Technical Note - 2021 - November - Number 04 - Dinte

Brazil And Russia: How To Improve The Economic Relationship Beyond Resource-Based Industries

Autores: André Pineli, Fernando J. Ribeiro, Flavio Lyrio Carneiro e Mateus de Azevedo Araújo

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Despite the great distance – both in terms of geography and history – that keep them apart, Brazilian and Russian economies share some important commonalities. One is the key role played by natural resources. Another is the relative decline of the manufacturing sector over the last three decades, which was accompanied by the enlargement of the services sector.

Both economies pursued, for several decades, very domestic-oriented development strategies. Russia has undergone a rapid industrialization under the communist regime, that resulted in a quite unbalanced economy, where the services industries were relatively underdeveloped whilst the heavy industry and the military complex were oversized (Dohrn and Heilemann, 1996). Trade was strongly distorted towards the members of the Council of Mutual Economic Assistance (Comecon) (Havrylyshyn and Al-Atrash, 1998). Foreign direct investment (FDI) was virtually nonexistent.

Brazil was never a centrally planned economy, but the strong hand of the State could be perceived in almost every aspect of the economy. During the import substitution era, whose heyday extended from the 1950’s to the 1970’s, multiple distortionary measures were adopted aiming at transforming the agrarian into an industrialized economy. Utilities and the heavy industry were largely under State control and trade was hampered by high tariffs. Despite the nationalist rhetoric, foreign capital was largely welcome, except in a few segments.

By the end of the 1980’s, Brazil and Russia had two of the largest manufacturing industries in the world, whose inefficiencies remained hidden by the barriers to trade. In both countries, the 1990’s were a decade of fundamental economic reforms, although the specificities of transition made it considerably more challenging to Russia. Numerous enterprises were privatized and liberalization policies were pursued in various areas, including trade and FDI. As a result, a Schumpeterian process of creative destruction took place. Uncompetitive industries and firms vanished, while others emerged, resulting in a reallocation of the factors of production across firms and industries.

During the reformist 1990’s, Brazilian economy had sluggish growth (2.6% annual average), as compared to 1950-1980. In the same period, Russia had an economic depression – per capita GDP fell 42% between 1990 and 1998. After the currency devaluations elicited by the Russian Crisis (1998), both economies entered a period of recovery, which gained momentum in the early 2000’s, with the ignition of the commodities super cycle, boosted, especially, by Chinese demand for energy, raw materials and food. As shown in graph 1, although both economies benefited from the China shock, Russian GDP grew considerably faster until the outbreak of the global financial crisis in 2008. This is not surprising since the (positive) terms of trade effect was much more pronounced in Russia as compared to Brazil (graph 2).