Special Report: BRIC becomes BIC?
Russia is expected to be the worst performer among the BRIC economies in 2009 (Brazil, Russia, India and China), with its economy projected to contract sharply in contrast with the relative stability of the other three. Russia’s over-reliance on the energy sector, and its declining and ageing population, mark it from the other BRICs and cast shadows over its long-term growth. This is leading many analysts to focus on “BIC” as a group rather than the BRIC.
- In June 2009 the presidents of Brazil, Russia, India and China – the leading emerging economies known as BRIC – met for their first ever summit to discuss increased cooperation in global economic and financial matters. Yet Russia’s poor economic performance in 2009 casts doubts over its inclusion in the BRIC group;
- Russia appeared in 2009 as the BRIC laggard, facing a sharp contraction of 6.5% in 2009. All four countries suffered as a result of the financial crisis and the global recession since 2008, yet India and China seem set to maintain growth above 5.0% while Brazil is poised for a milder contraction;
- Russia is perceived as more risky than other BRIC economies because of frequent state intervention in the economy. The Russian rouble plummeted between July 2008 and March 2009 due to large capital outflows as investors fled to safety;
- Furthermore, the global recession exposed Russia’s over-reliance on its energy sector as the leading driver of economic growth. As oil prices collapsed from US$147 per barrel in July 2008 to below US$40 per barrel in December 2008, Russia’s economy plummeted. Other BRIC economies have more resilient foundations, with a greater role for domestic consumption (Brazil and India) or more diversified export base (China);
- Russia’s demographic profile also makes it different. Russia’s population is the smallest, most elderly, and is declining rapidly in contrast with growing populations of India, China and Brazil (BIC). With its workforce and consumer base shrinking, Russia’s long-term growth is undermined.
BRIC and the global recession
- BRIC had been originally signalled by a Goldman Sachs analyst in 2001. Fast growth, strong economic foundations and large populations made BRIC into the world’s most promising markets. In 2008 BRIC accounted for 22.2% of the world’s GDP in International dollars (measured in purchasing power parity terms, which compare purchasing power across boundaries);
- Between 2003 and 2008, annual real GDP growth averaged 10.7% in China, 8.4% in India, 7.1% in Russia and 4.1% in Brazil.
Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statisticsNote: 2009-2010 figures are forecast.
The financial crisis and global recession since 2008 exposed weaknesses in all the BRIC economies. Unlike Brazil, China and India, which seemed to withstand the crisis better than most developed economies, the Russian economy was severely hit, which caused many to reconsider its position within the BRIC group:
- The Russian economy shrank by 9.8% in the first quarter of 2009 year-on-year compared with a 1.8% contraction in Brazil, growth of 4.1% in India and growth of 6.1% in China (figure for China refers to production approach);
- With the rise of risk-aversion amid the financial crisis, foreign investors pulled out of Russia, which appeared as the riskiest of BRIC economies. As a result of strong capital outflows, the Russian rouble lost more than half its value against the US dollar between July 2008 and March 2009. This was the sharpest fall among the BRIC;
- One reason for Russia’s perception as more risky is frequent state intervention in the economy. In July 2008, before the escalation of the financial crisis, Moscow’s stock exchange fell sharply because of threatening comments by Prime Minister Vladimir against a large steel company;
- Furthermore, Russia’s poor performance exposes structural weaknesses that make it more vulnerable to external shocks. Two main vulnerabilities are Russia’s dependence on its energy sector and its ageing and declining demographics.
Over-dominance of Russia’s energy sector
- Russia’s economic base is the least diversified of the BRIC countries. The Russian economy is heavily dependent on the hydrocarbon sector, which contributed 63.7% of exports and an estimated 50% of government revenues in 2008;
- Russia’s reliance on hydrocarbon exports has exposed it to volatility in global commodity markets. This volatility reached a climax amid the global recession as oil prices fell to US$35 per barrel in December 2008, from a record high of US$147 per barrel in July 2008 amid declining global demand. These fluctuations put Russia in a precarious position when it comes to planning spending for future years;
- No other BRIC country is as dependent on a single sector. While China has also relied on exports as a primary driver of growth (accounting for 33.0% of GDP in 2008), Chinese exports are more diversified between various kinds of machinery and manufactures;
- The dominance of Russia’s energy sector is not surprising as the country is the world’s second largest producer and exporter of oil after Saudi Arabia. In 2008 Russia produced 12.4% of the world’s total oil. Russian share of the world’s natural gas market was even higher at 19.6% in 2008;
- While the government is publicly committed to economic diversification, it has been slow to take real steps. For instance, Russian infrastructure has suffered from decades of underinvestment. Furthermore, the energy sector itself is threatened by underinvestment. The Russian government is reluctant to allow foreign involvement in the energy sector, which is considered a strategic asset.
Russia’s unfavourable demographics
Another major difference between Russia and the rest of the BRICs is its ageing and shrinking demographic profile, which is not supportive of long-term growth:
- Emerging markets characterised by large and relatively young populations have a distinct advantage. Such a demographic profile provides a broad potential workforce, as well as a strong consumer base to make consumption a leading driver of growth;
- Russia’s population is the smallest among the BRICs, at 141 million in January 2009, compared with 197 million in Brazil, 1.2 billion in India and 1.3 billion in China;
- Russia’s population has been declining since the mid-1990s, due to a low fertility rate of 1.3 children born per female (2008) and a high male mortality rate. Between 1999 and 2009, Russia’s population fell by 6.8 million or 4.6%. During the same period, India grew by 17.0%, Brazil by 14.6% and China by 6.7%;
- Russia’s population is also the most elderly of the BRIC economies. In 2009, 13.3% of Russians were aged 65+ compared to 9.3% in China, 5.3% in India and 6.6% in Brazil. Russia’s ageing population makes it a less attractive market for consumer goods and services than the other BRIC countries. Older people tend to be more cautious in spending, and do not adopt consumer trends very easily;
- In addition, a growing share of elderly puts a strain on the economy. The shrinking workforce has to support a larger elderly population, and the government needs to allocate greater public expenditure for pensions and healthcare;
- Russia’s demographic woes are made worse by Kremlin anti-immigration policies, especially when it comes to migrants of non-Slavic origins. The number of violent attacks on migrants is on the rise, and in 2008, 99 people were murdered in hate crimes.
The outlook for Russia appears more negative than for Brazil, India and China:
- The Russian economy is expected to contract by 6.5% in 2009 in real terms, down from 5.6% growth in 2008. However, much depends on the price of oil, which recovered to US$70 per barrel in June 2009;
- Over the long term, Russia’s demographic woes constrain its potential as a consumption growth market. The population is expected to decline by a further 4.6 million between 2009 and 2020;
- At the same time, even if its economic foundations are less robust than the other BRICs, Russia’s hydrocarbon wealth will ensure its role as one of the world’s leading emerging economies.
The outlook for India, China, and Brazil seems more positive, although there are risks ahead. The ability of all three to launch large stimulus packages and the fact that they have a growing and underdeveloped consumer market also encourages medium term prospects:
- China’s economic growth is forecast to fall from 9.0% in 2008 to 7.5% in 2009, assisted by a massive fiscal stimulus of US$586 billion launched in November 2008. However, the economy still suffers from over-reliance on exports and manufacturing. If global demand fails to recover, China could be facing a protracted period of slower growth;
- India’s economy appears the least hit by the financial crisis, due to a large base of domestic consumption and limited dependency on exports. Economic growth is expected to slow from 7.3% in 2008 to 5.4% in 2009;
- In Brazil, resilient domestic consumption has helped to stabilise the economy and the country is benefiting from the surge in commodity prices in the second quarter of 2009. Brazil’s economy is forecast to contract by 1.3% in 2009, from 5.1% growth in 2008, a milder contraction than in Russia.