Mystery Train... should Russia bankroll Brazil's railroads
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For the past two years the government of Worker's Party president Dilma V. Rousseff has targeted Russian capital in an effort to help modernize its deteriorating rail transportation infrastrcture, putting on offer “concessions” in Brazil's vaunted Logistics Investment Program (PIL).
The rail component of the PIL has become fashionable lately, with president Dilma courting ruralist agricultural producers in Brazil with prospects of increasing agricultural exports.
The project has also gained new political currency among the Worker's Party and its base of allies in the political class, whose media architects have positioned it as “sustainable” freight transportation that can lessen Brazil's “carbon footprint", and showcase Brazil's commitment to the weak, voluntary guidelines that emerged from the Paris talks that may help reduce global warming.
Most importantly, the PIL-2 is being positioned as a socially inclusive project that creates jobs and promote exports in the poor and predominantly Afro-Brazilian heritage Northeastern Brazil, helping the caciques (bosses) of Dilma's allied base to fend off impeachment and other threats to her presidency.
The program also helps to shield the monocratic tendencies of the current president, who as a trained economist has the skills to control the Worker's Party economic project and delegate administration to others.
The myth of an export driven economy
Filtering out the social media and other partisan political noise International Monetary Fund statistics find that Brazil had a 2014 GDP of $3.073 trillion, but exports were only $225.1 billion of that... just 7.3% of the nation's total economic output.
This belies Brazil's reputation as one of the nations whose exports are critical to maintaining global food security. Most of the food and grains “made in Brazil” are consumed locally by a rapidly growing population, now at 203 million according to current census data...
As for railroads, they comprise just 10 percent of Brazil's freight transportation infrastructure, with 90 percent of commercial freight hauled by trucks on a neglected highway system that is managed by partisan political considerations.
Although railroads can transport more tonnage more efficiently, trucks and highways bring in more money in taxes and user fees to help fund the Worker's Party government.
Add to that insurance, reinsurance and their regulation, law enforcement, road upkeep, satellite tracking, driver training, vehicle inspection (when conducted) and maintenance and countless other jobs associated with highway transport and you've got the kind of job creation that generates the revenue that big government likes to run through the coffers of state controlled and “state friendly” banks.
This psychopathology helps expand the economy and puts deficit spending in the danger zone. As we are seeing right now, it is prone to scandals and the crisis that impacts all Brazilians and its collateral effects, now being felt by allies and international investors.
Rail infrastructure in Russia, historically serious and strategic
During imperial times, the Czarist regimes developed rail infrastructure to reach out to Europe and Asia, to populate territory and move commerce domestically and internationally. This model was not without scandals and unfortunate circumstances that are part of history.
The rail infrastructure during the first quarter of the 20th century supported a successful revolution and later was critical in defeating Hitler's attempt to establish the Nazi “Thousand Year Reich” during the Great Patriotic War.
Brazil's railroads, not favored by the military
Brazil, in contrast, developed rail transport infrastructure in an unorganized fashion. After gaining independence from Portugal and eliminating slavery during the 1880s the mix included private, often foreign, investors seeking personal gain, not necessarily in the national interest of the young nation like Brazil.
Brazil resisted participating in World War I due to it's large population of German immigrants in it's predominantly European southern states and only cast its lot with the Allies in November of 1917. Ironically, most of Brazil's rail infrastucture is concentrated in this region even today.
During the years following the First World War Brazil was more interested in developing aviation infrastructure and even claims that it was the first nation to fly across the Atlantic Ocean.
The “lieutenants revolution” of the mid-1920s featured a “Long March” through Brazil on foot, picking up a few thousand socialist-leaning followers largely due to the personal magnetism of Luis Carlos Prestes, a charismatic young military officer who was a communist and and trained by the military as a railroad builder who participated in the movement.
His efforts to recruit followers in rural areas of Brazil eventually became a model for other Latin revolutionary leftists, including Fidel Castro and the Argentine Ernesto “Che” Guevara.
After long exiles in Moscow, where he was a member of the International responsible for South America, Prestes was rehabilitated after Brazil returned to democratic rule, Prestes affiliated with the Democratic Workers Party (PDT) and was elected as a federal senator from the Federal District of Brasilia. He died in 1990.
The BBC has rated Prestes one of the “100 greatest Brazilians of all time.”
Historically, Brazil's armed forces have never used the nation's railways to conduct their military interventions (coups). They relied on armored columns traveling on highways, and heavy air cover and buzzing to help disperse crowds.
It can be argued that Brazil's armed forces have had an aversion to expanding the nation's rail infrastructure, which with few exceptions, has effectively languished since the military coup of 1964, which ousted president Joao “Jango” Goulart, who was a member of the same PDT as presidents Getulio Vargas and Juscelino Kubischek, and Prestes...
President Dilma recently gave assurances to the armed forces that the current austerity measures s the government says it will continue to impose would not impact their big ticket weapons programs like the Swedish Gripen combat jet fighter and the deal to "co-produce" submarines with France.
Back to the future
Although presidents Putin of Russia and Rousseff of Brazil committed to doubling trade between the two nations (including “services” like logistics know how) at the BRICS summit in Brazil in 2014, the current economic and political circumstances make the PIL-2 venture problematic.
Brazil is mired in a financial crisis that has seen the nation fall from the world's 6th largest economy to the 10th. Inflation could hit an annualized 11% for this calendar year;
While Russia has the infrastructure know-how to help Brazil the Kremlin is faced with U.S. - led boycotts and loss of income from low prices in world energy markets that have yet to definitively bottom out.
If the parties find a modicum of reciprocity both governments are committed to using local currencies (ruble, real), much as Brazil seeks to do with China. Brazil also seeks to complete the costly "Transoceanic Railroad" with the help of China to facilitate exports to Asian markets via ports in Peru. But the probable election of Keiko Fujimori, daughter of former president Alberto Fujimori, in coming election could complicate the completion of this project.
Brazil's musical chairs government
Against this backdrop, Sergey A. Pavlov, director-general of Russian railway giant RZHD and a delegation of Russian businesspersons met in Brasilia on Tuesday December 15th with then-Planning and Development minister Nelson Barbosa and officials of Itamaraty, Brazil's inistry for external relations.
In the 72 hours that followed the visit of the Pavlov delegation a second credit risk agency downgraded Brazil's sovereign debt to “junk” status and Barbosa was named the nation's new finance minister. An article that appeared on Decmber 23rd on the online version of the BBC Portuguese service suggests that bookish, technocratic Barbosa lacks a feel for the rough and tumble of Brazilian retail politics and will need to work hard to develop the trust of the international financial community and major economic powers.
Rail infrastructure is a slow growth proposition
During a conference call with international media that originated from Brasilia on Tuesday, December 22nd, finance minister Barbosa responded to a question from this blogger noting that Brazil is looking for “investment in projects that provide fast growth.”
Further responding to the question from this blogger the minister said that Russia has an opportunity to invest in the freight rail compopnent of the current Logistical Investment Project (acronym PIL 2) of 40 billion riais (the equivalent of US $10 billion). But he also indicated that the prospective arrangement would require the approval of Brazil's congress and that the terms of the concession on offer to international investors may change during or after the second quarter of 2016.
Old wine, new bottle
Representatives of the Dilma government held meetings in 2013 with public and private sector groups in London and in Russia in an effort to sell “concessions” (now the politically correct meme for “privatization”) to invest in the original PIL.
At that time, as one can learn from articles in The Economist, The Wall Street Journal, and The Financial Times Brazil did not find any investors in those markets.
The main reason for the PIL being a non starter was that the Dilma government wanted to control the freight market and limit the ability of Russia and other nations to profit from their investments.
The Worker's Party government wanted to set up a new Brazilian government bureaucracy to insure “stability” by freezing out market forces that often determine rates in the volatile rail freight marketplace and have the bureaucracy control the demand, and as a result, the ability to make money.
Ironically, this set-up has similiarities to some of the old Soviet bureaucracies that Mikhail Gorbachev saw during the Glasnost and Perestroika days.
Brazil launched “PIC-2” in June of this year, looking for around 200 billion riais. The total amount for modernizing highways, rail, ports and airports.
As a measurement tool, Brent Crude barrel spot in June was US $70. Today Brent is spotting at around $36, half that amount. The U.S. dollar bought 3.10 Brazilian riais. Today it buys 4.0 riais.
One Brazilian rial bought 17.89 Russian rubles on 21 December and around 17.12 on June 1st.
In June of this year one Brazilian rial bought 1.987 Chinese yuan. On December 21st one Brazilian rial bought 1.620 Chinese yuan.
The ticket to ride on Brazil's mystery train is expensive. And all bets could be off if more voters continue to oppose Worker's Party candidates in nationwide state and local elections coming up late in 2016.
If this happens, the sum of all fears for Team Dilma is that the impopularity of the Worker's Party regime will spawn a Brazilian-style poderemos movement like the one that has paralyzed the government and economy of Spain. And, yes, there is someone who is waiting in the wings, which will be the theme of a future article,
Perhaps the best way the Kremlin could help its BRICS partner Brazil is to focus on prospective bilateral deals that can generate the fast growth the current government in Brasilia wants.
As for improving the Brazilian infrastructure, the best solution would be to bring in a no-nonsense business leader like Donald Trump.
Russian president Vladimir Putin would likely undertsand the logic of doing this in order to getting the job done. Brazil's Dilma would probably authorize a working group of several of Brazil's 31 ministries to study the situation and report back, over time.
But time may not be on Dilma's side
