Streetwise Professor

August 25, 2010

Thick as a BRIC

Filed under: Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 8:39 pm

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.

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  1. So, what would be the BRIC to bet on?

    Comment by Surya — August 25, 2010 @ 8:52 pm

  2. 1. An alternative viewpoint at Why Russia is cemented to the other BRICs.

    2. I don’t know why you’re quoting the July figures, given there’s always quite a lot of monthly variability in the figures. Wouldn’t, say, y/y Q2 growth (which was 5.2%) be the more accurate indicator – at least until Q3 figures come out?

    3. I think China and Russia (in this order) are the most prospective BRIC’s. Brazil and India are distinctly less promising.

    Comment by Sublime Oblivion — August 25, 2010 @ 9:07 pm

  3. Professor,

    Who cares?

    (I’d curb my enthusiasm, if I were him. Jumping a stingray did not pan out too well for Stevo).

    Comment by So? — August 25, 2010 @ 9:19 pm

  4. Craig writes: “Raw materials are a curse to growth and long term economic prospects, not a benefit.”

    Uh, how come we Canadians have done pretty damn well then?

    Comment by michael webster — August 25, 2010 @ 10:41 pm

  5. […] Streetwise Professor: Thick as a BRIC […]

    Pingback by Thursday’s Caught On The Web - The Source - WSJ — August 26, 2010 @ 2:04 am

  6. That’s cause you had American neigbours to keep you honest.

    Comment by So? — August 26, 2010 @ 4:21 am

  7. […] 26th, 2010 · No Comments Corruption is rife: today, Russian educators put the cheat in […]

    Pingback by Obscure but amusing — August 26, 2010 @ 5:06 am

  8. Correct me if I’m wrong, but doesn’t Troika Dialog make money by convincing people Russia is a good place to invest in and then making those investments and taking a fee for doing so?

    If I’m correct, then TD is obviously not a reliable source for information such as this.

    Comment by La Russophobe — August 26, 2010 @ 9:33 am

  9. @Michael–I wrote about this long ago on SWP. Before anybody was reading, for the most part. It’s very simple. Countries endowed with a strong legal-political system that enforced and protected property rights, an endowment inherited primarily from England, were/are not subject to the curse; the US, Canada, and Australia are excellent examples. The legal/institutional endowment was antecedent to the discovery of the natural resource endowment. Where natural resources have proved problematic is in countries with a weak pre-existing institutional framework. Virtually all of Africa, and a good chunk of S. America are examples there. Venezuela used to be considered a counterexample. No more.

    The ProfessorComment by The Professor — August 26, 2010 @ 9:55 am

  10. @LR–you’re right. Which makes it all the more interesting (an amusing) they can’t muster a better case.

    @Surya. China is doing well but has the greatest downside risk. Brazil seems pretty solid. I think India is the dark horse with the greatest potential for an upside surprise. Corruption is a problem, but that is overcome by other advantages (large Anglophone population, some institutional strengths) and the fact that it is just really getting started.

    The ProfessorComment by The Professor — August 26, 2010 @ 10:35 am

  11. Twitter Trackbacks…

    Trackback by Anonymous — August 26, 2010 @ 9:50 pm

  12. Thanks Prof. I would definitely agree wrt India. Corruption and lack of streamlined & quick justice system is the biggest problem faced by citizens and corporates alike. Due to increasing diverse media, a lot of corruption cases are quickly exposed these days.

    I have always had this question of how the emerging markets contributed to the US crisis – outsourcing heavily has resulted in substitution of high paying manufacturing jobs with lower paying retail jobs. Did this have a substantial impact on the reduction in the american consumption capacity?

    Comment by Surya — August 27, 2010 @ 7:55 am

  13. thanks surya for bringing up a pressing issue that many delusional flag-waving don’t want to bring up… the american economy is wrotten at the core. it is based on retail and debt. prosperity is an illusion. as is the dollar. real wages are down. income inequality is up. corruption (the word we use is lobbyists) is way, way, way up. potemkin village, ponzi scheme, call it what u like. america is FAR worse than russia.

    Comment by jack — August 27, 2010 @ 9:02 am

  14. flag-wavings “americans”


    Comment by jack — August 27, 2010 @ 9:03 am

  15. India’s biggest problem by far is the low level of its human capital.
    All other factors pale by comparison.

    Comment by Sublime Oblivion — August 27, 2010 @ 1:17 pm

  16. At the time of this writing, Russia appears to be worth $41:

    Comment by Ivan — August 27, 2010 @ 1:36 pm

  17. Yes, we got that you hate Russia, Ivan, thank you.

    Comment by Sublime Oblivion — August 27, 2010 @ 2:05 pm

  18. Hi LR,

    I always enjoy seeing you comment on the topics that you know nothing about, namely, Russia. One would think that after 5 years of intense training, even a Pavlovian or Durov dog would learn basic facts, like the names of the former Soviet block countries. But not you: after many years of opining on Russia, you still have no clue as to which countries used to be part of the USSR’s “sphere of enslavement” and which weren’t. To wit, your latest post in which you wrote about the top 17 countries with the highest predicted rate of population decrease:

    What’s also stunning about the BW list is that only four of the 17 countries who are even worse than Russia (Japan, South Korea, Cuba and Germany) are outside the former USSR’s sphere of enslavement. In other words, a jolting fourteen of the top eighteen population losers in the world, nearly 80% of the total, are in former Soviet space, a space that was until quite recently dominated by Russian policy.

    Well, you have put communist Albania (number 17) – a Maoist, pro-Chinese and virulently anti-Soviet country – into the list of Soviet-dominated countries.

    Croatia (number 14), Serbia (number 8) and Bosnia-Herzegovina (number 4) were all part of Tito’s Yugoslavia, a neutral country which wanted to have and had nothing to do with the Soviet sphere.

    To balance your ignorance, you put Cuba, a virtual Soviet colony, outside the Soviet sphere. East Germany too didn’t register with the Soviet sphere in your feeble mind.

    You call yourself an “expert”, don’t you? Tell me: how did you graduate middle school with such a pathetic ignorance of modern history?

    Comment by Laszlo Tooth Jr. — August 28, 2010 @ 2:45 am

  19. S.O., should I interpret your “we” as indication you are expressing a consolidated opinion of all bolsheviks/all Soviet people?

    Comment by Ivan — August 28, 2010 @ 6:49 am

  20. Ivan.

    My interpretation of SO’s use of “we” was that he meant himself and other readers.

    But as a man interested in the causes of mental retardation, I would be interested in hearing how you decided that SO meant “a consolidated opinion of all bolsheviks/all Soviet people” and not, say, a consolidated opinion of all pharaohs/all ancient Egyptians?

    Comment by Laszlo Tooth Jr. — August 28, 2010 @ 5:15 pm

  21. Laszlo,
    don’t you worry, it is not necessarily mental retardation on your part: possibly just a case of plain vanilla ignorance.

    See, them Soviet peepol have been conditioned to always express any opinion as coming not from first person, but from “all Soviet people”: partly because the Party always talked that way, but more importantly because of the need to hide their “I” in the “we”-crowd in case the Party frowns at the particular opinion. A dead giveaway for the tovarishch.

    Comment by Ivan — August 29, 2010 @ 1:26 am

  22. Really Lazlo, you should get help with your mental problems.

    I suspect it may come from your inbreeding.

    Comment by Andrew — August 29, 2010 @ 3:18 am

  23. More and more Russians see hard times ahead:

    They know what TD apparently doesn’t.

    Comment by La Russophobe — August 29, 2010 @ 8:37 am

  24. Hi Laszlo,

    We always enjoy seeing you comment on topics you know nothing about, but also ignoring the topic entirely.

    The topic of that post was Russia’s shrinking population. You ignored it.

    You also ignore the topic of THIS post. How very, very rude and IGNORant.

    Instead you babble utterly insane gibberish about a side-point, namely the USSR’s blame in the downfall of Eastern Europe, about which you offer exactly ZERO contrary evidence.

    Guess that’s why you don’t have a blog of your own, but just lurk in the shadow of other people’s blogs, huh?



    Comment by La Russophobe — August 29, 2010 @ 8:40 am

  25. SUBLIME LIAR: Yes, we got that you love sticking your tongue up Vladimir Putin’s butt, thank you.

    Comment by La Russophobe — August 29, 2010 @ 8:53 am

  26. More proof of Russia’s pathetic performance, bonds:

    Comment by La Russophobe — August 29, 2010 @ 5:53 pm

  27. Putin declares he’ll return as president and will crack the skulls of anyone who marches without a license:

    That’s simply marching without government permission, mind you, not refusing to disperse or otherwise violating police instructions.

    This man is a maniac.

    Comment by La Russophobe — August 30, 2010 @ 5:02 pm

  28. Russia needs $125/barrel oil to balance budget.


    Russia has $75/barrel.


    What other BRIC cannot balance its budget without a high enough commmodity price being set by foreigners?

    Once again, Russia is in a class by itself. Third class.

    Comment by La Russophobe — September 1, 2010 @ 9:34 am

  29. Dear LR,

    I indeed don’t have an active blog. Unlike you, I am smart and highly educated and spend most of my waking hours working for my own company, which brings me a lot of money. I also pay a lot of taxes, some of which goes to support CIA provocateurs like you. Internet discussions are just a little hobby for me.

    However, if I were to retire and devote my time to blogging, I assure you that my blog would be highly popular and profitable. You, on the other hand, devote your entire life to your blog and even claim to employ a large staff, and yet your blog barely makes it into the top 1 million blog rank. There are 900 thousand blogs more popular than yours. How pathetic.

    Comment by Laszlo Tooth Jr. — September 1, 2010 @ 7:15 pm

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