Backfiring BRICs

Russia harms the BRICs and adds to global risks

BRICs? Perhaps it should be shortened to BICs. Russia's intervention in Ukraine is a big blow to the Russian economy and also to other embattled emerging economies. It's not good for the global picture either, as the redirection of funds makes developed markets more bubbly and vulnerable.

The damage begins in Russia itself. The Russian rouble's drop provoked a 1.5 percentage point rise in the central bank's interest rate to seven per cent. That will weigh on an already weak economy. Capital flight will be exacerbated and investor confidence shaken, not just in the short term.

The damage spreads. Boston-based EPFR, a fund-tracker, reports that $18.6 billion flowed out of emerging-market equity funds from January 1 to February 5, more than the $15.2 billion outflow in the whole of 2013. Russia's manoeuvres in Ukraine may frighten more investors.

That's bad for other emerging economies. Though India's rupee has firmed recently, it and Brazil's real have fallen a long way in the past year, obliging increases in policy interest rates. Brazil's interest rate is now 10.75 per cent and only 1.7 per cent GDP growth is expected this year. The government's budget deficit rose to 3.6 per cent of GDP in January, the highest since 2009. Brazil disappoints.

In China, credit growth and exchange-rate manoeuvres trouble investors, as do slowing exports, down by 1.6 per cent on a year earlier in January and February. EU imports from the rest of the world fell six per cent in 2013. The BRICs can no longer rely on the export engine. And, prices of commodities, important to many emerging economies, have waned.

Soft emerging economies are in turn a drag for developed ones. But EM woes also offer a financial windfall. Mario Draghi, the European Central Bank president, acknowledged last week that funds migrating from EMs helped explain declining yields on Euro zone periphery debt. Developed equity markets, meanwhile, bubble.

The problem is that EM weakness is negative for global growth and profits in developed-country companies. Asset price bubbles loom when markets rise while growth is slow. Russia has delivered an untimely kick to the BRICs and the world.