increases in prices.

For example, with the increase in oil, the export of Chinese products will be more expensive, unbalancing the trade balance of several countries. Similarly, with less access to palladium, used to manufacture electronic devices, the price of smartphones and computers will increase.

Monetary policy

The second area where the impact of the Ukraine war will be felt in the Latin American and Caribbean region is a tightening of monetary policy.

Interest rates in the region, even before the conflict escalated, had risen well above pandemic levels as central banks tried to manage inflationary pressures.

Chile, for example, decided to raise the monetary policy interest rate by 150 basis points, to 5.5%. This is likely to continue in other countries in the region.

Regional fragmentation
The Russian invasion of Ukraine is likely to result in further regional fragmentation, with variations in LAC governments’ responses to Russia’s escalation.

This situation is particularly worrying in a context of governance crisis, as indicated by the United Nations Development Programme report Latin America and the Caribbean: Effective Governance, beyond Recovery. This outlines how COVID-19 must be outlined as a crisis of governance, as well as a health crisis, amid low trust in institutions and political and social polarization, among other factors.

In addition, in recent electoral cycles we have seen an overrepresentation of candidates facing each other in the second round, with political positions at opposite extremes and winning with very slim margins. Because of this, electoral winners increasingly govern with limited legislative support and weak capacities to enact reforms.

This is the time to strengthen trade relations as a region and provide a rapid response.

To achieve this, the UN’s Economic Commission for Latin America and the Caribbean proposes the creation of three pacts: a productive one, a social one and a fiscal one.

In this sense, it is necessary to develop new industrial parks, for example to promote the manufacture of electronic devices from Latin America, and not depend on China.

Progress must be made in the universalization of social protection systems, so that, in the face of rising cost of living, the most vulnerable people will have basic support mechanisms.

Finally, if progressive taxation is promoted, combating evasion (which reaches 6.1% of the region's GDP) and tax exemptions, collection can be increased and investment in strategic areas to boost productivity.

But these recommendations cannot be achieved by anyone alone, regional co-operation and political will on the part of all countries are needed.

This article is based on several ideas initially proposed by the UNDP Regional Director for Latin America and the Caribbean, Luis Felipe López-Calva, and complemented with data and evidence from official sources.