Bolivian nationalisation leaves Lula in disarray

The summit of more than 50 Latin American, Caribbean and European leaders last week was hardly Brazil’s finest hour. Where once the South American giant – with the region’s biggest population and economy – would dominate such events, this time it found itself reacting to an agenda set by Bolivia, the continent’s poorest state.

Bolivia’s nationalisation of its hydrocarbons sector on May 1 has embarrassed Luiz Inácio Lula da Silva, Brazil’s president, more than perhaps any other world leader. It has also raised questions over the direction of policy in Brazil, both domestically and abroad.

Petrobras, controlled by Brazil’s government, has assets worth about $1.5bn (€1.1bn, £790m) in Bolivia and has spent another $2bn on a pipeline to bring Bolivian gas to Brazil. “Our whole foreign policy is under threat,” one of those involved told the FT after crisis meetings following the nationalisation decree.

At the summit in Vienna, things got worse before they got better. Evo Morales, Bolivia’s president, began by announcing he would not compensate companies for assets seized in the nationalisation. The price Brazil paid for its gas would increase by as much as 60 per cent, he added, accusing foreign oil companies of operating illegally in his country and branding them smugglers.

Following Brazil’s threat to recall its ambassador, Mr Morales started to backtrack and by the end of the summit he promised negotiations over the nationalisation and the gas price rise. Petrobras and other oil companies were now Bolivia’s “partners” and Mr Lula da Silva his “compadre”.

Assuming there are no further U-turns, the way should be open for Petrobras, Repsol of Spain, BP and BG of the UK and other oil companies to reach negotiated settlements. Any agreement is unlikely to benefit Petrobras, which may have to pay more for Bolivian gas and write off some of its investments. But this will not be commercially disastrous.

The damage done to Brazil’s regional and global ambitions will be harder to mend. Much has been written about the recent polarisation of leftwing politics in Latin America, between the radical populism of Venezuela and Bolivia at one end and the pragmatic orthodoxy of centre-left governments in Chile and Uruguay at the other.

Mr Lula da Silva has sought to steer a middle course, matching commitment to economic stability with concern over social issues. Yet in its policy for South America, Brazil has made leadership its priority.

In the past, says Peter Hakim of the Inter-American Dialogue, a Washington think-tank, policy was designed to promote development at home, through trade and investment, and to maintain good relations with Brazil’s neighbours. “Leadership was always part of that,” he says, “but under Lula, leadership has been pursued for its own sake rather than to serve other interests.”

This was seen in Brazil’s promotion of the South American Community of Nations, launched in December 2004. It sought to unite Mercosur, the would-be customs union between Argentina, Brazil, Paraguay and Uruguay, and the Andean Community, both of which have since fallen into disarray, not least through failures of Brazilian leadership.

It was also seen in Brazil’s pursuit of a permanent seat on the United Nations Security Council, received frostily in the rest of the region. Furthermore, while sticking to economic orthodoxy at home, Mr Lula da Silva has been much friendlier – until the latest developments – with populists such as Hugo Chávez of Venezuela, Mr Morales and Néstor Kirchner of Argentina.

“This is a puzzle about Lula,” Mr Hakim says. “It’s not clear what he gets out of constantly meeting people like Chávez and holding up their arms in victory signs. Why doesn’t he treat Chile and Uruguay the same way?”

Yet there is an underlying consistency in Mr Lula da Silva’s stance. He began his political life as a fierce proponent of the kind of policies espoused by Mr Chávez and Mr Morales, including a deep distaste for the International Monetary Fund, the Washington consensus and “neo-liberalism”. It was just before taking office, when investors’ fears over his politics sent prices of Brazilian assets plummeting, that Mr Lula da Silva converted to economic orthodoxy.

“This is the big contradiction,” says Rubens Barbosa, former ambassador to London and Washington. “At home, he is following economic policies that he and his party are against, and internationally he is following policies that he and his party support but can’t maintain.” Between a swing to populism at home and a move to more pragmatic foreign policy, the latter appears more likely – though some analysts fear the former should Mr Lula da Silva win a second term at elections in October.

What causes concern among many investors in Brazil is that, as demonstrated by the spat with Bolivia, Brazil’s embrace of pragmatism and orthodoxy may owe more to expediency than conviction.