World Economy

If Economy Stalls, Russia, Brazil Will Quit BRICS

If Economy Stalls, Russia, Brazil Will Quit BRICSIf Economy Stalls, Russia, Brazil Will Quit BRICS

Brazil and Russia are set to drop out of the BRICS group by the end of the decade if their economies continue to stall.

Russia has seen its economy battered by falling oil prices since mid-2014 and the government has predicted it will slide into a recession this year, Bloomberg reported.

Brazil has also seen its economic expansion slow down and is expected to grow by less than 1% in 2015.

 Jim O’Neill, a former Goldman Sachs economist who coined the term “BRIC” for the emerging market-economic powerhouses, believes that Brazil and Russia have fallen behind India and China.

“I might be tempted to call it just IC or if the next three years are the same as the last for Brazil and Russia I might in 2019!” O’Neill told Bloomberg.

“It is tough for the BRIC countries to all repeat their remarkable growth rates,” he added. “There was a lot of very powerful and fortuitous forces taking place, some of which have now gone.”

However, O’Neill predicted that the group would regain momentum and become an increasingly dominant force in the world economy.

While Russia has suffered from the drastic oil price drop, net importers India and China have benefitted and are both expected to post strong economic growth figures in 2015.

Cheap gasoline may be a blessing for drivers and a boon to the US economy, but it is wreaking havoc with oil-producing countries around the world.

Perhaps none has struggled as much as Russia, where the fall in oil prices has set off a cascade of economic crises and left the country flirting with a prolonged recession.

  Budget Crisis

To pay for education, the military, pensions, and other core government services, Russia doesn’t just rely on taxes. A huge amount of revenue comes direct from state-controlled oil companies. So as the price of oil drops, government revenues collapse and budget deficits pile up.

Oil has to be priced around $100 a barrel for Russia to balance its budget. At the current price of roughly $50, the government simply isn’t taking in enough money to pay for promised services.

Oil is bought and sold in dollars. So after Russian companies sell their oil on the international market, one of the first things they do is convert those dollars to rubles. That way they can pay local salaries and conduct business inside of Russia.

When the price of oil falls, those companies earn fewer dollars, which means they have less money to convert into rubles. And rubles obey the same laws of supply and demand that govern everything else you might buy or sell: If companies have fewer dollars to convert, that means there’s less demand for rubles, and the value of the ruble goes down.