AQ Feature

What's Putin's Game in the Western Hemisphere?

The Russians are coming—again.
Americas Quarterly - Winter 2015 - Rosneft
Brand Russia: The logo of Rosneft, Russia’s top crude oil producer and flagship oil giant. Photo: Carlos Garcia Rawlins/Reuters

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When President Vladimir Putin announced plans to visit Latin America, most observers would have been right to conclude that it reflected Russia’s renewed interest in building ties with a region that was once a source of East-West conflict. But by the time he arrived, in July 2014, the trip had taken on new significance as an apparent effort to counter Russian isolation in what has been called the most troubling flare-up between Moscow and the West since the Cold War.

 The Putin visit took place less than four months after the March annexation of Crimea and the outbreak of a violent breakaway movement in eastern Ukraine, which fueled in turn a drumbeat of condemnation and sanctions from the U.S. and Europe. Putin’s announcements of new Russian investments in the region—including military arms sales, energy projects and infrastructure deals—reflected not only Moscow’s commercial priorities but its foreign policy interests in seeking to shore up relations with some of Russia’s old allies. And the announcements fell on receptive ears, particularly among nations anxious to diversify their U.S.-oriented trade relations. Still, the level of investment and commerce between Russia and Latin American and Caribbean countries remains insignificant in comparison to China.

The centerpiece of Putin’s six-day trip was his participation in the July 15-17 BRICS summit in Fortaleza, Brazil, but the president also made a special effort to warm up relations with Argentina, Cuba and Nicaragua, the three countries he visited on his way to the summit.

In Cuba, for example, Putin forgave 90 percent of the country’s outstanding $35.2 billion debt to Russia, and renegotiated the terms of the remaining 10 percent for economic investments on the island.1 In Nicaragua, he expressed interest in the TransOceanic Canal2 and is said to have proffered Russian security officers for the canal’s construction.3 This story—out of a Taiwanese news service—seems far-fetched. However, based upon supplies of Soviet arms until late 1990, reports that Nicaragua purchased six artillery frigates from Fair-Nevsky shipyard in St. Petersburg, and that Russia agreed to patrol Nicaragua’s Caribbean and Pacific coasts are more credible.4

Putin wasn’t the only Russian VIP to land in the region in 2014. Underscoring an already perceptible tilt in Russian trade and defense policy toward Latin America, Russian Foreign Minister Sergey Lavrov visited the region in April 2014.5 He toured Nicaragua, Cuba, Chile, and Peru. Later, in Lavrov’s speech to the International Youth Forum, he acknowledged Russia’s interest in securing naval stations around the hemisphere and stated that “Latin America is a powerful, growing and very promising region, which is turning into a pillar of the new world order.”6 In May, Igor Sechin, chairman of Rosneft, Russia’s state-owned oil company, and member of the so-called St. Petersburg power team, visited Argentina, having previously reached a commercial deal with Brazilian oil and gas company hrt.7 A month before the trip, Rostec, Russia’s state corporation for high-tech industrial products, announced plans at the International Air & Space Fair in Santiago, Chile, to step up sales of aircraft, helicopters and anti-aircraft defense systems to Latin American governments.8 Moscow’s growing interest in strengthening military sales was already in evidence in October 2013, when Defense Minister Sergei Shoigu visited Brazil and Peru.9

Top-level Russian interest in Latin America and the concentrated nature of these visits demonstrated an urgent need to corral allies before the fall 2014 meeting of the UN General Assembly and expand markets for Russian trade. The regional push attempted to counter the effects of the sanctions imposed by the European Union and the U.S. to protest Russia’s annexation of Crimea and its intervention in eastern Ukraine. By July, the list of sanctioned Russian firms included those with established trading relations in the Western Hemisphere, such as Rosneft, natural gas company Gazprom, high-tech company Rostec, and the state bank Vnesheconombank.10

Strengthening agricultural relationships with the region has also joined military and commercial interests on Moscow’s agenda. On August 6, 2014, Putin responded to new and tougher U.S. and EU sanctions with a one-year ban on certain agricultural products from the U.S. and Europe. That was a painful move for Europeans—Germany’s international broadcaster Deutsche Welle estimated the loss of European agricultural exports at $15.8 billion11—but for Russian consumers as well. During his trip, in an evident attempt to compensate for the loss of U.S. and EU food products, Putin invited Latin American countries—including Argentina, Brazil, Chile, and Ecuador—to supply these foods. Russia’s agricultural watchdog, Rosselkhoznadzor, permitted imports from more than 90 Brazilian suppliers of beef, poultry, pork, and dairy products.12

For many leaders, such as Ecuadorian President Rafael Correa, it represented an opportunity to demonstrate that they could trade on preferential terms with Russia and no longer rely on U.S. markets. “We don’t need to get anybody’s permission to sell products to friendly countries,” Correa said in August 2014.13 Following Putin’s visit, Nicaragua sent a delegation to Moscow with the intent to sell more food products to Russia.14 The prospect of significant sales of food to Russia over the next 12 months may replace, somewhat, South America’s decline in exports of raw materials to China. The slowdown in Chinese economic growth has resulted in diminished imports of fossil fuels and raw metals from Latin America and elsewhere, reflected by Bloomberg’s Commodity Index of 22 raw materials, which has dropped from $175 in May 2011 to $111 in December 2014.15

Russia’s Growing Ties with Latin America

Russia’s rekindled interest in Latin America has been evident since 2001, when Putin began his first official term as president. Ending a period of dormancy following the 1991 dissolution of the Soviet Union, then-Foreign Minister Igor Ivanov proclaimed Moscow’s interest in renewing relations with the region, laying out an agenda for scientific and technical cooperation, combating narcotrafficking, and political consultation between respective foreign ministries.16 As an observer to the Organization of American States (OAS), Ivanov committed Russia to work with regional groups such as the Rio Group, Mercosur and the Andean Community.

In the decade that followed Ivanov’s 2001 statement of Russian policy toward Latin America, Russia focused on resuming inter-governmental agreements that could underwrite commercial trade. According to Ivanov, total trade between Russia and Latin America amounted to $3 billion in 2000.17 Russia’s principal purchases were coffee, sugar, palm oil, tropical fruits, nonalcoholic beverages, and flowers. In exchange, Russia exported combat and military helicopters, tanks, surface-to-air missiles (sams) and other missiles to replace Latin America’s outdated military equipment.

Bilateral commissions created between Russia and a number of countries in the region have focused on economic and commercial relations, as well as scientific and technical cooperation. However, the work of these commissions in facilitating trade and technical exchange appears to have been negligible, and the absence of government guarantees has resulted in only minimal Russian investments in Argentina, Brazil, Cuba, Ecuador, and Nicaragua. A lack of credit guarantees, as well as the global financial crisis of 1998, appeared to have tainted Russian willingness to undertake significant investments in the hemisphere.18 Thus, until 2008, the size of Russian investments in Latin America remained modest, with greater focus on European and Southeast Asian markets. When the region continued to grow after the Great Recession of 2007–2008, that changed.

According to my calculations, by 2013, Russia’s trade with Latin America had increased to $24 billion, and its interests in the region had changed, reflecting the need to acquire exploration rights in diverse oil and gas fields, expand the market for arms sales, cultivate a subtle anti-U.S. mindset in the region, and, finally, assert that Russia was a political actor on the world stage.19

In its Foreign Policy Strategy Concept paper for 2013, the Russian government stated that Russo-Latin American relations would be “focused on expanding political interaction, promoting trade, economic [sic], investment innovation, cultural and humanitarian cooperation, combined responses to new threats and challenges, [thus] securing the position of Russian companies in dynamically developing industrial, energy, communications and transport sectors of the region’s economies.”20

During this time, Russian leaders had moved beyond developing closer scientific and technical cooperation envisioned earlier in the creation of the bilateral commissions to assertively seeking new markets for the export of Russian goods—in particular, reinforced plastics, heavy equipment for railway construction and turbines. Military sales continued apace, especially to Venezuela—yet there was little to suggest a direct threat to the United States.

Despite Russia’s increased trade with Latin America and the Caribbean, the $24 billion estimated total trade in 2013 is insignificant compared to the $260 billion in trade between Latin America and the People’s Republic of China.21 China continues to displace other foreign competitors through mergers and acquisitions, evidenced by the $102.2 billion invested in Latin America and the Caribbean by the China Development Bank (CDB) and Export-Import Bank of China (CHEXIM) between 2005 and 2013.22 China remains the number one or number two trading partner for Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.23 And overall, the U.S. is still the region’s top trading partner.

For Moscow, the economic links between Russia and Latin America are still small change. No country in the region exceeds more than 1 percent of Russia’s total foreign trade.24

Commercial trade with Latin American markets offers Russia an opportunity for growth, but despite the Western sanctions—and Russia’s retaliatory ban on food imports—it is not considered a strategic backup to offset losses in more prosperous markets.

 Nonetheless, Russia is exerting an increasing influence and forming important alliances around commercial deals, military arms sales, investment in diverse energy projects, and agricultural cooperation with four countries in particular—each with
distinct levels of antagonism toward the United States.

Argentina

Russia’s investment in developing energy projects in Argentina has been less productive than its efforts in Venezuela. According to the Argentine-Russian Chamber of Commerce, bilateral trade increased by 30 percent in 2013 to $2.63 billion,25 with Russia interested in developing Argentina’s nuclear power capability. In his visit to Argentina in June that year, Foreign Minister Lavrov discussed potential contracts for Gazprom and Argentina’s state-owned energy company, YPF.26

Argentina expressed interest in developing several projects: extending the life of the Embalse nuclear power station near Córdoba, the construction of Atucha III and IV nuclear power stations in the Buenos Aires province, the development of the CAREM nuclear reactor prototype, and the support of nuclear medicine.27

Despite several bilateral commercial and technical agreements, the Russian state-owned nuclear energy producer, Rosatom, had to compete with Chinese and U.S. companies in the tenders for these projects. General Electric has since won the tender to provide steam turbines for the Embalse unit, and the China National Nuclear Corporation (CNNC) won the contract for the construction of Atucha III. The agreement with CNNC was facilitated by a $2 billion long-term financing arrangement.28 Rosatom will have difficulty competing with Chinese financing.

Development of shale gas within the Vaca Muerta reservoir also remains of interest to both China and Russia, but financing these ambitious projects is Russia’s principal challenge.

Cuba

The renewal of Cuba’s post–Cold War relations with Russia began with Putin’s visit to Havana in December 2000.29 Although there were no major agreements or investments announced, the visit marked the resumption of Cuban-Russian relations after a 10-year hiatus in high-level contacts between the two states.

While then-President Fidel Castro and Putin declared mutual friendship, then-Foreign Minister Ivanov was later quick to assert that bilateral relations would be based upon “the realities” of each country and the competitive rules of the international trading system.30 Pragmatic trading relations, rather than subsidized contracts, would guide commerce between the two countries. In the ensuing years, $166 million of Cuban debt incurred during the Cold War years was restructured,31 and Cuba leased two vip convertible Ilyushin planes for $110 million in July 2004.32 In 2006, the Russian government provided a $325 million export guarantee33 and the state-owned Cubana de Aviación airline purchased two Ilyushin and three Tupolev aircraft.34 Payment of interest on the new loan was to be completed by 2016. The intent of this aircraft purchase was to turn Havana into an airline hub that could ferry Russian and European tourists to Cuba and other destinations in the Caribbean and South America.35

Another important visit occurred in July 2008, when then-Deputy Prime Minister Sechin headed up a business mission.36 Sechin, who speaks good Spanish, noted that trade with Cuba had grown to more than $360 million, without specifying whether this amount was included within the new line of credit. Nevertheless, he could point to a 32 percent rise in the number of Russian tourists visiting the island. Sechin was soon to become president and chairman of Rosneft—­becoming Putin’s unofficial representative on energy matters. In frequent visits to Latin America, he sought opportunities for oil and gas exploration and development.

Sechin’s first visit, in July 2008, was followed by a visit from then-Russian President Dimitri Medvedev in November 2008 to consolidate bilateral agreements on health, education, national archives, space exploration, and military cooperation.37 He met both Castro brothers and announced the creation of a bi-national investment bank and plans to begin extending loans the following month. Since that time, neither the government nor the bank has announced investment projects.

Economic, energy and trade ties are important to both Cuba and Russia. Putin had hopes for significant oil and gas development from Cuba’s offshore oil fields. Drilling began in 2010 in the north-central waters off the island. The principal Russian company, JSC Zarubezhneft, had four contracts for oil exploration—reserves that were estimated by CUPET, the Cuban state oil company, to be 20 billion barrels (the U.S. Geological Survey estimated oil reserves of between 4 to 9 billion barrels).38 Difficult geology, problems with the oil rig and Washington’s embargo on the use of U.S.-made equipment led to termination of Zarubezhneft’s efforts in 2013.

In February 2013, Prime Minister Medvedev returned to Cuba to restructure Cuba’s outstanding debt, which then stood at $30 billion. An unspecified proportion of the debt was written off, while the remainder would be refinanced over 10 years.39 (Payment of this debt is complicated because it was acquired in convertible rubles, a currency that no longer exists.) Nevertheless, both governments sought to resolve the debt issue so the Cuban government could lease eight more Russian jets, valued at $650 million.40 At the sidelines of the talks, Russia’s Industry and Trade Minister Denis Manturov reported bilateral trade of roughly $ 200 million for 2012.41 Commercial relationships underpinned the renewed bilateral and mutual friendship, but were it not for the sale and lease of high-priced aircraft, the real value in bilateral trade would be meager.

Nicaragua

As in Cuba, the Soviet Union withdrew its military and economic support from Nicaragua in 1990. Moscow’s friend, President Daniel Ortega, was defeated in the February 1990 elections, but he set out to restore the relationship with both commercial and security goals after returning to power in 2007.

In 2012, bilateral trade stood at $110 million.42 This commerce is concentrated principally in food products: beef, peanuts, coffee, and other goods.43 Beyond trade in food products, Russian-Nicaraguan relations have focused on the development of a counter-narcotics academy to train security officials from Central America and the Caribbean in the fight against illegal trafficking of drugs and psychotropic substances. Russian interest comes from the need to contain the flow of South American drugs to Russia, some of which transit through Central America.

Venezuela

Until the 40 percent drop in oil prices, Venezuela was the most important overseas investment target for Russian companies, and was on track to become the largest export market for Russian arms, after India, by 2025.44 Venezuela and Russia cemented their economic ties in February 2011, when Venezuela paid $400 million for a 49 percent stake in one of Russia’s biggest commercial banks, Evrofinance Mosnarbank S.A., thus becoming the bank’s biggest shareholder and overtaking Citigroup in bond underwriting in Venezuela.45 Venezuela’s Fondo de Desarrollo Nacional (National Development Bank Fund—FONDEN) also bought 49 percent in Russia’s VTB Group and Gazprombank.46

Though Russia’s trade with Venezuela lags far behind China’s trade with Venezuela, Russia has several important joint ventures with the South American nation to develop its crude oil reserves.

In January 2013, Venezuelan Oil Minister Rafael Ramírez said that Rosneft and other Russian oil producers planned to invest $17.6 billion in Venezuela to quadruple their combined output by 2019.47 When Venezuelan President Nicolás Maduro visited Moscow in July 2013, he announced a strategic alliance between the two countries that focused on petroleum and gas production, as well as equipment and energy services.48

In 2013, Rosneft invested in Venezuela’s heavy crude oil resources in the Carabobo 2 and 4 and Junin 6 fields in the Orinoco River Basin through a joint venture with the Corporación Venezolana del Petróleo (CVP), a subsidiary of Venezuelan state oil and gas company Petróleos de Venezuela, S.A. (PDVSA). Rosneft also agreed to pay a $1.1 billion bonus for the exploration rights in two installments: $440 million on signing and the remainder upon Rosneft’s final decision to move forward with the project. Furthermore, Rosneft agreed to make a $1.5 billion loan to CVP for five years in five installments of not more than $300 million each year.49 Then-Deputy Prime Minister Sechin also disclosed that he was prepared to invest a total of $16 billion, reflecting the potential of the Carabobo 2 project reserves, estimated at 40 billion barrels of crude oil. At that time, Rosneft estimated that commercial oil production could peak at over 400,000 barrels per day.50

More important than the Russian investment in the two oil fields was the confidentiality agreement signed in May 2013 that allowed Rosneft to obtain geological data on Venezuela’s offshore blocks for possible future exploration.51 This agreement was clearly intended to ward off Chinese commercial interests and ensure Russian access to future oil and gas sites in Venezuela.

What Does It All Mean?

Russian trade in the Western Hemisphere has assumed geopolitical importance, but whether the frequent announcements from Russian media will turn into solid projects remains debatable. Taken together, Russia’s new commercial projects in the Americas reflect an urgency to make friends and to demonstrate to Russian citizens that they have allies in the Western Hemisphere who will sell food and participate in public declarations. But those same friends are also open to commercial deals with competitors who offer adequate financing.

In practice, Russian prospects are hobbled by the fall in the value of the ruble, the paucity of credit guarantees and China’s much stronger trading position. Targeted U.S. sanctions on Russian banking will make financial institutions in South and Central America hesitant to enter joint ventures with Russian banks for fear of becoming tainted and thus subject to U.S. Treasury penalties. We might expect continued declarations of prospective deals, but should remain skeptical about the capacity to implement those agreements.

View Endnotes

Click here to read a sidebar on Russian arms sales to Latin America.

Haz click aquí para leer una versión de este artículo en español.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Russia-Latin America Relations, Military and defense spending, Vladimir Putin