Getting the R out of BRIC?
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Nils van der Vegte
January 28, 2012
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‘Dreaming with BRICs: The Path to 2050’. With this title two economists of Goldman Sachs kicked off a report on how four emerging countries would surpass the G6 economies in less than forty years from now. These four countries, Brazil, Russia, India and China, were dubbed as the BRIC economies by Goldman Sachs economist Jim O’Neill back in 2001. This article aims to look into the definition of BRIC and how the R, Russia, stands out in this term. In the first part of this article, we will look at what the term BRIC means after which we look more in-depth into Russia and its position in the BRIC bloc. This article will deal with negative and positive aspects of BRIC to answer one question:. Is Russia rightly or wrongly seen as part of the BRICs?

Defining BRIC: pros and cons

Unlike what the term implies, the BRIC countries are not quite alike; they have dissimilar politics and economies. While India and Brazil are democracies, Russia is a “declared democracy moving toward authoritarianism” while China is a Marxist ‘people’s’ republic. Their cultures and languages also differ enormously. All four do possess large industrial sectors, with both links to the global capitalist economy and the informal sectors (the sectors that fall outside the reach of tax collectors). In the area of trade, there are also differences. India is the only one to run a trade deficit, but has a smaller external debt than the other three. Russia’s trade is focused primarily on oil and gas while the other three have more diversified export markets.

It might seem then, that the term BRIC is forced upon us by the two Goldman Sachs economists, and with the emergence of many variations to the term BRIC (terms like BRICS, the four + South Africa, or BIIC: Russia out and Indonesia in) it looks like that the term BRIC does not seem to hold ground. Yet there are some arguments in favor of the term. A simple fact is that the four BRIC members account for more than 40% of the world’s population and almost a third of the world’s land mass, making these countries an important factor in global affairs. Yet the most common denominator is that “economic growth development in the BRICs has greatly exceeded growth compared to the world’s leading industrialized nations. Even after the economic crisis that started in 2007, they continued outperforming the rest of the world.” In 2009, economies such as Germany and Japan shrunk while the BRIC economies (with the exception of Russia that got hit hard) kept growing. To further boost the firmness of the term, Goldman Sachs researched the performance of the BRIC economies in the last decade. They concluded that “over the past 10 years they [the BRICs] have contributed over a third of world GDP growth and grown from one-sixth of the world economy to almost a quarter (in PPP terms). Looking forward to the coming decade, we expect this trend to continue and become even more pronounced.”

Further criticism to the term BRIC has been directed at China’s seemingly overwhelming significance over the other three members. Although this is true, the combined imports of the BRI to China accounts for 18%, the largest trading share for China’s economy. Besides this, the leaders of the BRIC have started more actively to talk (on equal footing) about protecting their interests against countries such as the United States which is now visible in Syria.

It can be argued that the differences between the four countries can also work to their advantage: while China and India can become dominant suppliers of manufactured goods and services, Brazil and Russia can become dominant suppliers of raw materials. If we take into account that in today’s global economy China is mostly seen as the ‘factory of the world’, India leads in export of information technology and software workers, Brazil with a large service and manufacturing capacity and as the largest exporter in Latin America and Russia largest exporter of (natural) oil and gas, then we can see great possibilities for interactions between these countries and the governments and companies from the rest of the world.

When turning our attention back to the political level, the economists Haugaard and Larsen argue that greater openness (also as part of economic liberalization) contributes to greater growth, and the BRIC countries have followed this pattern since the 1980s, resulting in their high economic growth. The two authors excluded Russia from this pattern due to ‘data problems’ that no doubt have to do with the prevalence of the Soviet Union in the 1980s, its subsequent fall, the opening up of the markets under Yeltsin and the following renationalization of ‘strategic sectors’ under Putin. Overall however, it can be argued that today’s Russia is more open than the Soviet Union was at the start of the 1980s under Brezhnev.

So, it can be concluded that the definition of BRIC may not seem as a solid one due to the numerous differences between the BRICs on both a economical and political basis. But the four members do share a high economic growth and their dissimilarities can be seen as a positive rather than a negative point. With their varying economies these four countries, who have been seeking deeper relations (under the acronym BRIC), can help each other by providing either manufactured products or raw materials to each other. On a political level too, on the long term, these countries have been opening up themselves more and more (although Russia may go the other way) in a world where the (genuinely real or fake) democratic institutions are important for countries to develop international ties on a bilateral (with countries such as the US) or multilateral (organizations such as the WTO) level. We now turn our attention to Russia and if it is still convincing to keep the R in the BRIC.

Russia’s role in the BRIC

Until the financial crisis in 2008, nobody argued that picking Russia as one of the members of the BRIC group was a bad choice as since 2001 Russia posted between 5 percent and 9 percent annual economic growth. But then, disaster struck. In 2008 the world was hit by a financial crisis which had very negative consequences for Russia. Russia’s economy contracted by 8.8% and this prompted many journalists and economists to doubt the place of Russia in the BRIC group. The differences were clear indeed: China and India quickly resumed their economic growth and whilst Brazil was hit by the low oil price as well it never posted negative growth. Some people argued that corruption, the rule of law, demographics and an “authoritarian government” also significantly contributed to doubt about Russia’s status. Commentators argued that Russia should be replaced by Indonesia or Korea as a promising market.

There are many reasons why Russia should belong in this promising group. First of all, there is Jim O’Neill himself. When asked about removing Russia from the BRIC group he promptly answered: “rubbish.” He does admit that the Russian economy was quite a disappointment in 2008 but he states that the oil price is only part of the story. The fact that major Russian companies had taken on a large amount of debt was a major factor leading the economy to a standstill. He goes on by declaring Russia the best of the four BRIC countries to invest in. The fact that the Russian economy has performed bad in 2008 means that there is a lot of opportunity to make a healthy return on investment as opposed to Brazil, China and India.

Jim O’Neill himself is not the only investor to agree that Russia is a very attractive market. In the first half of March 2010 for example, Russian funds (on the exchange) received 411 million dollars in foreign investments, the highest in six months. Even more interesting was the destination of these investments: about fifty percent went to the retail sector and banking. China (83 million USD), India (67 million USD) and Brazil (47 million) lagged behind Russia, representing a significant turnaround. Evidence of investors returning of Russia is easy to find in the recent BP-Rosneft deal which means that BP will invest 1.5 billion Dollars in Russia or in the Pepsi-Wimm-Bill-Dann deal, which meant another investment of 1.5 billion Dollars.

Next there is a recent report by Troika Dialog, the main investment bank in Russia, which argues that people overlook the advantages of Russia. The main pillar being the strong macroeconomic data. One of the most important indicators is Russia’s per capita income: 18,945 Dollar as opposed to 10,427 Dollar in Brazil, 6,675 Dollar in China and 3248 Dollar in India.     This means that consumers are the richest of all the BRIC nations and as O’Neil stated himself: consumers are a very important indicator of the BRIC group. Russia may have only a tenth of the population of China, it most certainly is the richest one. Troika Dialog suggests that in Russia, 68% of the people can be counted as middle class (100 million people) against 31% in Brazil (75 million), 13% in China (160 million) and less than 3% in India (30 million). The gap between Russia and China is considerable but in terms of market size, Russia easily beats Brazil and India. In other words, China and India are better markets for for producers of low-quality goods whilst Russia and Brazil are attractive for, say, car producers. Russia’s gross domestic product in purchasing power parity is 2.1 trillion Dollars, making it the 7th largest economy. In addition, the data on human development and education is telling of the possibilities in Russia. The average Russian has 8.85 years of schooling, compared to 7,54 in China, 7,17 in India and only 4,39 years in Brazil. In Russia around 70% of the Russians go into higher education, compared with just 20-25% of the Brazilians. The 2006 PISA science assessment concluded: “only 15.2% of the Brazilians possessed skills beyond those needed for purely linear problem-solving, compared with 47.6% of the Russian students.”

The common arguments of “authoritarian government” and ease of doing business are easily refuted. First of all, the authoritarian government argument does not hold any ground when one compares Russia with BRIC colleague China which has a very bad human rights record (far worse than Russia’s), let alone the complete lack of democracy. Yet, investors do not have any problems with China. China and Russia are excellent examples of the fact that capitalism thrives in authoritarian states. The same goes as far as ease of business and corruption is concerned. First of all, corruption is endemic in all BRIC countries and whilst Russia should be ashamed of the “low’ place it got in the Ease of Doing Business table (123th place) India and Brazil performed worse with a 134th and 127th place respectively.

Indeed, following from the report of the World Bank it seems that Brazil, not Russia is the odd one out in the BRIC ranking. For example, since 2000 Russia’s real gross domestic product grew by 5.6% annually (in average) whilst that of Brazil only grew 3.2%. Brazil also suffers from low savings and low investment. Whilst Russia saves thirty percent of its income and invested 22%, Brazil saves about 17% and invests only 17%, well below many advanced economies. The mediocre performance of Brazil has led the International Monetary Fond to predict that Russia will takeover Brazil in terms of total GDP by 2014, making

Brazil, not Russia, the worst BRIC

Likewise other BRIC members suffer as well. A recent article in the Financial Times for example questions the promise of India. The possible economic problems in India consider many aspects. One of these is called “twin deficits” which could lead to serious payment crises like in 1991 (in short: the government has budget problems). Next, economic reforms have completely stalled the last years and, like with Russia, energy is a major concern here as well. Although Russia is a supplier and thus profits from high energy prices on the world market, India needs to import its energy supplies. What makes this worse is that Indian oil companies are forced to sell oil products against subsidised prices, creating a lot of problems. Next, whilst many observers see the demography as a problem in Russia, higher food prices will increase unrest in the coming years and will thus increase the risk of investing in India.
Conclusion

“Is Russia rightly or wrongly seen as part of the BRICs?” With this question we kicked off the article, first researching the validity of the term BRIC and subsequently looking at Russia’s role in this acronym. While there is a lot of criticism on the term BRIC, the fact the four members are vast countries with fast growing economies makes a strong point in favor of the term. While the four are very different countries, their different markets are a plus when dealing amongst each other or the rest of the world. When looking at the R in BRIC, we can see that here too there is a lot of criticism against Russia, but truthfully the place of every BRIC member (excluding China for obvious reasons) can be questioned. While Russia was hit hard in the 2008 crisis, it has made significant economic progress in the years before the crisis, surpassing a country like Brazil with ease (in terms of GDP growth). The answer to the question that we started with is thus, in our opinion, that Russia should rightly be seen as a member of the BRICs. Russia, with its enormous gas and oil reserves, already plays a crucial role in supplying the fast growing countries in today’s world with energy and if we are to believe Goldman Sachs, this role should increase in the coming decade.

Kevin de Kuyper and Nils van der Vegte both hold a Masters degree in Russian Studies. This article is an adapted version of their academic paper, which was written in 2011.