Russia and Brazil are struggling. Trouble has been brewing for a while. High inflation and big currrent account deficits meant exports were too cosrtly; their currencies topped the list of those likely to tumble. The Russian rouble, has fallen far. The central bank scaled back its expensive and futile efforts to prop the currency up, leaving it floating almost freely.
Brazil and Russia are in really bad shape. The largest emerging economies after China, together they have the heft of Germany. In both countries the currency is sliding. The real hit new lows in November after data revealed the budget deficit reached a record in September. The rouble is dropping faster, down 27% in a year and 10% in the past month. Both face stagflation: bubbly prices coupled with growth rates likely to be below 1% this year.
Some of their pain comes from abroad. Brazil’s main trading partners are slowing (China), stagnant (the euro area) or tanking (Argentina). Not only are export volumes down; the prices of things Brazil sells—iron ore, petroleum, sugar and soyabeans—are dropping as global demand falters. Russia is feeling the slowdown too, as energy prices fall. It is one of the world’s biggest producers of oil and natural gas. Its big five energy firms employ close to 1m workers. Exports worth $350 billion flowed through pipelines to Europe and Asia in 2013. As prices drop, Turkey’s gain is Russia’s loss.
But Brazil and Russia’s problems have domestic roots too. Since the 1990s Brazil has tended to aim for a primary surplus (before interest payments) of close to 3% of GDP—enough to begin reducing its debts. But Dilma Rousseff, the newly re-elected president, has played havoc with Brazil’s public finances.
Russia’s self-inflicted wounds are even more severe. Vladimir Putin’s invasion of Ukraine led to American and European sanctions that have been gradually tightened since they were imposed in July. The rules limit Russian firms’ access to American debt markets. They also ban American firms from selling kit or advice to Russia’s energy giants. This prevents western oil firms from helping Russian ones develop oil- and gasfields. Mr Putin’s retaliation—import tariffs on Western goods—has pushed up domestic prices further.
There could be worse to come. The drop in commodity prices looks set to last. Meanwhile, in order to crimp inflation and stem the slide in their currencies the central banks in both countries raised their rates last month: they stand at 11.25% in Brazil and 9.5% in Russia. At the same time, worried finance ministries are keen to bolster their books. In Brazil, fuel-tax hikes are being mooted, and tax breaks on car purchases may be scrapped. In Russia a rule that caps the budget deficit at 1% of GDP may require austere fiscal policy.
Banks could prove vulnerable as public-sector spending cuts hit incomes and high interest rates make loans hard to service. In Russia things are particularly bad: non-performing loans are rising, and savers are draining the banks of roubles.
Bond markets could be another flashpoint. Both have big foreign-exchange reserves: despite losing around $100 billion in the past year, Russia has close to $370 billion. But they also have big dollar debts that become harder to serve as their currencies fall. Pessimists see tumbling currencies, bond-market routs and even bank runs.
