Tags: BRIC, Mike Caggeso, Russia

Russia's Economic Demise Could Turn "BRIC" to "BIC"

By , Money Morning •

By Mike Caggeso
Associate Editor
Money Morning

Russia's continuing weakness could cost the country its membership in one of the most identifiable and esteemed investor acronyms - the BRIC nations.

Back in 2001, the Goldman Sachs Group Inc. (GS) - eager to push its clients toward emerging markets investment - created the acronym "BRIC" to stand for Brazil, Russia, India and China, the four emerging markets the investment bank's strategists believed would become a dominant part of the world economy in the years ahead.

Such was the case until the global financial crisis happened. Now, Russia is falling out of investor sunlight and into the pits of recession.

Russia's Economic Development Minister Elvira Nabiullina projects a 2.2% gross domestic product (GDP) decline for 2009, according to EurasiaNet. But the current global financial crisis is making previous estimates look foolish and impossibly rosy (U.S. GDP was originally estimated to fall 3.2% for the fourth quarter. In reality, GDP plunged 6.2%).

The culprits: A falling ruble, plummeting oil prices, war with Georgia and a gas-export dispute with the Ukraine.

Russia's economy is heavily reliant on its oil reserves, making the effects of falling oil prices easy to measure. But the silent killer of the Russian economy has yet to be full measured - the money spent in a thus-far vain attempt to prop up its falling ruble.

The ruble recently fell to a level not seen since 1998, a scary statistic because that was the year Russia experienced a nationwide banking crisis - and it was also a period during which world markets were being roiled by the Asian Financial Crisis, also known as the "Asian contagion."

In an effort to cushion the ruble's fall, Russia has spent $245 billion since August, as policymakers sold more than a quarter of the country's gold and foreign-currency reserves. Russia's reserves, the world's third-largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA. 

That has some economists calling for a "free-float" - or a big devaluation - to avoid depleting all of the reserves.

The tactic, and the accompanying effect on investors, is nearly identical to that of 1998, when the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt. Investors are fleeing Russia because the government is tapping its reserves to defend the ruble, further eroding investor confidence and undermining the currency.

Brazil, India and China are currently faring far better than Russia currently, but are still dealing with their own unique struggles. That has led analysts to question the viability of the BRIC acronym.

Milton Ezrati, a senior economist and market strategist at Lord Abbett & Co. LLC, recently published a report titled, "Broken BRIC," in which he questions the notion of lumping those economies together - especially in view of their wealth of differences.

"We, at Lord Abbett, were always skeptical of BRIC," Ezrati said in an interview with MarketWatch.com, noting that investors should diversify beyond emerging markets. "The whole concept behind the BRIC, that these four countries were leaders, is no longer the case today."

Ezrati no doubt has his share of dissenters, who can quickly point out that while the stock markets of China, India and Brazil are taking their lumps, they are the only major economies in the world with positive GDP growth.

Effect on Local Elections

Looking at Russia's recent local election results, the country's decline into the financial red is having little effect on the popularity of United Russia, the party of former President and current Prime Minister Vladimir Putin.

Elections were held yesterday and preliminary results show United Russia racking up commanding leads in local elections around the country, The Associated Press reported. Of course, allegations of election violations abound.

But the bottom line is that those in power are keeping it. Doing so engraves their names next to the economy's decline; but it also gives them a chance to take credit for recovery if their policies work.

 

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