10th April 2012
Kelly's criticisms focused primarily on the political stagnation of the country. He pointed out that Russia is now the only one of the BRICS in which power does not rotate: "Instead, Putin is starting to look like one of those oil-rich Arab dictators who never leaves, continually gimmicking the ‘institutions' and ‘constitution' to justify how, mirabile dictu, he keeps staying in power."
Criticisms of Kelly's views focused on this point, saying that this was a misinterpretation of what was happening in Russia and that plenty of other countries were guilty of similar misrule.
However, Kelly also argued that Russia simply isn't a great power anymore. It is not progressing, but stagnating: he says: "Its population is contracting at a startling rate. The average lifespan is declining. Alcoholism is a uniquely terrible scourge. Infrastructure is a mess. Its bureaucracy has scarcely budged in 20 years. It has basically missed the globalization boat that has linked in the other BRICS to the US and western economies, and that has allowed them to export their way into the middle class."
Edward Evans, Product Manager on the Schroders Emerging Market Equities team is more upbeat: He says: "Liquidity, lending rates, external and fiscal accounts, sentiment and ultimately growth in Russia are all related to crude oil prices which have been strongly supported recently by production constraints in Iran and Syria in particular. Furthermore, the Russian consumer looks in good shape with a healthy employment market reflected by recovering consumer confidence, better than expected real wage growth and improved unemployment figures. Market sentiment has been boosted by easing inflationary pressure which is forecast to remain low during H1 2012 chiefly owing to a delay in utility price hikes.
He adds: However, the scale of recent net private capital outflows is indicative of political uncertainty, although over the short term this uncertainty has been reduced by Putin's victory. The risk of a deteriorating investment environment should incentivise reform although the government may be slow in its implementation. These concerns are discounted in attractive valuation levels with the market trading on around 5.2 times prospective earnings.
Before taking the argument further, It is worth looking at the original BRIC definition, set out by Goldman Sachs' Jim O'Neill in 2001 – O'Neill's view was largely an economic one:
"Over the next 10 years, the weight of the BRICs and especially China in world GDP will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs.
"In line with these prospects, world policymaking forums should be re-organised and in particular, the G7 should be adjusted to incorporate BRIC representatives."
He added: "In view of the expected continued relative growth of the BRICs, the opportunity should be taken to incorporate China and probably Brazil and Russia and possibly India, expanding the key body of global economic policy co-ordination to 8 or 9. It is time for the world to build better global economic BRICs."
But Kelly takes a different, more political rather than economic, tack
He says: "Placing Russia in a developmental category with Brazil, India, China, and South Africa does a disservice to the notions of quickening modernity, rapidly expanding GDP based on global integration and law, growing democratization and liberalization, greater responsibility for global governance, and, for lack of a better word, growing ‘normality' that the other BRICS have striven so hard to achieve."
Russia was always the laggard in terms of GDP, as O'Neill's original piece shows. In this, nothing has changed. In the IMF's largest World Economic Update from January, Russia's GDP for the years 2010 to 2013 was shown to be 4%, 4.1%. 3.3%, 3.5%. This is obviously a long way behind China and India, but is not materially different to that of Brazil, for which the same years delivered 7.5%. 2.9%. 3% and 4%. Russia is still expanding economically, even if it is not spreading to the wider population in the same way as has been seen in the other BRICs, so on this basis would still merit its place on O'Neill's original definition.
The real change that has been adopted on the back of the BRICs phenomenon is the advent of the G20, set up in 2008. There are plenty of other countries with political challenges within this group – Saudi Arabia, for example – and it is difficult to argue that Russia no longer merits a place at the table here. The original G7 has remained as a standalone group and has not expanded. In this context, therefore, the decision to drop Russia from the BRIC grouping is immaterial.
The definition ‘BRICS' has perhaps been most widely used as an investment grouping. A number of funds have launched on the back of the concept. Should these now be focused on merely the BICS? It is difficult to suggest that Russia should be out of an investment portfolio altogether. It oil-price dependency makes it extremely sensitive to the global economic cycle, so there are times its market will do very well. It also trades at a significant discount to other markets, largely due to its political problems, so investors can get exposure very cheaply.
For Evans, stockpicking comes before grand geo-political concerns. He concludes:
.".. We are currently finding attractive stock ideas in the financial and consumer sectors which are benefiting from strong domestic consumption and private and corporate credit growth. We are also finding some companies in the energy sector attractive owing to very attractive valuation levels."
So even if, as Kelly asserts, Russia is near a basket case, ther
e are still investment opportunities in its equity market.
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