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Can Brazil fall into Russia's energy trap?

President Jair Bolsonaro said last week that Brazil is negotiating with Russia to buy cheap diesel. In theory, this could help reduce inflation and alleviate pressure on food prices in an election year. But would the Russian discount really make a difference in the Brazilian economy? And, if it does, would it not place Brazil in a situation of dependence on Moscow, as happened with Germany and European countries in relation to gas?

The War Games column talked to specialists in the area to try to answer these questions. But first, it is necessary to understand how the diesel issue has gained importance in Brazil.

Fuel prices have been rising worldwide due to factors such as the attempt to transition energy from fossil fuels to renewable sources and the economic recovery post-pandemic. Finally, came the attempt by Western powers to embargo Russian oil to contain the invasion of Ukraine.

The Brazilian government has set a maximum rate for charging ICMS on fuel. The price of gasoline dropped at the pumps, but diesel was not so affected, as it already had a low rate, according to economist Luciano Losekann, from the Fluminense Federal University.

In parallel, Europe began to stockpiling diesel as a way to lessen the impact of the Russian hydrocarbon embargo attempt and the United States increased consumption. All of this raised the price of diesel in the global market.

This also affected prices in the Brazilian market, since around 30% of the diesel that the country consumes comes from abroad – mainly from the Gulf of Mexico and, in some cases, from the Middle East. The value of a liter rose by almost 60% in one year, according to data from the National Petroleum Agency.

“Rising the price of diesel in Brazil is dark for the cost of food, because most food in the country is transported by trucks”, said analyst Emanuel Pessoa, a doctor in economic law from the University of São Paulo.

Since the beginning of the sanctions on Russia due to the war in Ukraine, Moscow has been selling oil and its derivatives at below market prices to countries like India and China. India even obtained a discount of US$ 30 per barrel. Brazil’s idea is to take advantage of the opportunity generated by the crisis and buy cheap diesel from Russia.

But what would be the real impact on the Brazilian economy?

It is not known yet what would be the value of the discount offered by the government of Vladimir Putin. Therefore, analysts are divided on the possibility of the measure having a significant impact on inflation.

According to Losekann, Brazil could not simply “turn the key” and replace all the imports from the United States and Arab countries for Russian diesel.

This is because of contracts and technical issues related to product specifications. According to him, the diesel market is less liquid, or versatile, than the crude oil market.

In addition, it may be difficult to find intermediaries to facilitate the transactions, as many companies that operate in the import process they are afraid of being sanctioned by the United States.

Another possibility is that the discount is lost because of the high costs of transporting diesel from the other side of the world. Or even if the economy is absorbed by the distribution networks before reaching the pumps.

Therefore, in Losekann’s opinion, the most likely scenario is that Brazil will start importing diesel from Russia, however , in a limited volume. Thus, it is unlikely that the maneuver will generate a very significant impact on inflation.

Pessoa stated that only part of the Russian discount should be lost along the way. Depending on the price set by Vladimir Putin’s government, the reduction in value can indeed reach the consumer’s pocket.

“The discount is not lost 100% on the way. If Brazil bought fuel 20% cheaper, it doesn’t mean that it will be 12% cheaper at the pump , but something remains”, he said.

In the opinion of Armando Cavanha, a consultant specializing in oil and gas at PUC-Rio, it is likely that Russian diesel will arrive in Brazil at a similar price to what is practiced by Petrobras – which has adopted prices a little lower than those on the international market. The positive side would be the diversification of import sources.

Refineries

But we cannot totally rule out the hypothesis that the discount offered by Russia is based on in geopolitical interests. The barrier of transport costs, in theory, could also be overcome with the use of Russian oil tankers – not subject to Western sanctions.

If this is the case, it is conceivable that diesel will reach the Brazil at a price well below the market.

Before finishing this text, I discussed this possibility with some readers on Twitter. Some of them brought the following solution: Brazil could benefit from cheap diesel from Russia for a while, until it has more refineries and no longer depends on imports of the product.

According to Cavanha, this hypothesis is unlikely. . Brazil is currently trying to privatize part of the 14 Petrobras refineries. The country would hardly find investors interested in building more refineries in Brazil, because of the energy transition process to clean sources.

“The refining process gives a small profit margin compared to oil extraction . Therefore, the refineries have to work for 20 or 30 years to compensate for the investment”, he said.

In addition, according to him, it is healthy for the country to import part of its diesel needs. This is because, if there is a problem with national production, the country already has suppliers and is at less risk of running out of the product.

Energy dependence

In the years 1970, Germany decided to start importing natural gas from the then Soviet Union, attracted by attractive prices. At the time, NATO (Western Military Alliance) warned the German government about the risk of the country becoming dependent on Russian energy. At the time, Norbert Plesser, the then head of the German government’s gas department, replied that the country would never depend on Russia to provide more than % of its need for gas.

In addition to benefiting from attractive prices, Germany believed at the time that increasing trade was the best way to make the Soviet Union less autocratic and more dependent on European manufactured goods.

But recently, a similar warning about dependence on Russian gas was given by the administration of former President Donald Trump to the Germans.

However, when Russia invaded Ukraine this year, 55% of German gas needs were supplied by Russia.

Under pressure from the US and European neighbors, Berlin reduced to 35% its dependence on Russian gas since the invasion of Ukraine. Part of this pressure is explained in a concept of geostrategy (Heartland) that arouses a historic fear in Washington: a possible alliance between Germany and Russia.

But then, keeping the proportions, what is the possibility of the Is Brazil falling into a similar strategic trap when buying diesel from Russia?

Brazil is not an industrial power, but right now the Western embargo on Russian energy has Moscow looking for any kind of buyer for its hydrocarbons.

For the specialists interviewed by the column, this possibility is low due to some factors. One of them is that, unlike Germany, Brazil produces oil and has a diversified energy matrix.

“Brazil imports diesel from different sources and, in the future, when the war is over and world relations with Russia to normalize, Russia should return to trading at the price of the international market”, said Pessoa.

In addition, although Brazil uses the road transport modal, the share of diesel imported is relatively small in relation to other energy sources used by the country.

We cannot fail to observe, however, that it is not known whether international trade relations will ever return to what they used to be. were before the Ukrainian war. It is also worth remembering that the German dependence on Russian energy also started in a practically inexpressive way in the last century.

Ethical question

Assuming the hypothesis that the Brazilian government manages to negotiate an advantageous price with Putin and knocks prices down at the pumps, what about the moral issue?

According to Pessoa, western sanctions on Russian energy were aimed at making the country’s economy shrink from 12% The 14%. In this way, Moscow would have great difficulty in continuing to finance the war in Ukraine and would be forced to withdraw its troops.

However, Russia managed to relatively control its inflation, European countries did not completely cut oil imports and gas, and nations like China and India signed partnerships to buy energy that was no longer exported to the West. This made analysts revise their projections and estimate a retraction of the Russian economy for this year of 7.8%, according to Pessoa.

The ethical dilemma lies in the fact that, when buying Russian diesel to take advantage of of the crisis, Brazil would be collaborating with Russia to prolong the war.

“Although morally it should not be, it is very difficult for you to justify letting the price of diesel go up, the price of food go up, in a country like Brazil, where the majority of the population is poor”, said Pessoa.

Some reader may remember that, when the United States and its European allies invaded countries like Iraq or Afghanistan, nobody tried to apply sanctions against them.

This is true, but the moral issue here is not to point out heroes and bad guys, guilty or innocent on the global stage. What is being tested is the ability of the international community to end a conflict through the economy and not by sending troops to the battlefield.

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