Streetwise Professor

October 25, 2010

The Sick BRIC

Filed under: Economics,Energy,Russia — The Professor @ 8:26 pm

Last Friday the WSJ ran an interesting article comparing the ruble to other commodity currencies.  Whereas the Australian and Canadian Dollar, South African Rand, and the Norwegian Kroner have rallied smartly against the dollar since June, with double digit percentage gains, the ruble is down about 6 percent.  This is symptomatic of a sluggish economy.  There is other information consistent with this interpretation:

Russia does not believe that the crisis is over – whatever the government spin might say.

And while the official line is that the country is open for business and investment is not only welcome but safe and secure, both incomes and spending are falling, says the Federal Statistics Service (Rosstat), and this is bumping up inflation as goods stay on the shelves.

“Demand is now in a state of crisis,” warns Association of Retail Companies (AKORT) executive director Ilya Belonovsky.

“We’ll be doing well if mid to late 2011 we return to the pre-crisis levels of consumer spending that we had in 2007-2008,” he told

The economy is at a standstill and worried Russians are squirreling money away for a rainy day as instability stretches further into the future, creating a vicious cycle, Komsomolskaya Pravda reported.

Talking themselves into trouble

Rosstat’s gloomy prognosis does more than make the government look unreasonably optimistic. “[Prime minister] Vladimir Putin has regularly said that everything is in order, that the economy is going uphill. In actual fact there are no grounds for these kinds of statements,” Higher School of Economics (HSE) scientific director Evgeny Yasin told

All it means is that when people see that the good news is not true people will be disappointed and not believe the next swathe of promises, he says. “There is no correlation between what is really happening and what our leaders are saying.”

Russia truly is the sick BRIC.  It should be benefitting from the growth in other emerging markets and the resultant increase in demand for its raw materials.  If it is benefitting, its lagging overall performance indicates even more acute problems elsewhere in the economy; that is, the raw materials sector is obscuring a truly bleak picture in other sectors.

Indeed, emerging markets are the primary beneficiaries of Helicopter Ben’s insanely loose monetary policy.  Their currencies are appreciating too as investors are taking dollars, buying EM currencies, and investing in those countries.  But the ruble is missing out on this: indeed, as the WSJ article shows, private capital is actually flowing out of Russia.  Benchmarking this outflow against the surging inflows in EMs (including other BRICS) makes the Russian performance look even more anemic.

This is another indication that putting Russia in the company of China, India, Brazil, and other emerging markets is flawed.  The comparison is not at all flattering to Russia.  Putin can brag as much as he wants, but the numbers tell a far less optimistic story.

If there is a silver lining in this for Russia, it is that the leakage of US monetary stimulus to EMs puts a lot of stress on those economies.  They tend to bubble, and those bubbles can–will–burst.  Russia isn’t bubbling, to say the least, so it has no bubble to burst.  That’s good news in a way, and reduces some of the pressure on Russian policy makers.  But a bursting EM bubble wouldn’t do Russia any favors, as that would hammer demand for its exports (think 1998).   Not a pretty thought.

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1 Comment »

  1. Professor, in case you are interested in RUB analitics there was a good one from Morgan Stanley
    Their end-2011 RUB-basket forcast is 33.0 (35.75 today)

    Comment by a.russian — October 26, 2010 @ 4:15 am

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