Two of the emerging world’s largest economies are mired in economic crisis, and their ability to recover may depend on the quality of their democracies;.
On the face of it, neither the Russian nor Brazilian economies are much to write home about. Both have suffered severe currency devaluations, runaway inflation, and a collapse in output and purchasing power in recent years.
However, economists are uniformly more optimistic about the ability of Brazil to bounce back—and that’s because of the very different ways in which corruption cases in the respective countries are playing out.
In Moscow this week, police found $120 million in cash at an apartment registered in the name of the sister of Dmitry Zakharchenko, the deputy head of the Federal Interior Ministry’s central directorate for economic security and anti-corruption. He has been arrested on suspicion of abuse of power, obstruction of justice and bribe-taking. Meanwhile, the seemingly well-documented assertion from anti-corruption blogger Alexey Navalny that Prime Minister Dmitry Medvedev has been living the high life in a luxurious private compound on the Volga (set in 80 hectares of land), complete with three (sic) helipads and its own wireless masts, financed by ‘charitable donations’ from a private oil and gas company, has provoked no response from law enforcement.
In Brazil, by contrast, congress has removed from office the elected President, Dilma Rousseff, and police have charged her predecessor Luis Inacio Lula da Silva, with corruption and money-laundering, while a new government under President Michel Temer prepares a radical change in economic policy.
The implication is clear: Brazil, a chaotic but real democracy, is capable of taking on its most entrenched interests and changing course; Russia, where there is no effective political competition, is not.
“Some people may be delighted to see certain corrupt officials go to jail but that doesn’t mean that the investment climate is improving,” says Sergey Guriev, chief economist of the London-based European Bank for Reconstruction and Development.
Indeed, it’s hard to argue that Brazil has had any economic benefit from this political catharsis just yet: gross domestic product fell for the ninth straight quarter in the three months to June, and was down 3.8% year-on-year. The jobless rate hit another multi-year high of 11.6% in July, while inflation ticked up to 8.9% from 8.7%. But the signs of change in the air are clear: earlier this week, the government published a list of assets for privatisation, from airports to railways and oilfields, with a view to raise $24 billion and give the private sector more freedom to run the economy.
As Craig Botham, an emerging markets economist at investment firm Schroders in London, argues, investment has already started to pick up in anticipation of better times.
“That’s very encouraging and that’s what will lead the recovery in Brazil,” Botham says.
By contrast, Russia’s privatisation program has gone nowhere this year: the government hasn’t even been able to settle infighting that would allow it to complete the sale of oil company Bashneft to its own favored bidder, national champion Rosneft.
For now, Russia’s economic indicators are, if anything, better than Brazil’s: it’s expected to return to growth in the third quarter after a mere five quarters of contraction, inflation is lower at 6.9% and wage arrears (a better measure of slack in the labor market than the jobless rolls) are down over 20% since April. The country’s oil companies, mostly controlled by the state, are pumping more than ever before, and farming output has increased (if only fitfully) as bans on EU and U.S. produce have allowed domestic producers more opportunities. Standard & Poor’s raised the outlook on the country’s sovereign debt to stable from negative Friday on the basis that external condition (i.e. oil and gas prices) are unlikely to get any worse.
But a structurally lower price of oil–the biggest source of budget revenues–means that there is less in tax revenue for the government to recycle through the economy. The Washington-based Institute of International Finance notes that real spending on social security has fallen 3% and spending on education has fallen 4% as the government kept the increase in pensions and wages below the inflation rate. The government had budgeted for an average price of $50 a barrel, but received only $42.70/bbl through August (Russia’s benchmark oil blend, Urals, sells at a discount to international blends because of its lower quality).
Even so, the deficit has widened, forcing the government to run down the ‘rainy-day’ fund it accumulated in the first decade of the year. By the end of next year, the so-called Reserve Fund will be exhausted as the budget deficit widens beyond 3% of GDP, the Finance Ministry estimates.
True, the Kremlin will still have the assets of a second sovereign wealth fund (the National Welfare Fund) to draw on, but as the EBRD’s Guriev points out, even that fund will likely run out in 2018 without a major increase in oil prices, and the government will by then have drawn down one of the few sources of long-term investment capital in the country.
Budget deficits matter: although Russia’s is smaller than Brazil’s, it has less flexibility: Moscow remains shut out of international capital markets by western sanctions, and President Vladimir Putin’s governments have generally avoided the embarrassment of asking for credit from their own people, afraid of what the answer might be. To start borrowing domestically now would risk driving interest rates for businesses and mortgage borrowers sharply higher.
But as long as there is still money left in its sovereign wealth funds, it seems that the economy won’t put enough pressure on Moscow to change its economic course. And knowing that–why bother voting this Sunday?
