Global Investing

Time to kick Russia out of the BRICs?

December 3, 2009

It may end up sounding like a famous ball-point pen maker, but an argument is being made that Goldman Sach’s famous marketing device, the BRICs, should really be the BICs. Does Russia really deserve to be a BRIC, asks Anders Åslund, senior fellow at the Peterson Institute for International Economics, in an article for Foreign Policy.

Åslund, who is also co-author with Andrew Kuchins of “The Russian Balance Sheet”, reckons the Russia of Putin and Medvedev is just not worthy of inclusion alongside Brazil, India and China  in the list of blue-chip economic powerhouses. He writes:

The country’s economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.

I have just returned from Moscow, which is always dreary around this season. But this year, the mood among the capital’s eloquent liberal economists has hit a new low. For the last seven years, Russia has undertaken no significant economic reforms. Instead, the state has been living off oil and gas, like a lucky but undeserving rentier.”

Economically, Åslund has the numbers on his side. The International Monetary Fund estimates that the Russian economic will contract by 6.7 percent this year, while China will grow 8.5 percent and India 5.4 percent. There is less of a case for Brazil, with a contraction of 0.7 percent projected, but it is still doing far better than Russia.

But the BRICs concept is not just about economics. As mentioned, it is a marketing device to urge investors to focus on the big emerging players. From an investment standpoint, it could be argued that Russia is leading the BRICs. Its stock market is up 128 percent this year versus around 80 percent for the other three.

At very least, however, Russia’s economic underperformance and stock market outperformance does suggest it is the outlier of the group.

Comments
18 comments so far | RSS Comments RSS

We Russians don’t care about being considered part of BRIC, it is Western investors that care. As far as FDI opportunities you will find Russia far more open to Western investment than China or Brazil with their protectionist policies. Russia has less growth opportunity in the way of cheap labour, but far more in resources and skilled human capital. Russia is the leader in technology in BRIC and joint partnerships can bring about rapid economic development that won’t be experienced in the other countries for quite some time.

 

Well, while it is relatively easy to focus on the % change of GDP we also might want to look into the per capita numbers: Russia’s per capita GDP is c$9800, while India’s is c$1000, China’s is c$3500 and only Brazil shows a similar level of c$6800. Relatively higher GDP levels in Russia and Brazil are not a coincidence, both countries are actively supplying the world and other BRIC members with raw materials and food and all these goods are both important and valuable. At least Brazil and Russia do not deserve to be blamed for this.One of the purposes to introduce the BRIC term was to distinguish a group of emerging countries which have a considerable potential to drive the world economy relying on a political end economical system based on global capitalism. Russia with its fast emerging market economy and liberal tax system is one of the leaders in BRIC actually. To remind, the corporate profit tax in Russia is 20%, the personal income tax is flat 13% rate and the VAT is 18%. Yes, Russia’s economy has sharply contracted in 2009. The three key factors hitting Russia simultaneously were the plummeting prices for resources, the unprecedented capital flight and an economy overheated by inflation, previous inflows of capital and short term leverage. Despite all the blows the Russian government is getting even more committed to the market reforms, modernisation and deregulation. Just compare the political system of Russia and China and the way the economy and financial system are regulated in China and you will realize that Russia is well ahead in imposing the liberal economic rules.Inflation has been zero in Russia since mid August and is on target to be 9% this year. The analysts at Troika Dialog (leading Russian investment bank) expect it to fall to 6.5% in 2010. For the first time since the fall of the Soviet Union, they expect single digit Russian inflation for a sustained period in 2010. This would imply greater profits and higher valuation multiples for stocks, strong GDP growth of at least 5%, and better conditions for the formation of long term domestic capital. As you saw in Brazil and Turkey, this is likely to drive outperformance.

Posted by Konstantin Lysenko | Report as abusive
 

Russia simply repeats Lenins’ NEP over and over again. Periods of free capitalism intertwine with times of communistic confiscation. It’s a dodgy place to do business if you’re not an insider. I suggest to visit Poland.

Posted by Polisz | Report as abusive
 

Look up Anders Åslund on wiki…”Åslund was a firm believer and key advisor in the controversial “shock therapy” measures that were applied to the Russian economy with appalling results..”However, I do believe Russia needs to get out of the elitist mind set currently plaguing its politics, and business circles. Instead of wasting 9 billion dollars on Winter Games, they should put that money into providing decent living standards to its citizens and dealing with corruption.And they need to stop feeding its people crap that the world is against them, and that we should stick together because we are better then the rest of them, that just leads down the path were most people don’t even want to go.Russian is a home to a great people, with tremendous resources, and a true desire and will to succeed that seems to suffer from occasional misdirection.

Posted by DD | Report as abusive
 

No, No! It should be formed another Union – Venezuela, Iran, Russia, Uzbekistan, Sudan – VIRUS.

Posted by Viktor | Report as abusive
 

Couldn’t agree more Jezza.I think the most damning indictment of Russia is its declining population and low life expectancy. At just 60, the average life expectancy of a Russian male is low not just by European standards but by South American and Asian too.Russia is certainly resource-rich but it’s a basket case. Sometimes worth a punt, yes, but as a long term investment for your hard earned pension pot? No chance.

Posted by SpanishBill | Report as abusive
 

Tell me something I don’t know…Russia has always been a third world country with noticeable achievements in sports and too little to show in technology or anything else that matters in the modern world.I find the most staggering number in this context to be the life expectancy of the Russian male: 59It says all about the Russian economy, society, infrastructure – and future.What else can one say about a country who’s barely surviving thanks to the exportation of raw materials such as natural gas, oil and timber?This is ridiculous (but not funny)

Posted by yr | Report as abusive
 

I agree that Russia is considered as a member of BRIC mainly by Western Investors.It is clear that the crisis has hit the country quite severely. But it is worth to note that Russia and the CIS region represent one of the main FDI destinations for Western Capital.Despite the fact that Russia, Kazakhstan and Azerbaijan are treated as less friendly environments, there is still a huge appetite from investors to some particular companies and industries, e.g. take Gazprom eurobonds! Oversubscribed! Major share of the bonds went to US investors… Lukoil, KazMunaiGas issuances – good trend indeed.

Posted by Ardo | Report as abusive
 

First I think the idea of ‘alliance’ is usually a good thing, especially in economics, and second that Russia should indeed remain in the BRICs mix because of its potential. And it appears that Medvedev has shouted a wake-up call in regard to too much past dependence on oil and gas, especially with their recent problems with Europe, Turkmenistan, Ukraine, etc. For one thing, oil and gas are as political as they are economic, and the political aspect is still a relative minus for Russia, whereas diversified business can be a gigantic plus for Russia, more than for India or China. And I think the perspective of ‘perpetual Leninism’ is becoming weaker and weaker with time, as well as the notion of ‘western vs eastern’. Russia can easily look and move in both directions and is better set to capitalize (literally) in the future than some other countries. As I’ve met many young Russians in the past several years, I’ve felt more confident that the next 10-20 years will bring a complete paradigm shift in business and political climes, IF substantial positive steps can be taken to minimize the corruption and distrust that still seem to pervade.

 

I remember Åslund from Sweden around 1990. Then he predicted millions of Russians would soon leave the country and many of them hit the Swedish border with Finland in the north. The local governments set up emergency centers expecting thousands of impoverished Russians. The only ones who finally showed up were people from Murmansk who came to visit the new Ikea store.

Posted by Ben | Report as abusive
 

I work for a multi-national company incorporated in the U.S. and with operations in both China and Russia. Furthermore, my wife was born and raised in Russia. China far outclasses Russia as a place to do business. The Russian bureaucracy is absolutely smothering – and seems to be intentionally designed to reap bribe money. The Chinese, rather than attacking business via denial of needed permits as is done in Russia, go out of their way to ensure a smooth entry into the country for new business.Medvedev and Putin have both stated publicly that corruption needs to be uprooted. Unfortunately, the corruption vine is so entangled in Russia’s economic tree that it will take a serious and sustained effort to bring Russia to a true free-market economy. But both men seem to be just giving lip service to the problem. As things now stand, only state-owned corporations can freely negotiate the Russian bureaucracy without fear of administrative attacks.That’s too bad, because I’d really like to see expanded economic opportunities for my in-laws now living in Russia.

Posted by Scott | Report as abusive
 

DD,Completely agree with you. Though, I would not say “seems to suffer from occasional misdirection”. It is constant misdirection ;) Russia’s elite is leading Russia through complete control of the media and discrediting and containing all opposition.

Posted by Gary | Report as abusive
 

This has got to be one of the stupidest comments I’ve read lately. Is he gonna kick out every oil fiefdom as well, to be fair? Or the US, seeing that they are in a deep recession? And what about Japan, having been in a drawn out recession for fifteen or so years?It is fashionable to admire China and India (and Brazil, to a lesser degree) these days, but they are still only just emerging without anyone knowing if it’s gonna last (back to Japan, we go), whereas Russia (formerly the Soviet Union) has been a world power for more than half a century, and a strong regional power for centuries before that, before the concept of a world power in the modern sense even existed.

Posted by Laz | Report as abusive
 

no doubt Russia has to be kicked out of BRIC as well as out of G20. There is nothing to get out of that country anymore, why would somebody consider it as developed country.

Posted by AB | Report as abusive
 

Russia needs to be broken up, it is far too large to be ruled effectively either by a despot or a democratic government. The country is slowly dying off, the current elite only cares about maintaining power and lining their coffers while their children are raised in western Europe.A new generation needs to grow up in Russia that is willing to fight for freedom, democracy and the rule of law not just be treated as pawns and slaves of the state.Eventually Putin will die off and hopefully there is a Russia left when that happens.

Posted by Nevski | Report as abusive
 

The GPD per capita used above to measure the richness of China or India compare to Brazil and Russia was not necessarily accurate nor appropriate. China and India’s population is measured by billion while Brazil and Russia’s million. Let’s use China as an example. China has 1.3 billion of population. When we equalize the measuring unit to million, it becomes 1,300 million. Russia has only 140 millions of population. You can see China has 9.28 times of people more than Russia. Of course, the GDP per capita for China is much lower than Russia and Brazil, simply because the R & B have much less population. However, not to forget that the middle to high income (comparable to those developed countries) population of China could simply outnumber the total population of Russia or Brazil. Just simply see the reality by visiting Louis Vuitton’s website. They have already put China on their front page for selection while the rest of the BRI countries are absent from the list.

Posted by Jerry | Report as abusive
 

how lame of you to say that russia must be kicked off. dont forget russia it is still learning to be a capitalist country. and when they mastered that china and india will tremble. “even the tallest bamboo knows how to bend.” right now russia is bending to adapt on its new found freedom. china if ever it lose its grip on its peple it will surely colapse remember china is still a communist country. although india is a capitalist country it cant sustain its wealth without natural resources.

Posted by shunsuikyouraku | Report as abusive
 

india russia are friend so no problem!

Posted by prashant_sharma | Report as abusive
 

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