beyondbrics

It was bound to happen. Like the proverbial red rag to a bull, Colombia’s presentation of evidence to the Organisation of American States on Thursday regarding the presence of Colombian insurgents in Venezuela was always going to provoke a fierce reaction from President Hugo Chávez. And, sure enough, he has broken diplomatic relations “completely” with Colombia.

In reality, diplomatic relations could hardly get much worse anyway, even if it does make life difficult for the incoming government of Juan Manuel Santos, who had pledged to improve relations with Venezuela. But what will this mean for commercial relations?

Again, in practice they could hardly get much worse, since Chávez implemented a partial boycott on Colombian goods in August 2009 in response to Colombia’s decision to allow the US access to seven of its military bases. Bilateral trade plummeted from about $7bn to recent estimates of $1.5-2bn this year (the vast majority of it flows from Colombia to Venezuela). That figure might drop by a few hundred million more as a result of these latest developments.

But Colombia’s economy doesn’t really seem to have felt the pain. It has been impressively resilient to the negative shocks, and is now roaring ahead. Alberto Bernal at Bulltick Capital Markets recently revised his growth estimate for 2010 up from 4 per cent to 5 per cent. Colombia has managed to redirect most of the goods it was exporting to Venezuela to countries like Ecuador, Chile and China.

Venezuela, on the other hand, is mired in recession. Most analysts are expecting a contraction of 3 to 4 per cent this year. It too has been able to resource its imports to countries like Brazil and Argentina, but with one key difference: they are more expensive (and take longer to arrive). And pressure on prices is the last thing needed by a country battling with one of the highest inflation rates in the world, currently running at around 30 per cent.