Sanctions against Russia cause greater capital inflows to Brazil

Recife, Brazil

The Russian Federation’s actions in the Crimea continue to reverberate throughout the world. Far away from Eastern Europe, even Brazil is likely to feel the effects of Russian choices as short-term capital inflows increase.

In response to Russia’s annexation of Crimea in Ukraine, the United States in conjunction with key allies in Europe and elsewhere have pushed for targeted sanctions as means of punishment, deterrence, and leverage against the Russian Federation.

The sanctions target key associates close to Russian President Vladimir Putin. The first list included many ideological exponents of Eurasian nationalist doctrine, including a few notable MPs. Recent additions to the list included banking and business associates and supporters of Putin, his own chief of staff, close aides, key legislative chairs and many others.

Notably, key emerging powers did not support the sanctions. One of those countries, Brazil, is likely to see greater capital inflows in the aftermath of the sanctions.

Brazil was one of the 69 countries in the United Nations General Assembly that either abstained or voted against the ultimately successful resolution condemning the recent Crimea referendum. With its support of Russia’s actions, Brazil joins other BRICS countries in backing fellow BRICS member Russia in its recent moves in Ukraine. Since the sanctions, capital flight from Russia has gone to various other countries with Brazil being a chief beneficiary.

A dramatically slowed Russian economy and greater regional instability have resulted in diminished returns and greater risk for many investors, who have been steadily placing their capital elsewhere. With western backed sanctions, the incentives to place capital outside of the Russian Federation have only increased.

Indeed, some argue that the recent decision in the Kremlin to annex Crimea may push Russia’s economy over the edge, which would only accelerate this trend. Capital flight has occurred at a rapid pace. Goldman Sachs estimates that capital outflows may reach $130 billion, more than twice of what they were in 2013.

Brazil receives a good amount of the capital inflow for two reasons. For one, the country offers diverse investment opportunities. Secondly, Brazil continues to offer extremely high yields, which show no sign of decline at the moment. The country’s interest rates hover around eleven percent. With these conditions in place and a steadily deteriorating climate in Russia, it makes sense for substantial amounts of capital to be moving.

However, the benefits to South America’s largest country are less clear.

Capital inflows resulting from sanctions and Russia’s present economic situation are likely to be short-term investments. With high unpredictability in the international markets regarding Russia’s situation, it is also quite plausible that the inflow may disappear as quickly as it came.

The benefits of the influx of capital are likely to be minimal given Brazil’s present economic situation. Brazil greatly needs foreign direct investment and dramatic infrastructure improvements. Introducing short-term capital is not going to improve the Brazilian economy. In fact, it may exacerbate some of the problems plaguing the country.

For investors watching the capital flight, the larger takeaway may be that it is startlingly easy for capital to leave Russia and that is doing so at an increasing rate. While Brazil continues to offer an attractive climate for high yields, this will do little to put Brazil on track for greater and sustainable economic growth. The BRICS countries may be able to illustrate solidarity in opposition to a UN vote, but their widely diverse economies continue to reveal their own individual disconcerting fissures.

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Categories: Economics, International

Author:Sean Durns

Sean Durns has an MSc in History of International Relations from the London School of Economics and Political Sciences where he completed his dissertation on U.S. collective security policies in the Middle East. He has a B.A. in History and Political Sciences from the University of Arizona where his focus was on Latin American Politics and U.S. political history. His current academic interests are the intersections where U.S. foreign policy, security studies, and energy issues meet particularly in the areas of South Asia and Latin America.

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  1. Sanctions on Russia also hit foreign investment | Global Risk Insights - May 6, 2014

    […] capital outflow worth $150 billion this year. Previously, GRI’s analysts Luke Rodeheffer and Sean Durns have looked into the economic ramifications of the Crimea crisis and capital outflows from the […]

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