Russia: the unloved Bric

Another Davos has come and gone. The delegates left the Swiss ski resort having achieved less than normal, but buoyed by a sense of cautious optimism now that the worst seems to be behind us. Held under the slogan “Rethink, Redesign, Rebuild”, there was lots of thinking, but little in the way of designing and no rebuilding at all. Davos is billed as the powwow for world leaders, but this gloomy description is actually only applicable to half the conference-goers. For the other half – those from the so-called emerging markets – Davos was a celebration of their coming of age.

The Bric nations have been impacted by the global meltdown, but countries such as China and India are already back in fast growth mode and are starting to implement their exit strategies from the crisis-busting stimulus programmes that are holding the rest of the world up. Indeed, a Chinese suggestion that it would tighten rates sent stock markets around the planet plunging at the end of January. Why would they do that? Because they are growing too fast.

“Crisis” was the most used expression at Davos, but “emerging markets” came in a close second. The world's leading businessmen have their eyes now on these new “wunderkinder” of the global economy, but the very slogan of the event belies the fact that, actually, most of their attention still remains at home.

“The emerging markets are looking much better now,” said Mark Green, senior economist at HSBC, “but the West is on life support and surviving on the drugs of stimulus.”

But where was Russia in all this? Last year there was a Russia session as business leaders focused on the booming economy. This year, while China and India’s names were bandied about by nearly everyone, Russia is increasingly missed out altogether. Even the op-eds about the Bric quadriga skip over Russia’s name. A few have even called for the “R” to be removed permanently from the acronym.

The reason? Russia had a bad crisis and the other Bric members didn’t; it was the only one of the four to suffer from substantial and dramatic economic contraction. China and India are rapidly returning to their habitual fast growth, while Russia is recovering from 8.8pc contraction in 2009 and is expected to put in somewhere between 1.5pc and 5pc of growth this year (depending on what happens to oil prices).

Should Russia be booted out of Bric? It is certainly the least loved of the four. Jim O’Neill, the chief economist at Goldman Sachs, who coined the term in 2001, says no, but admits Russia disappointed last year. However, in a recent note he argued that the economy was dragged down by its exposure to the oil price and heavy borrowing in the international credit markets, but expects the country to return to strong growth this year and next – and so justify its membership of the club.

The 1998 financial crisis levelled Russia’s nascent banking sector and forced the government to default on its international debt, wrecking the state’s reputation. This time round, the government has emerged relatively unscathed: none of the big banks or companies has gone bust; the government still has the third largest foreign currency reserves – about five times more cash than either the UK or the USA – and the lowest external debt of any major country. Even the budget deficit (the first in a decade) is expected to fall to between 5pc and 1pc of GDP, depending on oil prices, this year.

What most commentators miss is that the boom years have transformed Russia from a petro-economy to a normal one where consumers, not hydrocarbons, are the long-term driver of change. Roustam Tariko, founder of Russian Standard Bank (and owner of a vodka by the same name), said that both his businesses took a hit, but both are back to 60-70pc of 2008 levels.

“Everything relating to the Russian consumer is going better and faster than with business,” says Tariko. “The situation is stabilising and we will go back to growth, but clearly it will be slower than before.”

A little growth would go a long way to earning Russia a little more love; the strong recovery some are predicting should make it hot again.

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