Brazil and Argentina Just Agreed to Use Local Currencies for Bilateral Energy Trade, In Yet Another Snub for US Dollar

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 fellow the Central American nations of 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…

Read the full article on Naked Capitalism

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