The Potential Impact of a BRICS Development Bank on Argentina

From July 14th to July16th Brazil will host the 6th Summit of Heads of State and of Government of BRICS. This meeting will likely see the emergence of a BRICS Development Bank that will serve as an alternative to the World Bank, which the BRICS see as too heavily oriented towards Western interests. Though the idea for such a bank has been discussed since 2012 the impact of the Federal Reserve’s tapering on countries such as India and South Africa, Chinese unease over the fluctuation of the US dollar, and the challenges that Russia is facing due to its actions in Ukraine have accelerated this project. One country that could benefit from a BRICS Development Bank is Argentina.

Russia has invited Argentina to the BRICS summit and is supporting the possibility of Argentina joining the organization. This can been seen as part of Moscow's effort to generate good will in order to increase trade and enhance its presence in Latin America. To achieve this end Russia has also canceled 90% of Cuba’s $35 million debt and backed Brazil for a permanent seat on the United Nations’ Security Council. If Argentina joined BRICS, or at least had access to capital from the BRICS Development Bank, it could greatly benefit the country. The reality is that due to the default of 2001 Argentina is a relatively risky place to invest and has struggled to attract capital since the default. Access to the BRICS Development Bank combined with Russia’s efforts to build good will in Latin America via trade and investment could help Argentina attract the capital it so desperately needs.

Argentina will likely seek funding to improve their ports from either the Russians or the BRICS Development Bank. As things stand now the expansion of the Panama Canal and the creation of the Nicaragua Canal will likely make Argentine exports such as soy less competitive as compared to comparable US and Brazilian exports. The latter countries are both closer to the canals and have or are developing their infrastructure to capitalize on this shift in global shipping. The Brazilians in particular have been very active in developing their ports and improving transport from the interior to the coast. Argentina does not want to be left behind. In a worse case scenario the Argentines could find themselves dependent on Brazilian ports thus reducing profits from their exports while enriching their regional rival.



If Argentina is able to attract the capital it needs to be competitive on the global market it could help the country rehabilitate itself economically. A shift to a leadership that is more business friendly could facilitate this process though it is important to note that any attempt for the country to become more economically sustainable would presumably result in cuts to social spending which would likely lead to social instability and a heightening of political risk. That said, Argentines are tired of the country's economic decline and are no doubt acutely aware of how neighboring Uruguay has been flourishing due to its relatively pro-business policies. Argentina has seen political instability in the past. If Buenos Aires can attract capital and survive whatever unrest results from potential economic reforms we could see the country return to the level of economic development that its geography and resource base should afford it.       

Will Improvements in Brazilian Infrastructure Marginalize Argentina?

Argentina is a country that is relatively poor due to policy rather than a lack of resources and easy access to global markets. Though the 2015 presidential election could bring an administration with more pro business policies to power it is important to note that such a shift will not necessarily result in a major influx of capital as issues related to the development of infrastructure could still hinder the country’s development. Infrastructure and investment go hand in hand as capital is less likely to flow into countries that lack adequate facilities. The 2001-2002 Argentine default and the seizure of Repsol’s majority stake in YPF (a settlement may have been reached but a precedent has also been set) will also make investors wary of financing construction. This is not to say that there will be no investment. After all there is some foreign investment aimed at developing the Vaca Muerta shale reserves and Argentina’s hydropower resources. The reality though is that risk increases the cost of capital so the projects that do get funded will likely be on terms that are less favorable to the Argentines than they otherwise would be thus reducing the total funds that can be put towards development.

Improved infrastructure in other parts of the Americas could make Argentine exports less competitive. Argentina is the third largest soy producer in the world after the Brazil and the United States. The expansion of the Panama Canal could make the later two exporters more competitive when shipping soybeans to Asian markets. In addition to this Brazil is attempting to invest $27 billion to improve its infrastructure with the goal of quadrupling Brazilian exports by 2030. Brazil became the largest exporter of soy in 2013 despite its poor infrastructure. Projects such as the development of the Amazonian port of Santarem would make the country even more competitive. Though Brazil has its own share of political and economic issues we have seen that auctions privatizing Brazilian highways, airports and ports are proving to be fairly effective in attracting capital to the country. If Brazil continues to develop and Argentina continues to stagnate it will be difficult for the later to develop infrastructure that is competitive with Brazil. The Argentines could find themselves in a position where they might have to ship some of their goods via Brazilian ports. This would eat into Argentina's profits resulting in less capital for the country to invest in itself.

To truly develop countries have to move beyond being exporters of raw commodities whose prices fluctuate dramatically. Such as shift requires investment and the development of infrastructure such as power plants, adequate port facilities, and internal transport network. Funding such projects is challenging given Argentina’s track record and economic policies. As we have seen competition and the need to rely on foreign ports could further weaken the country and limit the amounts of capital that it can bring to develop its infrastructure. This vicious cycle is a situation that will need to be monitored closely. The increasing demand for agricultural commodities and Argentina’s geographic location will allow it to profit from its resources. That said, a country profiting off of its resources and a country developing to its full potential is not the same thing.