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#19 - JRL 2006-42 - JRL Home
Date: Mon, 13 Feb 2006
From: Andrea Crandall <alcrand@gmail.com>
Subject: Editorial on Ian Bremmer's Russia Analysis

Dear Mr. Johnson,

I would appreciate it if you would publish this commentary on Ian Bremmer’s “Taking a Brick out of BRIC, Russia doesn't belong in the same league as Brazil, India, and China,” which was published in Johnson's Russia List 2006 - #41, 13 February 2006.

Mr. Bremmer argued that the Goldman Sachs economists who coined the term "BRIC" should have omitted Russia from the group. He claims that Russia’s growth is limited by factors that are different from those in Brazil, India or China.

Mr. Bremmer places the blame for this on Vladimir Putin, who squandered Russia’s advantages in order to “consolidate state control of Russia's domestic politics and to restore Moscow's international influence.”

I would argue that the Russian government under Putin is no more guilty of squandering opportunity or economic manipulation than is the Chinese government under Wen Jiabao or Zhu Rongji. If Russia should be excluded from the BRIC group under Mr. Bremmer’s rubrics, China certainly should.

Mr. Bremmer claims that Russia did not "maintain policies and develop institutions that are supportive of growth." Clearly, China has not taken steps to strengthen “growth-promoting institutions” either. Bank reform languishes (estimates are 50% of loans are non-performing), there is poor commercial law enforcement, industrial R&D is uninspiring and capital markets remain underdeveloped. China’s current economic surge is based on a cheap labor pool and government tax incentives for foreign companies- how is this more stable than an oil-based economy?

Mr. Bremmer states that the Kremlin ignores the need to diversify the economy by enabling entrepreneurship and investment in non-energy-related research and development. Yet, Beijing has not “enabled entrepreneurship” any more than he claims Russia has. Entrepreneurial opportunity is still limited to the very few wealthy party members and their friends that have access to the necessary capital. Investment is still dictated by the government and is not particularly well diversified: spending on China’s military and technological aims is given top priority, everything else comes second.

According to the Eurasia Group president, Russia's unemployment rate remains in double digits, and the state-favored energy sector accounts for too few of Russia's jobs. However, China’s unemployment rate is at 10% in urban areas (the richest) and moderate estimates of rural unemployment are 20%. I doubt those out-of-work farmers will be employed by a bloated military-industrial-technology complex. Where is Russia’s disadvantage here?

Mr. Bremmer criticizes Russia’s lack of, "openness to trade and foreign direct investment.” Yet, China has erected barriers to trade and limited capital flows where they are in the government’s interests. China still has not fulfilled WTO-entry promises to end protectionism. Ask The North Face or GM if they feel that politics hasn’t trumped their profits in China. Does this send an upbeat message to international investors (especially when they have limited access to Chinese companies)?

Mr. Bremmer claims that “globalization” is the factor driving “economic development and expansion” in China.

Foreign Direct Investment is driving economic growth in China. Institutional development is still a long way off. Right now, international investors are so bullish about China’s future market potential, that the lack of basic economic institutions (like, enforceable property rights) is overlooked. This is not a healthy base for long term economic development. I don’t see how China has a clear advantage over Russia here.

Mr. Bremmer concludes that Russia treats foreign investment as a risk rather than an opportunity and therefore should be considered in a different category from Brazil, India, and China.

China’s opaque investment policies and law show at least equal reservations about “globalization” as Russia has shown. (Try to get your money out of China.) The Chinese government is famous for the “centralized control of investment flows, resources, and political authority.” Chinese officials do not even feel the need to “say the right things” about democracy and no tangible results have come from their sweet words on transparency, rule of law, and market access. These facts are obvious to anyone who has followed the situation in China over the last 10 years.

I believe Mr. Bremmer’s criticism would be better directed if he suggested a more cautious approach to investing in any of the BRIC economies that show the worrying symptoms that China and Russia share. Singling out Russia for criticism smacks of the “blame Russia first” attitude that was eloquently outlined by Ambassador Ushakov in his Wall Street Journal article on Feb 13th 2006.