April 2008

The so-called BRIC countries — Brazil, Russia, India and China — are widely expected to evolve into world-leading economic powers during the next few decades.

"They occupy this very nice niche of developing countries that, while not fully industrialized, are definitely well-developed, with very large and relatively broad economies," said James Pressler, second vice president in Northern Trust's Country Risk Group.

Because they are lumped together under one tidy label, you might think Brazil, Russia, India and China represent a unified economic block with similar situations, goals and political challenges. You'd be wrong.

"All the hype about the BRIC countries is, in large part, just hype," said Victoria Marklew, vice president in Northern Trust's Country Risk Group. "To figure out which economies will continue to be big, we need to study their underpinnings in terms of financial risk and the political terrain."

Analysts assess each member of the BRIC "bloc" individually, weighing the economic, political and policy factors that could affect their credit instruments, currency and equity markets.

Brazil's economy mirrors the United States'
For instance, Brazil's stock market and currency often shadow those of the United States, which is the biggest single buyer of Brazil's metallurgic and agricultural exports. But if Brazil expands its sugar cane exports to other nations seeking ethanol, how might that affect its U.S. relationship?

India continues benefiting from early 1990s economic reforms that spawned a competitive business environment and burgeoning middle class. Yet one quarter of India's population still lives in poverty, and its bureaucratic system moves more slowly than, say, China's command state.

And Brazil and India are democratic governments that tend to let prevailing market forces operate independently, providing some transparency. Not so with Russia and China. Russia has enjoyed a surge in living standards — but those have been limited to political insiders and the newly wealthy urban elite. Its government in transition also touts efforts to loosen its grip on segments of the economy. But as long as oil profits flow, Russia has little impetus to fix its crumbling infrastructure or retool its banking system.

"Russia floats on this huge lake of oil...but has tremendous problems politically," Marklew said. "In some ways, it is riskier to invest in Russia than in China."

In China, a real estate and stock market boom saw share prices at the Shanghai Stock Exchange nearly double last year alone.

"The growth was so rapid that it reminds me of the Nasdaq in 1999," Pressler said.

Now, as markets worldwide erode, assessing China's downside risk is especially difficult, given the opacity of China's state-run economy. China's desire to project a harmonious front could obscure the extent of any trouble, leading the government to quietly shift the cost burden to other economic segments.

Weighing risk vs. reward
Despite their growing cache, BRIC countries still deserve close scrutiny of their individual long-term outlooks to appreciate the true risks versus potential rewards.

"When there's a global economic or financial crisis, some countries weather it better than others," Marklew added. With emerging markets, "you've got to have an iron stomach and know what you're getting into."