http://knowledge.wharton.upenn.edu/article.cfm?articleid=2430
Over recent years, several economists have put forth the thought that the original Goldman Sachs acronym "BRIC" might need to be shortened to "BIC" since Russia was having difficulty keeping up with the consistent GDP growth of Brazil, China and India. This, of course was exacerbated by the worldwide financial crisis.
The article we've attached from K@W does an excellent job of describing how the economic downturn exposed Russia's weaknesses.
It is sad, though not unexpected, that a concept created by Goldman in 2003 to describe the best places for companies to invest has been turned into a concept that is used "politically". Russia's effort to do so is described in the article but the descriptions of Russia's economy and oil resources provide a perspective on why Russia may no longer qualify for the 'R' in BRIC.
Goldman, in 2005, put forth a follow up concept called the "N 11" - or Next 11 - group of BRIC aspirants, including Indonesia, Egypt, Mexico, the Phillipines and Turkey. And, Goldman may have a point with these aspiring BRICs but the original concept has been weakened by Russia's performance. Russia's economy was the worst among BRIC economies by a large measure: for the whole of 2009, its real GDP will have declined at least 8% (the numbers are in as of now but they have to be refined). Brazil dropped too, but dropped less and is coming back quickly in 2010. China and India both enjoyed GDP growth in 2009 of 8.3% and 6.5% respectively.
Russia is the world's largest producer of oil and gas but, for Russia, this simply creates a larger area of economic risk. Any weakness in that sector (read "oil price") can't be made up for in other parts of its economy. The bursting of the oil price bubble in 2008 curtailed export revenues and made the country's foreign debt obligation loom much larger than when oil prices were headed toward $150 per barrel. The consensus of most economic and political experts is that "... a combination of corruption, poor governance, government interference in the private sector and insufficient investment in the oil and gas sector (plus the erosion of civil liberties) will continue to stymie growth.
More important: "Even if there were a will to change, solutions are not obvious." This per Philip Nichols, professor of legal studies and business ethics at Wharton.
So, where is this all going? Well, hard as this is to believe, Russia had the humiliating distinction of joining the Ukraine and Zimbabwe as the only countries in 2009 that suffered from both double-digit output decline AND double-digit inflation!
Since the fall of communism 20 years ago, the Russian business landscape has "... gone thru a turbulent transition that is still nowhere near complete." There could be more darkness on the horizon with the increasing rate of non-performing loans on Russian bank's balance sheets.
Oil prices have saved and disguised Russia's economy in the past. Even if there were another "spike", if Russia can't do well with oil prices pushing $80 (at this writing), it will get harder and harder for Russia to achieve a balanced GDP and "real" BRIC status. Take the "ifs" out of the prior sentence and Russia has no chance.
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It's only a matter of time before we switch up on oil consuption in America... I'd give it 20-30 years, where we'll see the use of green technology (or at least something that isn't fuel) being equal or close to fuel consumption and perhaps another 20-40 years after that where fuel consumption is minimal in the US and other developed nations. Perhaps China will beat us in that race.
ReplyDeleteI think Russia will be able to shrug it through, but definitely not with Putin. He cares more about what people think of him than of his own country. They need someone that will make the tough decisions even if the people don't like it.
I can't agree more, Charlie. Russia just doesn't belong there. Not with what I learned in your class, not with what I've read since, and not based on my Eisenhower hehe. It's a mess with it's huge corruption issues, lack of private property rights, etc.
ReplyDeleteI agree with Minh, oil's going to become less of a factor at some point. I can only hope it's sooner rather than later.
Goldman did not consider Russia's stagnant population growth when classifying it as a BRIC country.
ReplyDeleteI agree that Russia from an economic perspective has been driven into irrelevance, especially with the decline in oil prices over the past two years.
ReplyDeleteI'd like to point out though that their political sway is still huge. They hold the key to natural gas in Europe, which is what everyone uses to heat their homes, and many cars are starting to use as an alternative to oil. They can flip the switch to energy and heat in Europe - a very powerful thing to have.
I would still like to see Russia recover. A recovery will depend on how they spend their money when commodity prices return to their peaks. Although Russia faces many plagues, it can still push through it all with the right leadership. It all begins at the top. With the likes of Putin in charge, we will probably see a business and political environment reflecting his values.
ReplyDeleteGreat comments from all of you! I enjoyed reading them!
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