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Will Brazil and Paraguay Go to War Over Itaipu?

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May 20, 2009 – Comments (9)



That is Itaipu Dam on the Parana River between Brazil and Paraguay, which we visited during a Global Gains research trip at the end of 2007. It started generating electricity in 1984, and generated more than 94 thousand GWh of juice in 2008 which were split 50/50 between Paraguay and Brazil, but most of which Paraguay sold back to Brazil at below market rates (as per a treaty between the two countries).

But if you're a reader of this blog, then you know there is a global grab for resources going on these days. That includes metals, minerals, oil, and electricity. This global grab should make the relationship between Brazil and Paraguay vis a vis Itaipu quite interesting in the near term.

This, of course, was anticipated 20 years by Jim Rogers writing in his book Investment Biker (the current text we're reading as part of our Motley Fool Global Gains learning curriculum):

I did see a political problem that could arise in twenty years. When their economy was grown, the Paraguayans might well want their electricity back. Rather than surrender its vital supply, Brazil would likely come up with a ruse to invade its smaller neighbor, or "renegotiate" the treaty...and there wouldn't be much tiny Paraguay could do.

Well, Brazil and Paraguay do disagree today about the future of the electricity that Itaipu is generating, creating -- as this article calls it -- a "strain in their relations":

Brazil benefits greatly from energy sold at below-market value. On March 10, 2009 the Wall Street Journal reported that in spite of a slowdown in the economy, demand for energy in Brazil is rising. As a result, Brazil has been reluctant to renegotiate the terms of the treaty. On May 7 Fernando Lugo reiterated that Paraguay will not change its course and will continue to demand a higher price paid by Brazil and an end to exclusivity to the Brazilian market. The next round of talks is slated for June 2009. It remains unclear whether these negotiations will accomplish anything. Both Brazil and Paraguay have shown little flexibility in compromising their positions...A failure to reach an agreement at Itaipú will increase tensions between the two nations, which could impact bi-lateral security.

The investing takeaway
A war is not imminent, but what is clear is that the global grab for resources will be a defining international movement over the next few decades. Countries that have them -- or the cash to get them -- stand in a superior position to those that don't.

9 Comments – Post Your Own

#1) On May 20, 2009 at 1:33 PM, TDRH (96.20) wrote:

"Global Gains research trip at the end of 2007" - I think you guys just used that as an excuse to see the Iguazu Falls, they are truly remarkable. 

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#2) On May 20, 2009 at 1:39 PM, TMFMmbop (28.22) wrote:

Yes, we were pleasantly surprised to stumble upon Iguazu after visiting the dam. :-)

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#3) On May 20, 2009 at 4:19 PM, Schmacko (90.88) wrote:

The blog title seems a little sensationalist.  The chances of Brazil invading Paraguay, as long as Lula or someone who follows his line of thinking is in power, are close to zero.

 

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#4) On May 20, 2009 at 4:23 PM, catoismymotor (< 20) wrote:

Nah. They'll treat the dam like a small child caught in the middle of a messy divorce at the most.

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#5) On May 20, 2009 at 4:29 PM, TMFMmbop (28.22) wrote:

I agree war is unlikely, but Brazil is starting to throw its weight around in the region (which is good given that guys like Chavez had heretofore been the ones throwing their weight around). And going forward, I do think we are going to see a lot of international "disagreements" over water and resource rights. Just something to think about as one considers where to invest.

 Tim

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#6) On May 20, 2009 at 4:33 PM, catoismymotor (< 20) wrote:

This could make my itty-bitty stake in PHO a little more interesting.

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#7) On May 20, 2009 at 4:39 PM, TMFMmbop (28.22) wrote:

Looking at the top 10 holdings of PHO (Ameron, Danaher, Veolia, etc), it looks to be more a play on water infrastructure than actual water rights. The former should be a big market as well, but the latter is going to be the source of disputes.

Tim

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#8) On May 21, 2009 at 2:42 AM, rembu (< 20) wrote:

@catoismymotor.

Yeah, a rather important "small child" considering it is the second largest dam.

@TMFMmbop.

I hope that in the future we realize how working together can be beneficial (Hippie, but true). I don't see how an unstable (make that to "more unstable than it already is") Paraguay will be of any help to Brazil and its investors.

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#9) On May 21, 2009 at 8:50 AM, catoismymotor (< 20) wrote:

Tim,

If Brazil wants to build a big straw so they can drink Paraguay's milkshake maybe it would boost PHO a little. A boy can dream.

Rembu,

When referring to the dam as a "small child" I meant to convey its importence in the region. The parent that controls the child, of any size, controls to some degree the other party in a divorce. It is much is the same over natural resources found on the borders between countries.

I now want a milkshake. Darn you, Daniel Day-Lewis!

Craving sweets,

Cato

 

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