A Tale Of Two Countries In Crisis
Nov. 8, 2017
Russia and Brazil have a lot in common. It’s not something to brag about.
Both are blockbuster commodity exporters. They have a penchant for big government. Even their airports have that same doorbell chime before public announcements are made. Both are dealing with a serious political crisis, and corruption is endemic in the system. One is in slightly better shape than the other.
Ten months ago, I traveled to Brazil for a month, visiting my old home in Sao Paulo, and saw an entire region reeling from back-to-back years of recession and political crisis. Brazil was a complete mess, I wrote.
For the political class, it is even more of a mess now. The country’s president, Michel Temer, is without a doubt the least popular leader in the Americas, if not the whole world. Brazilian life has deteriorated in cities like Salvador and Rio de Janeiro where violent crime is rising. Last year was the worst year on record for homicide.
Over 14 million people are out of work. Unemployment is near an all-time high at 13.6%. Brazil’s crisis is a crisis created by its political establishment. Its biggest state-run company, oil giant Petrobras, and its private contractors colluded in milking the government for private gain and political influence. Brazil has been greatly embarrassed by this.
“The problem with Brazil is not the Brazilians, it’s our government. It is embarrassing,” says Patricia Gusmao Gouvea, a part-time school teacher in Campinas who used to work as a full-time sales operations analyst for IBM until it was finally sold to Lenovo in 2014. A single mom with a son in college, she thinks Brazil is not getting better and she blames the political crisis for it all. “Companies are still not hiring,” she says.
Two weeks ago, I was in Russia. It, too, is reeling from back-to-back years of recession. Protests have erupted over the last 12 months in defiance of United Russia, the ruling party of Vladimir Putin that those activists deem corrupt to high heaven.
Still, Putin is way more popular in his home country than Temer is in his. Temer is not running for president next year. Putin is. He has not formally declared.
“The odds of him not running are slim,” says Alexei Kudrin, former Finance Minister when Putin was Russia’s Prime Minister. He is now a professor at the University of St. Petersburg and runs the Civil Initiatives Committee, a Russian NGO.
If Washington, London, Berlin or Paris had to pick between the two presidents, Temer would win in a landslide. Ask Brazilians who’d they prefer, and they’d probably tell you Putin.
Like Brazil, Russia’s state-run oil and gas companies are in trouble. They are sanctioned by the U.S. and Europe. Unlike Brazil, Russian millionaires and billionaires (usually referred to as “oligarchs”) are constantly sullied for having dealings with President Donald Trump, even if those dealings occurred 10 years ago. Multinational companies like Kaspersky Lab are trying to protect their business here and may end up losing massive market share (or folding) now that stores have pulled their cybersecurity software from the shelves on allegations that it helped Russia’s government spy on the U.S.
American Senator Benjamin Cardin says Russia committed an “act of war” against the U.S. during last year’s election. In the summer, Senators like Cardin voted with near unanimity to block certain business deals with the Russians in their all-important oil and gas space.
Russia has been greatly embarrassed by this crisis.
“It’s like we Russians are an international virus,” says Maria Vavilova, a 23-year-old from Moscow. “Come near us, get this disease. Really, I feel we are the black sheep of the world.”
Which of the two is in better shape? There are only two differences, and both are measurable.
Russians feel victimized by the world.
Brazilians feel victimized by their government.
To the locals, only one is in crisis because of its own doing. That’s the psychological difference, at least. The other is a question of money and government finances.
Beating The Odds?
Thanks to global liquidity and some solid central banking by Brazilian and Russian monetary policymakers, the two countries are coming back to life. Only, Russia has more of a spring in her step, with a badly sprang ankle. Unemployment is just around 5%. By comparison, Brazil is hobbling along on crutches, with one of the crutches smaller than the other.
While their economies are improving, the market prefers Brazil.
Nine Brazilian companies did an IPO this year, raising $4.87 billion. Nexa Resources listed on the NYSE in late October, raising $496 million and coming in at the lower end of the pricing range.
Only four Russian companies did an IPO this year, raising around $2 billion. Commodities tycoon Oleg Deripaska listed his En+ Group in London last week, accounting for nearly all of the money raised for Russian entities this year at $1.5 billion. It too came in at the lower end of the pricing range.
You can’t compare inflation between them, because Brazil is notoriously worse, historically speaking. Inflation is coming down in both countries, and so are interest rates. Brazil interest rates are only slightly higher than Russia’s and not indicative of any particular strength or weakness in the economies. Although politics and political intrigue is more dramatic and sexy, it is, after all, “the economy, stupid”, that ultimately drives the electorate. If Brazil’s economy was growing, Temer’s approval rating wouldn’t be 3%.
The dollar is weaker against the ruble, 3.6% weaker this year to be exact, while the Brazilian real is basically flat against the dollar this year. The ruble owes its strength to oil. That the Brazilian currency is steady is actually good news.
The bad news is that Brazil’s economy isn’t growing much. Second quarter GDP rose 0.3% from a year ago. IHS Markit is forecasting a meager 0.6% growth rate for Brazil this year.
Russia’s second-quarter GDP rose 2.5%. This year’s growth rate is expected to come in at 1.7%, according to estimates by VTB Capital. This is impressive for Russia, considering its banks can’t borrow cheaply from Europe. Not to mention the fact that the country is currently gutting dozens of private banks for failing to meet new, strict capital requirements set by the central bank.
“My impression on sanctions is that the main impact has been on borrowing,” says Alexander Isakov, an economist with VTB.
Russia’s consumer confidence tanked when sanctions hit in 2014, but has rebounded. Russia, in other words, is doing more than muddling through. Consumer confidence is better than it is in Brazil.
Brazil may only look like it is muddling through, however.
Manufacturing PMI is about the same: 51. Retail sales for both are up 3% year over year, though Russia is forecast to see bigger gains over the next four quarters, according to Trading Economics.
Brazil is worse off from a government pocketbook perspective. Their account deficit is around -8%, while Russia’s is -3.7%. Russia’s is seen falling to -2% by this time next year; Brazil: -4.3%.
From an investing standpoint, there is more domestic political risk in Brazil than there is in Russia. Russia’s political risk is from the West. You have to watch a lot of moving targets to get Russia risk right.
In Brazil, domestic politics is easier to predict. Nobody knows who will be Brazil’s president. Elections are next October. If polls are to be trusted, former president Luiz Inacio Lula da Silva will win. The only caveat is that he is under investigation for influence peddling and being one of the ringleaders in the Petrobras contract-rigging scheme.
“We don’t know who the candidates will be, but even if Lula gets convicted, there are so many ways to interpret that in the courts that I can see it being a mess up to the last minute,” says Andrea Murta, the U.S. director of Brazilian legislative and regulatory news and information service, Jota. She thinks Temer has spent all of his political capital in avoiding another impeachment vote in the lower house. His predecessor and former colleague, Dilma Rousseff, was impeached last year.
Like Russia, don’t expect any blockbuster reforms.
Russia votes next spring. If Putin runs, he wins. Everybody knows this already. The political risk in Russia is dependent on Congressional appetite here. If the majority want to punish Trump for his ties, both real and imagined, to Russian oligarchs and government proxies, we could have sanctions on things like Russian government bonds and bans on owning equity of sanctioned companies. This was already stipulated and threatened by the latest sanctions update.
If Putin wins, it’s status quo governance.
If Lula wins, it is not a return to the good ole days of the early 2000s when he served two terms.
“An eventual Lula victory would not mean that his Workers Party has the power they had when he won last time,” says Murta. “It’ll be a very divisive politics in Brasilia and I don’t think he’d even have the ability to govern or finish his term because of the courts. That would be insane for Brazil. It’s a scenario I would not even want to imagine.”
The good news is, there’s always China and India…
First photo legend: Together again? A picture from 2007 of Vladimir Putin and Luiz Inacio Lula da Silva, who may very well be Brazil’s president for a third time despite the worst-ever political scandal in the country’s post-dictatorship history. (Photo by DMITRY ASTAKHOV/AFP/Getty Images)
Second photo legend: Brazilian President Michel Temer’s approval rating is 3%. When the margin of error is included, it can be as low as zero. He is the least popular leader…in the world. (Photo by EVARISTO SA/AFP/Getty Images)
First Chart Legend: The iShares MSCI Brazil ETF: losing momentum…. STOCKCHARTS.COM
Second Chart Legend: Twinning! Russia loses momentum. Both Brazil and Russia ETFs are not as hot as China, India and the greater MSCI Emerging Markets Indez fund. STOCKCHARTS.COM