When two of the largest countries on the American continent, Brazil and Argentina, agree to establish a bilateral payment system in local currencies, it is worth taking note.
As NC readers are well aware (in large part thanks to Michael Hudson’s comprehensive coverage of the topic), the world is gradually dedollarizing. The US government’s decision to weaponize its own currency in its escalating tête-à-tête with Russia has merely served to intensify the race among countries in the global south to find alternative payment arrangements that do not include the greenback. But as Yves recently pointed out, with input from payments systems expert Clive, replacing the dollar as global reserve currency is likely to be a long, painstaking process, “with a ton of moving parts”:
Right now, key countries are starting to do large bi-lateral transactions involving non-dollar currencies. That’s a start but a long way from a new system. Remember it took two world wars and a Great Depression for the dollar to dethrone sterling, and that was merely replacing one dominant trade currency with another, and not potentially devising a new system that does not depend on the control and backing of a single central bank.
That all said, when two of the largest countries on the American continent, Brazil and Argentina, sign an agreement to establish a bilateral payment system in local currencies for the purchase and sale of electricity, it is worth taking note.
Said agreement formed part of an extension to the Energy Exchange Memorandum signed by the governments of the two countries last week. The memorandum, which regulates the supply of electricity and gas between the two countries, was first signed in 2019 and was set to expire at the end of this year. The new agreement extends the memorandum until 2025, after which it will be automatically renewed every four years.
The document was signed by Argentina’s Secretary of Energy, Flavia Royon, the Argentine Ambassador to Brazil, Daniel Scioli and the Brazilian Deputy Minister of Mines and Energy under outgoing President Jair Bolsonaro, Hailton Madureira de Almeida.
If anything, one can expect Lula’s incoming government to be even more enthusiastic about bilateral currency agreements in Latin America. Lula himself has called for the creation of a single currency for Latin America called the “sur”, based on the Bancor international currency union proposed by Keynes. According to the proposal, first floated by Fernando Haddad, a former mayor of Sao Paulo and ex-presidential candidate of the left-wing Workers’ Party (PT), the sur would function as a wholesale central bank digital currency linking up the region’s national currencies.
The project is still very much in its infancy and would probably face insurmountable technical, political and economic obstacles. It is also highly questionable whether a CBDC is even desirable, as I have argued in numerous articles (starting with this one). But the idea has nonetheless gained the approval of Venezuelan President Nicolás Maduro, so the political momentum is growing.
The bilateral currency arrangement between Brazil and Argentina has been on the cards for some time. In 2008, both countries agreed to stop requiring bilateral trade to be paid for in dollars, albeit with limited impact. Then, at an event in Sao Paolo in July this year, the respective heads of the Industrial Organization of Argentina (UIA) and the Federation of Industries of the State of São Paulo (FIESP) endorsed a proposal to pay for electricity in local currencies. At the event, Argentine Minister of Productive Development, Daniel Scioli, said the use of local currencies for bilateral energy trade was part of a raft of policies designed to reduce dependence on the dollar.
Dead Cow Bounce?
Argentina’s production of energy has been on the decline in recent years. In fact, the country is expected to rack up a whopping $5 billion deficit in its energy trade this year. But the recent discovery of massive unconventional oil and gas deposits at Vaca Muerta (literally meaning “Dead Cow”), in the rugged environs of a remote Patagonian town called Neuquén, is expected to change all that.
And Brazil is expected to become a major customer of the resulting fracked gas. If the governments of both countries get their way and the technical challenges can be overcome, including each country’s currency risks, particularly Argentina’s, much of the electricity generated by that gas will be paid for in local currency.
In 2021, Argentina exported roughly $1 billion of electricity to Brazil, which suffered an acute shortage of hydroelectric power in the summer. It has also shipped roughly $350 million of gas to its neighbor so far this year. For its part, Brazil has provided Argentina with $250 million of electricity this year to date. But the trade in energy between the two countries is likely to increase in the coming years as the gas from Vaca Muerta begins coming on line.
Buenos Aires is already in negotiations with Brazil to obtain financing for construction of the Presidente Néstor Kirchner gas pipeline. According to Argentina’s presidential office, talks are under way between the state-owned company Energía Argentina (Enarsa), the economy and foreign ministries of both countries, the Argentine embassy in Brazil and the Brazil’s National Bank for Economic and Social Development (BNDES ) to finalize the financing of the later stages of the gas pipeline.
Argentina sees developing Vaca Muerta as essential to becoming energy self-sufficient and establishing itself as a global energy supplier, with Brazil likely to become its biggest customer. It would also bring in desperately needed hard currency. To that end, Argentina’s state oil company YPF recently signed a preliminary deal with Malaysian behemoth Petronas to build a major liquefied natural gas (LNG) plant with the capacity and produce 25 million tonnes of natural gas per year.
The first section of the Néstor Kirchner project, which involves connecting Vaca Muerta with the Saturno compression plant in Buenos Aires province, is expected to be finished by mid-2023. The second section would extend it all the way to the cities of Buenos Aires and Rosario.
Another country that has expressed an interest in investing in the pipeline is China. In 2021, the Chinese companies Powerchina and Shanghai Electric Power Construction signed a memorandum of understanding with the Argentine government to study the technical feasibility of building and financing parts of the gas pipeline system. The entire project is expected to require investment of around US$3.5 billion.
The US government and energy companies are also gushing over the prospects offered by Vaca Muerta. During his first visit to the site in August, the US Ambassador to Argentina, Marc Stanley, said: “Argentina has the energy to supply the world, the country has what the world needs.”
Cozying Up to China
As readers may recall, Argentina is one of more than a dozen countries (including the Central American nations Nicaragua and El Salvador) that have applied to join the BRICS. The BRICS already accounts for over 40% of the world’s population and over 25% of global GDP. But it is about to get a lot bigger. Following the expansion, the grouping would control an even larger slice of the world’s natural resources — including 45% of known global oil reserves and over 60% of all known global gas reserves.
Like many countries in Latin America, including El Salvador, Argentina is also strengthening its financial ties with Beijing. This month, the Industrial and Commercial Bank of China (ICBC) launched an RMB bank clearing system in Buenos Aires to offer correspondent operations in RMB to local financial institutions. This will allow exports and imports to be made directly from Argentine pesos to yuan and vice versa.
On the sidelines of the G20 Argentina’s President Alberto Fernández Xi Jinping, the result of which was an agreement to expand Argentina’s currency swap deal with China by $5 billion. This increases the total available for RMB-swap operations from $473 million every 90 days to $625 million per month. The move will give Argentina more firepower to defend its struggling currency. Even with daily interventions in the currency market, Argentina’s peso has fallen by almost 40% against the U.S. dollar so far this year in the official market. In Argentina’s informal currency markets, the peso is even weaker.
Fernández wrote on Twitter that he had “had a very good bilateral meeting with the President of the People’s Republic of China, Xi Jinping” with a handshake emoji between the Argentine and Chinese flags. “As defenders of multilateralism, we share the conviction of building a fairer world in which development includes all people.”
Xi said China will deepen cooperation with Argentina in areas including agriculture, energy, infrastructure and aviation, according to Chinese state broadcaster CCTV. While trade continues to grow between the two countries, it is deeply imbalanced, as Argentinean economist Horacio Rovelli notes in an article for the Madrid-based non-profit news site Rebelion.org:
In the first nine months of this year, exports [from Argentina to China] amounted to $5.21 billion dollars and imports $13,35, resulting in a trade deficit of 8,141 million dollars. China is our second biggest customer (after Brazil), but it is our biggest vendor (accounting for more than 20% of all purchases made by Argentina).
Argentina buys machinery and equipment, motorcycles and mopeds, telephony (including cell phones), computers and computer parts, televisions and television parts, etc. from China. And it basically sells fodder (soybeans and grain corn) and, to a much lesser extent, soybean oil, biofuels, tobacco, leather and other primary products (iron, lithium, etc.). Obviously they sell us far more added-value products than the goods they buy from Argentina. This happens in most of our international trade, but with China it is particularly pronounced.
Buenos Aires is hardly in a strong negotiating position. As I noted in an article in September on the intensifying race for lithium in Latin America, Argentina’s economy is quite literally on its knees, with inflation galloping at a 30-year high of 71% (it’s now 88%). Its heavily indebted government is also in desperate need for US dollars as its foreign currency reserves continue to plunge.
Yesterday, the government dispatched a diplomatic mission to Washington to discuss the third review of its $44 billion IMF bailout program. One topic likely to be discussed at the meeting is the government’s recent decision to revive a controversial currency measure to boost soy exports and prop up central bank reserves that already generated a backlash from the IMF in September:
The government is giving a temporary exchange rate for soy exporters between Monday and Dec. 30, setting the new rate at 230 pesos per dollar, according to an Economy Ministry statement published Friday night. That’s much more lucrative that the official exchange rate of 166 per dollar that exporters currently get.
Argentine officials rolled out an identical measure in September, which helped to boost soy exports to $8 billion, but violated the conditions of Argentina’s $44 billion plan with the IMF. The Washington-based lender had to approve a waiver for Argentina because of the policy. IMF leaders also warned that Argentina should avoid such currency practices.
Argentina’s bilateral currency swaps with China and now Brazil should help stimulate demand for Argentine pesos, which in turn may help boost its value — something that is desperately needed given the scale of its decline and the blistering pace of inflation in the country. Whether it will be enough to stave off another Argentine default remains to be seen.