Background
South America’s largest economy recently ended its election cycle resulting in a successful presidential bid returning Luiz Inácio Lula da Silva, or simply Lula, back to Brasília. The election has exemplified the recent bout of turbulence in Brazilian politics. The transition from a Bolsonaro to a Lula administration will undoubtedly bring domestic change, but many still rightly speculate where the chips will land on Brazilian foreign policy. To understand how a changing administration might impact the country’s foreign policy engagement and how the U.S. should adequately respond, we must gauge the landscape of Brazilian foreign affairs.
Analysis
Succinctly laid out by the Council on Foreign Relations’ Diana Roy, [1]“Brazilian foreign policy emphasizes diplomacy and multilateral institutions.” If you remember nothing else about how Brazil engages with other nations, remember this summation. This emphasis on multilateral institutions is exemplified most prominently by Brazil’s active role in the BRICS organization, a rotating non-permanent member of the UN Security Council, and regionally, “It is a founding member of and among the largest donors to the Organization of American States (OAS), the Western Hemisphere’s premier diplomatic forum. It is also the driving force behind the Mercosur trade bloc, in which it seeks to unite its economy with those of Argentina, Paraguay, and Uruguay. With a combined GDP of roughly $2.2 trillion in 2021.”
Where outsized benefits lay, Brazil also engages bilaterally. The country maintains strong trade and investment ties with the U.S., China, Russia, and the EU, each with a unique set of economic motivators primarily based on specific sector needs of the economy. Diana Roy’s piece lays out engagement with each succinctly (oil & gas investment from Russia, iron ore trade with China, agriculture trade with the EU, etc.), but overall the headline reads state-led economic interest playing heavily on foreign policy. While Brazil is South America’s largest democracy, global and regional foreign affairs are centered on economics, while ideology takes a back seat. We see outgrowths of this stance materialize in two different ways and with trend – 1. Closer ties with authoritarian regimes deemed distasteful by many in the democratic West (i.e., Iran, Cuba, China, Russia), and 2. Hesitancy toward global action.
1. To the ire of Washington, Brazil continually engages diplomatically and economically with a number of unsavory global actors, namely Russia and Iran. As recently as September, Brazil’s foreign minister Carlos Alberto Franco Franca,” where again we see trade and economics take a front seat, Iranian Foreign Minister Hossein Amirabdollahian replying, [2]“the two governments should support private companies to contribute to the enhancement of economic relations and trade exchanges,” all taking place against the backdrop of U.S. and Western sanctions on Iran. Ideally, in a scenario like this, a large continental democracy like Brazil would join like-minded countries in, at the very least, rhetorically distancing themselves from the Iranian regime and, at most, limiting further significant bilateral trade. Establishing trend, then President Bolsonaro met with Putin on Feb 16th to express Brazil’s [3]solidarity with Russia as troops amassed on the Ukrainian border. Eight days later, on Feb 24th, Russia invaded Ukraine. Whether or not Bolsonaro was privy to Putin’s plans, the trip was terrible timing. Of course, for optics alone, “the timing could not be worse,” a State Department spokesman said, but more damaging is the insinuation of what a large democracy like Brazil is willing to stomach.
2. Additionally, Brazil has historically been hesitant to back global action at the expense of economics. Here, we see a string of condemnations from Brasília’s “oppos[ition] to the U.S.-led war in Afghanistan and condemn[ation] the U.S. invasion of Iraq in 2003.” Since Bolsonaro’s photoshoot in Moscow, Brazil has stepped up and condemned Russia’s war in Ukraine. However, they remain firmly opposed to economically sanctioning the country…sound familiar? In June and July, Bolsonaro reiterated his stance with a phone call to Putin and a rebuke of sanctions. In July, Bolsonaro stated, [4]”The US and European economic barriers against Russia did not work. My line was that of balance, in addition to negotiating fertilizers, food security for the world.”
Understanding examples like Brazil’s engagement with Iran and Russia highlight the country’s emphasis on economics and trade at the heart of their foreign policy strategy, the pursuit of which often places Washington and Brasilia at odds with one other. Laying out Brazilian foreign policy tendencies, we can assess what impact, if any, an incoming Lula administration will have on foreign affairs.
Primarily, Lula’s campaign promises have centered on domestic rather than external issues. Even during his first presidency, the administration’s attention was by and far focused on enhancing domestic programs. More broadly, on the heels of the [5]car wash corruption scandal and subsequent referendum on Brazilian democracy, we anticipate the administration will keep the ‘boat steady’ as it lacks the social capital to afford any sea changes in Brazilian foreign policy. Lula himself stated, “He (Ukrainian President Vladimir Zelensky) wanted war. He would have negotiated a little more if he didn’t want war. That’s how it is. I criticized (Russian President Vladimir) Putin when I was in Mexico City, saying it was a mistake to invade. But I don’t think anyone is contributing to peace”, the president going so far as to claim, “That guy [Zelensky] is as responsible as Putin.” None of this indicates to us a break from the trend.
Conclusion
Broadly, a return to a Brazilian center-left party may align the Biden and Lula administrations, likely leading to dovish rhetoric from both sides and, perhaps ambitiously, alignment on hemispheric trade agreements. Still, we don’t anticipate geopolitical strategy to align when it comes to dealings with traditional U.S. adversaries. Continued support for Iran is almost assured, and barring an (unlikely) nuclear escalation, anything other than a condemnation of the war in Ukraine is dubious at best. Typifying regional thinking on China, Brazil is also not likely to change course on the Sino-Brazilian relationship under Lula either. Taking cues from Brazil’s tepid reaction to the invasion of Ukraine, we believe a Chinese invasion of Taiwan is unlikely to change the equation for Brazil as well. In a scenario like this, Brazil may very well want to continue selling China Iron, soybeans, and other agricultural products with companies like Vale and JBS in mind but would most likely be materially unable to should the U.S. come to the island’s aid. Continuing that thread, we expect the U.S.-Brazilian relationship to slowly trend sour, given Brazil’s lack of material and rhetorical solidarity with the West. Expect the trend to hasten should BRICS pick up any credible momentum in establishing a currency alternative to the dollar-denominated oil trade (Xi to meet with oil-producing Arab nations in early December).
Themes
- Rare Earth Minerals
- Fertilizers
- TMT
Heavy focus on trade and support of national champions such as Vale, Petrobas, and Ambev will continue into the Lula administration. Vale, in particular, stands to benefit from gradual upswings and building momentum in the EV and lithium battery markets. Contrary to the name, lithium batteries are largely comprised of nickel. Given Brazil’s relationship with the largest EV market in the world (China), we see short-term investment in Vale as profitable. Given the potential for U.S.-China conflict over Taiwan (or even heated regional contention), Vale exemplifies outsized risk in the long run. We prefer lithium and rare earth mining names like LAC, QS, ALB, MP, and low-cost mining ETFs. Much of the discussion between Brazil and Russia centers on the steady flow of fertilizers. While we see Chinese equities as too risky/un-investible, we believe Russian capital markets should be off the table (whether regulatory or not) for all conscious investors. To that end, we see value at the beginning of the food production process in fertilizer producers with operations in politically stable countries. Lastly, telecommunications companies have ample ground to run with Latin American markets. Huawei currently services/is building 5g capability for three countries – Mexico, Chile, and Brazil. We like cheap competitors in the space, such as Ericsson or Nokia. Over the long run, as the South American market develops and 5g becomes more of an economic reality in the region, anticipate TMT names, ex. Huawei to benefit.
Sources:
[1] https://www.cfr.org/backgrounder/brazils-global-ambitions#chapter-title-0-6
[2] https://www.tasnimnews.com/en/news/2022/09/24/2778384/brazil-regards-iran-as-reliable-economic-partner
[4] https://www.telesurenglish.net/news/Lula-and-Bolsonaro-on-Ukraine-and-Sanctions-Against-Russia-20220930-0015.html
[5] https://www.britannica.com/event/Petrobras-scandal
[6] https://www.bloomberg.com/news/articles/2022-11-24/china-arab-nations-to-hold-summit-in-saudi-arabia-next-month
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