FT Alphaville summarizes the Troika Dialog argument touting Russia as the BRIC to bet on. According to TD:
Russia has more raw materials, a more educated and middle-class population, a strong macroeconomic framework, a better track record, more resilience to global warming, and is cheaper. Moreover, it has unique commodity assets and a clear and successful European path to follow.
Color me extremely unimpressed. If this is the best case, Russia’s future is bleaker than I thought.
1. Raw materials are a curse to growth and long term economic prospects, not a benefit. That has been particularly true in Russia’s case, but it is difficult to find raw material intensive economies that have been stalwart growth performers. It’s a lot easier to find such economies that are basket cases.
2. Yes, Russia has a more educated populace than other BRICs. But that is already reflected in the higher per capita income of Russia compared the other BRICs (another attribute that TD touts). Moreover, as is true of much of Russian capital, the educational prowess–the human capital–of the Russian population is pretty much a Soviet legacy that is depreciating rapidly. The current Russian educational system is pretty much a disaster, and a shadow of the Soviet system. Corruption is rife: today, Russian educators put the cheat in ???????. The future of Russian education is hardly encouraging.
3. TD vastly understates Russia’s crippling economic defects:
Apart from oil price dependency, which is an aspect of macroeconomic fragility, Russia’s weaknesses are poor corporate governance, which restricts the returns to minority shareholders, and regulation, which restricts ROE levels (e.g. utilities). We reject the fashionable view that other issues like weak population growth, poor infrastructure, or poor government are necessarily damaging to ROE levels.
Poor corporate governance is the understatement of the century. FTAlphaville has a more complete list:
It ranks worst for corruption, corporate governance, and most institutions in international rankings. In financial services – such as investor protection, ethical behaviour of companies, strength of auditing, and market sophistication – again it fall short of the other Brics, according to the World Economic Forum. And it ranks second worst on the business cost of terrorism (behind India), and both violent crime and organised crime (to Brazil).
But even that list is seriously incomplete. A more complete list would include: the absence of reliable property rights, the lack of contract enforceability, the corruption of the legal system and the absence of the rule of law, the constant threat of expropriation, the arbitrariness of government. I could go on.
In brief, the TD analysts are being pretty thick.
Timothy Garten Ash had a more reasonable assessment a couple of months back, but it still focuses on traditional macro and structural issues and underemphasizes Russia’s fundamental problem: its institutional deficit.
These are all issues that primarily speak to Russia’s long term prospects. Its second quarter growth numbers came out, and they show things aren’t doing all that well in the short run either. Russian GDP grew 2.5 percent year-on-year from July, 2009 to July, 2010. The economy actually declined month-on-month. Although the fires certainly contributed to this decline, it is not a a favorable sign.
This is anemic even by comparison to the US. From trough (2Q 2009) to the present (hopefully not the peak, though it might be a local one given the real prospects for a double dip), the United States grew 3.1 percent. This was after a 4.2 percent decline from the peak in 4Q 2007 to the bottom in 2Q 2009.
In comparison, the Russian economy declined 7.9 percent in 2009, about twice the US decline. Twice the decline and a smaller rebound is hardly stellar performance, especially since the standard of comparison–the US–has not been a stellar performer itself.
Things are even worse if evaluated on an output gap basis. Given that Russia was growing at 5+ percent into mid-2008, the output gap is now about 15.5 percent. Since the US was growing at about 2.5 percent, the gap her is around 5.5 percent.
The sluggish growth in Russian GDP is particularly underwhelming given that oil prices have more than doubled off their crisis lows. This should have given Russia a favorable jolt, while serving as drag on the US.
The Finance Ministry is sticking by its forecast of 4 percent growth in 2010. Highly unlikely, especially given the effects of the drought; the fires; and the serious prospect for a global slowdown in the last third of the year.
Short run or long run: neither looks too hot.