Latin America may think Russia invading Ukraine would be a godsend. But it wouldn’t be | Opinion

The conventional wisdom is that a Russian invasion of Ukraine would be a godsend for Latin America, because the region could greatly benefit from a further rise of world commodity prices if Washington imposes economic sanctions on Russia. But the conventional wisdom may be wrong.

After talking with several international economists, I’m inclined to think that Latin America would benefit the most if things stay just as they are — with tensions along the Russia-Ukraine border that keep commodity prices higher than usual, but without a Russian invasion.

Russia is one of the world’s biggest producers of oil, gas, copper, wheat and other grains — the same commodities that account for Latin America’s main export income.

So if Russia were to invade Ukraine, as the U.S. and European governments fear, Western economic sanctions on Russia would interrupt Russia’s access to the Western banking system, cripple Russia’s commodity exports, and drive up most world commodity prices.

World food prices already rose by 28% last year, reaching a 10-year record, according to a Jan. 6 UN Food and Agriculture Organization report. Economists say they may rise further as a result of the latest Russia-Ukraine spat.

Oil prices, which have already risen to $94 per barrel earlier this month, could rise to $120 or $140 barrel if there was an invasion, economists say. And that would be good for Mexico, Colombia, Ecuador and Venezuela, some of the region’s net oil exporters.

But there would also be economic counter-effects, such as a world recession that could slow down Latin America’s overall exports, and a capital flight to safety in U.S. banks that would further reduce foreign investments in the region. In times of trouble, many wealthy people take their money out of emerging countries, and put it in richer nations they perceive as less risky.

“There would be a psychological impact, because of fears that things could get out of hand and bring about a wider armed conflict,” says Marcelo Giugale, a former World Bank director and professor at Georgetown University. “Don’t forget that Russia is a nuclear power.”

Felipe Larraín, an economist who served twice as Chile’s finance minister, told me that the net impact on Latin America would be negative. “A world recession would hurt almost every country,” he said.

There are three main scenarios, which would have different kinds of impacts on the region:

▪ A full-scale Russian invasion of Ukraine that would include a takeover of the country’s capital would almost certainly bring about stringent economic sanctions that would accelerate a world recession. That would be the worst possible scenario for Latin America.

“It would create something like an international financial heart attack,” says Alberto Bernal, global strategy director of XP Securities. “That’s not good for any country.”

▪ A partial Russian invasion of a Ukraine border region, such as the 2014 Russian takeover of Crimea, could produce less drastic sanctions, which may slow down the world economy, but not dramatically. The impact on Latin America would be neutral.

▪ An indefinite continuation of the current situation, in which tensions remain high but there is no Russian invasion, would be the most favorable for Latin America, many economists say. That’s because commodity prices would remain temporarily high, without a world recession.

But higher commodity prices will not be the solution to Latin America’s problems. Latin America has been the world’s slowest growing region in recent years mainly because it doesn’t attract investments, and keeps depending on world commodity prices it can’t control.

Instead of banking on a new commodity price boom, this time triggered by a possible Russia-Ukraine conflict, Latin American countries should focus on creating a pro-investment climate. They should scrap laws that scare away businesses, and promote quality education and innovation, so as to attract new investments. That would produce long-term growth, like we have seen in most Asian countries in recent decades.

Otherwise, we will see another Latin American boom and bust cycle. The region would benefit from a short-lived commodity-based economic boom, followed by a steep financial crisis once oil, metals and food prices return back to normal.

It’s a movie that we’ve seen many times before, and that almost always ends badly.

Don’t miss the “Oppenheimer Presenta” TV show on Sundays at 7 pm E.T. on CNN en Español. Twitter: @oppenheimera; Blog: www.andresoppenheimer.com