BRICS – More than just an acronym
4 September 2017
China Trade News
By Riccardo Orcel, Deputy CEO of VTB Group
Riccardo Orcel, Deputy CEO of VTB Group, Head of VTB International, looks at how the close relationship between Russia and China could be a model for closer integration and co-operation between the BRICS nations.
It was back in 2001 that former Goldman Sachs economist Jim O'Neil first coined the term “BRICS” to describe the economic potential of Brazil, Russia, India and China and predicted they would go on to become among the four most dominant economies by the year 2050.
During the 16 years since 2001 there have been various ups and downs but the BRICS countries (that were expanded to include South Africa in 2010) have experienced dramatic progress and there has never been a better opportunity for increased cooperation among the BRICS countries than now.
The latest global PMI data, which is a timely assessment of activity trends in the manufacturing and services sector, features the best two quarters of growth in two years. Forecasts from the IMF and the World Bank continue to predict a recovery in the global economy largely driven by stronger growth in many EM economies.
Countries like Brazil and Russia are recovering from having to adjust to the end of the commodity super-cycle.
The World Bank in its June forecasts envisages real GDP growth across Emerging Markets generally of 4.1% this year versus no more than 2% in the US, UK and Eurozone.
While the BRICS acronym began as simple acknowledgement of the growing importance of emerging markets economies generally, the component countries varied in their economic and financial structures. Now, we should start to think less of emerging market economies and financial markets as a homogeneous bloc but rather a grouping with its own country-specific characteristics.
China and Russia are providing a good example of how this co-operation can work, against a supportive global economic backdrop. These two countries have been accelerating their integration with closer ties and joint initiatives. There are vast opportunities in the development of China's ‘One Belt, One Road' initiative and the prospect of expanding opportunities in infrastructure, as well as agreements to grow closer co-operation in agriculture. For Russia and for VTB in particular, Asia's importance and outward focus comes as no surprise and in the first half of 2017 trade between China and Russia surged 26% as the Russian pivot east has produced the desire for bilateral trade, cross-border initiatives and increased corporate deal flow.
VTB identified this opportunity early and has been present onshore in China since 2008 and has an important branch in Shanghai, as well as opening an office in Hong Kong for VTB Capital in 2011. We are the only bank in Russia with a financial license to conduct banking operations in China. China's economy has grown tremendously and the country has rapidly created a deep capital market. VTB's development in China has kept pace with this market growth as we look to support cross-border investment flows. We have participated in over 20 bond issues and 5 M&A deals, as well as facilitating closer co-operation by financing Chinese companies in Russia and engaging in commercial agreements with CNPC, Alibaba and others.
India is another of the key markets where VTB see opportunities to continue expanding its business. The IMF in its latest update of economic forecasts published in July 2017 sees the Indian economy expanding 7.2% this year followed by an acceleration in growth to 7.7% in 2018. The economy has handled the impact of demonetization and replacement of high-denomination banknotes in November 2016. Domestic demand is expected to remain strong supported by ongoing policy reforms and the government's economic reform agenda aimed at easing supply constraints and supporting private investment.
In India VTB Capital are well known for advising on the take-private of Essar Energy Plc in a $2bn deal and the sale of Essar Oil in a recent $12.9bn transaction. We have also helped finance a number of Indian firms and are currently working on several projects across a number of sectors. VTB Capital was ranked #1 in Completed M&A by Thomson Reuters for the first half of 2017.
India has also traditionally been VTB's largest market for supplying gold and silver - since early 2017 Indian counterparts have bought circa 15 tonnes of gold and 130 tonnes of silver. Given the current dynamics we are optimistic that, by the end of this year, gold sales will amount to at least 20 tonnes, and at least 300 tonnes of silver.
Our objective is to help enable closer integration across the BRICS. This is often by working with Russian clients keen to attract investment or enter BRICS markets with the right introductions and financing. From a Chinese, Indian, South African or Brazilian perspective, VTB Capital is well placed to introduce clients to the opportunities Russia can offer to investors.
Many emerging market economies are in a much better debt position than some developed market regions. In 2017, emerging market government debt stands at 49% of GDP compared to 107% for advanced economies. Russia has one of the lowest general government debt-GDP ratios at 17%. Of course emerging market economies are not totally insulated from what goes on in the rest of the global economy and remain vulnerable in part to any adverse monetary policy spill-overs from both the US, as the infamous ‘taper tantrum' in 2013 made clear.
However, a softer US dollar and a Fed that is normalizing financial conditions only gradually are allowing emerging market equity markets and economies to perform well. Some markets are reaching new highs, as foreign portfolio inflows rotate away from over-valued US equity markets being led by a narrowing group of sectors dominated by tech stocks.
A natural beneficiary of this would be Russia, and even more free trade between other BRICS members would go a long way towards creating a healthy global economy, which requires that free trade; as well as open markets and a commitment to sustainable growth.