BiC, not BRIC (II)

I recently argued Russia didn’t belong in the BRIC group of developing country powers—Brazil, Russia, India, China. The group was really BiC, not BRIC, because Russia, the former Soviet Union, is a major, established, European power that doesn’t belong with the three developing non-European giants.

In an article entitled “Taking The 'R' Out Of BRIC,” Forbes has now published its own analysis of why Russia doesn’t belong with the others. Forbes, however, gives a different reason for excluding Russia. It says Russia is too weak to be a BRIC economy. Last year, Russia’s real GDP declined by -8% to -10%. That compares to Brazil's GDP decline of -5.5%, as China and India grew by 8.3% and 6.5%, respectively.

Russia’s problems go beyond 2009’s oil price drop. While 65% of Russia's export earnings come from oil and gas, the sector accounts for only 20% of Russia’s overall GDP. And other more oil-dependent economies, such as Kazakhstan and Saudi Arabia, suffered much smaller GDP declines last year. Ira Kalish, director of global economics at Deloitte Research, says Russia’s problem is “a combination of corruption, poor governance, government interference in the private sector and insufficient investment in the oil and gas sector."

Other countries are corrupt. All the BiCs, for example. Here’s what’s different in Russia, according to Wharton professor Philip Nichols:

In most countries, the mistrust generated by corruption leads to disengagement from government institutions and the creation of relationship-based networks. In Russia . . . these networks . . . are not as pervasive as in the other BRIC countries. . . people [instead] turn to the government for direction. And so it seems that corruption ... has the odd and indirect effect of further concentrating power in the government.

Forbes concludes the warning signs of more economic trouble for Russia are growing--for example, the increasing rate of non-performing loans on Russian banks' balance sheets. Russia needs strong leadership to stabilize its financial situation, to encourage foreign investment, and to attract management expertise. But Forbes views as “slim” the prospects of that happening soon.