Archive for February 2009


February 23, 2009


A BRIC short of recovery?

July 1st 2009

I’ve always been somewhat skeptical about the inclusion of Russia and Brazil in Goldman Sachs’ list of the top four emerging economies – collectively known as the BRICs. Brazil has always appeared as an unlikely bedfellow alongside China and India. However it is Russia which has caused the greatest doubt. I’ve frequently stood alone in investment conferences and economic debates as the luminaries around me all extolled the virtues of Russia and largely scoffed at my concerns.

For me the lack of transparency, infrastructure issues, declining birth rates, massive poverty, the difficulty of upholding contract law, the volatility of the stock market, corruption and the ever-growing list of foreign businesses who had given up on the Russian market have led me to conclude that this is a market that’s ready to claim its place as one of the big four. Indeed I am constantly surprised that so many supposedly forward thinking and well managed companies are still diving headlong into the market on the basis that it is part of the BRIC acronym.

This doesn’t mean the market is dead or that there aren’t opportunities – see the examples of Coca cola and Unilever cited below. However we’ve felt for some time that Russia is a market whose time has yet to come. Interestingly even Goldman Sachs seems to be changing their mind on the Russia story – along with a number of other economic forecasters.

Jim O’Neill, the Goldman Sachs economist who coined the term BRIC believes both China and India could almost be said to be enjoying a ‘good crisis,’ – a situation at odds with much of the world and even their fellow BRICs. Against a backdrop of global recession, consensus forecasts for India in 2009 and 2010 are that it will grow by close to 6 per cent. Despite weak exports China is likewise expected by GS to grow by more than 8 per cent in 2009 and over 10 percent in 2010 as domestic demand picks up[i].

Brazil has fared somewhat worse – the OECD said it expects gross domestic product this year to shrink by 0.8% from 2008, following 5.1% growth in 2008. The OECD said it expects Brazil’s GDP to rebound in 2010 with 4% growth[ii], whilst the Economist believes growth in Brazil could even reach pre-crisis levels by that date.

The fourth BRIC, Russia, has always been somewhat anomalous within the grouping – for example, it is the only BRIC with a shrinking, as opposed to growing, population. The economic downturn also highlights this seeming discord. The Wall Street Journal notes that Russia’s 9.5 percent contraction in the first quarter was the steepest in the G20 save Japan[iii]. Furthermore, the recovery underway in China, India and Brazil, which is showing above trend growth for the Latin American region, has also thus far missed Russia. The World Bank is now predicting (as of 24th June 2009) a 7.9 percent contraction that will spike unemployment up to 13 percent by the year’s end and push 7.5 million Russians below the poverty line. Using international definitions, the number of poor is forecast to rise to almost a fifth (17.4 percent) of the population[iv]. As such, the BRIC term at present encompasses both the best and worst performing major world economies, save Japan.

At a time when China and India in particular appear to be decoupling from other emerging economies, many of whom are still mired in recession, could it be that Russia’s stuttering economy renders the BRIC term itself obsolete?

The crisis has exposed an oil dependent economy and, arguably, a poor choice of policies to deal with it – such as the gradual rouble devaluation. However, for many analysts, the underlying long-term expectations generally remain positive. As of June 11th, its foreign reserves stood at $401.1 billion, third in the world behind China and Japan. Forecasts for 2010 range between 2.0 percent growth (EIU) to 3.7 percent (World Bank) with much of it being dependent on the oil price, whose 63 per cent drop during the crisis predicated the economic fallout affecting the country.

Looking further out – for the years 2011 through 2013 the EIU is predicting average growth of around 4.5% in what the World Bank terms a ‘gradual and prolonged recovery.[v]’ Just as importantly, inflation is forecast to average around 7.5% in this period, far below the 14.1% seen in 2008[vi]. A number of businesses are also using the downturn to expand their operations in Russia in anticipation of healthier times ahead. Coca Cola – which is predicting Russia to become one if its top 5 markets both in terms of revenue and profit[vii] – has launched 8 new products since May 2008 and is maintaining advertising spend. Likewise Unilever is investing $140 million in the city of Tula in 2009-14 in a bid to solidify and build its market presence; indeed Unilever is still targeting double digit growth in Russia for 2009.

Even so, is 4.5 percent growth enough to warrant inclusion with China and India, whose economies still have the potential to grow 10 percent plus according to Goldman Sachs?