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Stacking the BRICs: An Interview with Kenneth Rapoza of Forbes

January 8, 2016

by J. Andrew Zalucky

BRICS_heads_of_state_and_government_hold_hands_ahead_of_the_2014_G-20_summit_in_Brisbane,_Australia_(Agencia_Brasil)

At the dawn of the 21st century, the term “BRIC” entered the world’s political and economic vocabulary. Shorthand for Brazil, Russia, India and China, the term came to signify the emergence of countries that would challenge the political, economic and perhaps even military dominance of the developed west (e.g. the US, UK, France). In the last 15 years, through the War on Terror, the Euro crisis and other geopolitical flashpoints, these countries have played an increasingly important and even disruptive role on the world stage.

But they’re importance also pertains to areas outside of political power struggles, such as investing and commerce more broadly (though these certainly have their own political implications). As developing economies, these countries have proven to be an enticing area to explore, both for businesses and individual investors. Kenneth Rapoza writes about business and investing for Forbes, with a concentration on the BRIC countries (especially Brazil).

I originally met Ken at a writer’s conference in New York back in 2013, when he was speaking on a panel about reporting from (and living in) foreign countries. Though his focus is more toward finance, the realm of politics and power is never too far off, which has made for several insightful interactions on Twitter. This has been especially true with all the news coming out about FIFA, Ukraine and a myriad of other stories. So with that in mind, Ken was cool enough to answer some questions regarding recent BRIC-related events:

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Just to give readers some background, why are you the “BRICBreaker?” In other words, what drew you to focus your attention on countries like Brazil, Russia, India and China?

Here’s how that came about. In March 2011 I had been out of Brazil for exactly a year and, like all of us, I needed to earn my daily bread. I heard Forbes was looking for some finance writers for the magazine and website. They wanted me to write about Brazil, but I thought…hmmm, that doesn’t seem all that interesting to American readers. I need to broaden this out. I mean, I know Brazil has billionaires and all, but I don’t know them personally and wasn’t going to get insider access to their homes and get shown their fancy cars as they fill me in on their business strategies. So my editor and I came up with the BRIC countries. At that time, the online guys were given a column name (like “Private Parts” for privacy policy guys), and I chose BRIC Breaker.

It was a play on what was arguably the first ever globally popular cell phone game, and it had a news feel to it too. I was breaking news about the BRICs, introducing readers to new fund managers, new business, and writing about the breaking news of the day in those countries as I saw fit. I can pretend I had amazing foresight and tell you, “Oh, BRIC Breaker was a play on the old video game and also expressed my thoughts on how the BRICs were breaking.” Those titles are meaningless now. My page on Forbes.com doesn’t have a name. Only my Twitter handle does.

To bring the focus to Russia specifically, what do you think President Obama’s primary failures and successes are in relation to our policy in Ukraine?

I’m not sure the U.S. really has a policy in Ukraine other than to provide the bailout loan. There has been chatter about providing more military equipment and weapons, but as far as I know it has not gone beyond congress. There is a lot of money on the table, like around $300 million. I don’t watch the Russia-Ukraine story so much as a troop movement issue. I’m not looking at Russian tanks rolling across the boarder or American Humvees and lethals. I look at it more from a Russian angle first and foremost because that is my coverage area, not Ukraine. On the Russia side of the story you have sanctions because of Ukraine.

“The Russian government is never going to kowtow to the West. There’s too much bad blood that goes back centuries.”

If Washington’s goal was to punish Russia without being too heavy handed, then sanctions have succeeded. These were “sectoral” sanctions, not sanctions against the whole economy, so Russia was not blocked off from the Western world. That being said, its most important industries were – finance and energy. Washington (and Brussels in particular), definitely inflicted economic harm on Russia with those sanctions. But I don’t think the Russian government is crying over it. They’re more likely to tout how well they’ve handled it, despite plenty of evidence to the contrary.

Photo: Newsweek

Photo: Newsweek

The Russian government is never going to kowtow to the West. There’s too much bad blood that goes back centuries. That is definitely true between Russia and eastern Europe and Russia and Germany. I’m not a foreign policy expert. I’m a business and finance reporter. But at first blush, I would say that Obama is not very imperial-minded. That’s got him brandished as a wimp. If you remember, George H. W. Bush was branded a wimp, too. Despite being CIA, he wasn’t imperial-minded either, insofar as he wasn’t interested in kicking hornets nests and thinking they’ll land on our flowers, make friends with honey bees and make our gardens grow. He kicked Iraq out of Kuwait, but didn’t steamroll into Iraq for regime change. Then we got his son, George W., and he wasn’t a wimp, was he? And look at what happened in the Middle East as a result of these geopolitical adventures and regime change. Is Ukraine one of those? I don’t think so. I know the conspiracy wires will say otherwise. “Soros wants this” or “Biden’s son wants that.” There’s probably some truth in it, maybe a lot of truth. But I don’t think it tells the whole story, because there are way too many moving parts. I would not call Obama’s policies in Ukraine a failure. Washington shouldn’t have to save Ukraine. If it were Mexico, Colombia or Brazil, sure. These are in our sphere of influence. Ukraine is not. I think if Obama makes overtures for Ukraine to join NATO, that would be a big blunder; a poke in Putin’s eyes. For what? I don’t think it’s worth it. But that’s my opinion. I am pretty sure I don’t stand alone on that one.

Seymour Hersh recently published a story in the London Review of Books about the American Joint Chiefs defying the administration and providing intelligence to Bashar Al-Assad through back-channels. Essentially, it seems most of the military leadership disagrees with the White House on working with Russia. Is this what you’ve been hearing as well?

My takeaway from that article was that the Joint Chiefs of Staff think regime change is a complete and utter failure. It is hard to prove them wrong on that one. I don’t talk to military types, so I defer to Hersh.

To turn further east, your story on the growth of the Chinese bond market was very intriguing. What do you see as the future of the political system in China in relation to its economic structure?

There’s so much going on in China it’s hard to respond in a few short breaths. China, like Russia, does not trust the West. But unlike Russia, it is more of an economic machine than a political one. China has closer historic, cultural and economic ties with the U.S. than it does with Russia, even though it shares a border with the latter. The future of China is more Western, not anti-Western, and that means – as everyone in the market knows – a gradual opening of its financial system. What does that mean to the layman who is just intrigued by international power moves and not really interested in investing? It means that China – as the world’s number two economy — is going to become a place where rich Chinese are increasingly allowed to invest outside of China. That means more Chinese money flowing into the U.S., Europe and elsewhere. It could flow into real estate – as we have seen. It could flow into American physical assets like businesses. Or it can flow into American stocks and bonds. Going the other way, it means that Americans and every other country can invest in Chinese stocks and bonds. That means more demand for those products, which pushes up prices, making China richer, along with its investors (in theory, of course, because investors also lose money).

“I liken it all to that scene in the latest Muppet movie, with the evil Kermit and his human sidekick played by Ricky Gervais. When the credits roll on the world’s most important currencies and investment destinations, it will be the United States and then, “space bar, space bar, space bar,” China.”

Right now there are quotas for how much foreign investors can buy Chinese stocks and bonds. Those quotas will increase and/or they will add more investment firms to those quotas. So if you have an account with HSBC, for example, and want to buy a 10 year investment grade bond paying 4.5% interest in China’s currency, you can do so through HSBC. Rich institutions and individuals want to diversify their assets and so China is becoming an asset they can diversify into. Plus, this is a huge asset. Think about what China is: the second most important economy in the world. I know a lot of guys will say that China will replace the U.S. one day as the new number one, and that central banks of the world will want to hold more Chinese Yuan than American Dollars. I liken it all to that scene in the latest Muppet movie, with the evil Kermit and his human sidekick played by Ricky Gervais. When the credits roll on the world’s most important currencies and investment destinations, it will be the United States and then, “space bar, space bar, space bar,” China.

To come to the country where you spend most of your time: Brazil. What is the root of people’s dissatisfaction with president Rousseff? Is there a viable political alternative outside the Worker’s Party?

Knowing Brazil, the entire Dilma hate-fest is a media manufactured one, whereas Brazilians don’t want to feel left out of the party. It all feels insincere. I know as many people in Brazil who hate Dilma that like her, or who feel bad for her.

Is she the greatest leader in Brazil? No. She is a nightmare. I’ve spoken with people who have worked with her on presidential committees, and they say she is stubborn and hard to work with. This is why Joaquim Levy, the Finance Minister, was asked to leave, or resign. Whatever it was, it is pretty obvious that he and Dilma could not work together. This new guy was chosen because he can work with Dilma.

“Is she (Dilma) the greatest leader in Brazil? No. She is a nightmare.”

I don’t want to talk insider baseball, but consider this for a second: in 2013, we had the “Brazilian Spring” as they called it down there and in the media. I called it that too, because what else do you call it? We like to give things cute names. What triggered the Brazilian Spring? What triggered the Brazilian Spring was a five centavo (roughly two cents) fare hike on public transit in Sao Paulo city. College students protested. Police got heavy-handed. They pepper sprayed. They clubbed. Brazil looked like it was out of control, just a when the World Cup was coming to town. Protests continued…and what were they about? Dilma? Nope. FIFA. People were protesting FIFA corruption in Brazil. All of this was genuine because Brazilians are sick of paying a lot for something and getting nothing in return, right? Where as Dilma’s popularity rating? It was in the 60s, 70s. It went downhill at the start of her second term when the Petrobras scandal became worse and worse.

The root of dissatisfaction started in 2013 after nearly 12 years of a growing economy and generally good times in Brazil. Things were starting to fall apart. The economy was getting worse. Brazilians were still solidly more middle class than before, but they felt things were getting more expensive, life was not as easy as it was a few years ago, and the government is once again charging them more money for something that does not improve. Everyone agreed with that.

Photo: CNN

Photo: CNN

Is there an alternative to the Workers’ Party? The alternative is the Social Democrats. I think Ciro Gomes, from a much smaller party and also ex-Workers Party, would be good – at least in terms of winning the popularity contest. And let’s face it, that is what these things are all about. You elect the popular guy and you reject the candidate that is taking money from your wallet or making you feel insecure. Brazil doesn’t really have a right wing. The Workers’ Party is more into social spending, and the next dominant party in Presidential politics is also left wing, but a bit more free market at least in their thinking and in the way their candidates represent themselves. These are tough times in Brazilian politics. They are making a mess of things down there, not only for people and businesses, but for the political futures of their parties. If you’re the Workers Party, you need the economy to grow, you need the bad guys affiliated with the Petrobras scandal in prison, or you’re not getting the presidency in 2018. If you’re the Social Democrats, you want Dilma impeached so you can take over. But you’re taking over an insane asylum and if you don’t work miracles in a few short years, the Brazilians will kick you out of power like they did 12 years ago. The best case scenario for the Social Democrats would be for Dilma to last, not get impeached, and then try and beat them in 2018. Brazil is oddly one of the few countries in the world where investors think austerity is more good than bad.

Why do investors see austerity as more good than bad in Brazil, as compared to other high-profile examples (e.g. Greece)? What do you think?

I don’t know why they hated austerity in Greece so much. I didn’t follow it. I just know it was hated. In Brazil, the market likes it because they know it’s a necessity: public spending needs to be reduced, tax revenues need to increase. The government cannot spend its way out of this mess. Maybe people in Greece thought that they could handle more debt because they were in the Euro. Totally different system. I can count the number of anti-Brazil austerity people that I speak with on one hand.

Of all the BRIC countries, where do you see the most lucrative opportunities for Western businesses and investors in the coming years? From what you say about China, its size and ties to the US, it would seem like the natural choice. Is this the case?

From what I hear, and from what I know – as an investor, Brazil’s local bonds are a great buy right now. But I know this is not your audience really. So in layman’s terms, U.S. companies will always like China. Out of the four, it’s the place to be. I think outside of the big four, a lot of multi-national corporations like Mexico because the rules of engagement are understood, thanks to NAFTA. But Mexico has this drug war issue. Russia has sanctions. If the Russia sanctions were lifted, ExxonMobil would be extremely happy. They have a $720 million joint venture deal with Rosneft that is going nowhere. India is good, but that depends on the sector. I don’t know of any big US deals in India. In terms of economic health: India is the best. In terms of economic concerns: China keeps people up at night. In terms of geopolitics, it’s 80% Russia, 20% China. If you want a carnavalesque side show…then Brazil is going to be fun with all its impeachment drama. That makes Brazil interesting for American firms or any firm really that wants to get involved in Brazil on the cheap. Crises make things sell at a discount, makes people desperate.

Be sure to read all of Ken’s articles at Forbes. Even if you’re not an investor, the economic activity surrounding these countries will only become more consequential as 2016 marches on.

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