Russia and China cast darker shadows now for Irish investors than during days of Brics buzz

Caveat: Moscow’s invasion reveals risk of investing in the non-western economies

In hindsight, 2004 was a good year for this nation, despite the bootcut jeans and the salmon shirts. Rugby fans were elated after Ireland won the Triple Crown for the first time in almost 20 years. Irish golfers starred as Europe obliterated the US in the Ryder Cup.

The State basked in 2004 in the warm political glow of a high-profile European Union presidency, during which 10 mostly eastern nations gained accession to the bloc. The economy purred along with 5.5 per cent growth. It wasn’t quite the high watermark of the Celtic Tiger boom. But it was probably the final year of good growth before the property bubble began to dominate everything, eventually spinning out of control four years later in what was easily the low watermark for Irish economic stupidity.

It was also the year that I first strayed into business journalism. Everywhere I went in those first few months, I kept hearing chatter of “bricks” where Irish investors apparently were guaranteed to make a lot of money over the following decade. For a short period I genuinely did not understand what it meant. It sounded like it must have to do with the property boom, but back then it felt too stupid to ask.

Soon I came to realise that people were talking about the Brics of Brazil, Russia, India and China – the biggest developing economies, the financial Klondike. The buzzy Bric acronym had been coined the previous year by Jim O’Neill, the former chairman of Goldman Sachs Asset Management. Goldman had predicted that the Bric economies would outstrip the biggest western powers in about 30 years.


Russian boom

By 2004, discussion of the Brics had morphed into a subculture all of its own in business media. It was impossible to escape the hype. People understood the Brics were supposed to be high-risk and high-reward. But this being 2004, much of the media only paid attention to the potential for the high reward part. Western capital, including a bounty of booty from the Irish property boom, flooded in to the Brics.

China was posting incredible economic growth under president Hu Jintao. India, under prime minister Manmohan Singh, was a less obvious destination for Irish capital but, with growth of 7.5 per cent, it earned its part of the acronym. Brazil, growing at 6 per cent under reforming president Luiz Inácio Lula da Silva, seemed a sure bet for Ireland's cash-rich agrifood giants.

Meanwhile, Russia was in the grip of an unprecedented economic boom under the cold, watchful eye of its president, Vladimir Putin. Then he was still considered a reformer, a potential partner of the West. Irish investors took notice. Sean Quinn, then Ireland's richest man rather than one of its bitterest, was already sizing up Russia's property market and would go on to make a series of huge investments there.

For a long time, the gilded Brics narrative seemed to have no downside, even when our own economy started heading south. Between 2001 and 2011, the MSCI Bric index, which tracked the performance of the four nations’ stock markets, returned 379 per cent, compared to the 7.5 per cent of the MSCI world index.

But look at the Brics now and it is clear that the risk calculus has changed. The acronym has lost some its appeal and Putin’s bloody onslaught in Ukraine is just the latest proof that all has fundamentally shifted. The people of Ukraine will pay by far the highest price – the ultimate one for far too many. But some of the stream of investors from western nations such as our own also will pay a financial price, although it seems tawdry to even consider it given the human hell being unleashed on Kyiv and Kharkiv.

Kingspan in St Petersburg

Irish corporate giants such as CRH are making for the exit in Russia. A few years ago, Kingspan executives probably watched with pride as its building panels went up on the new football stadium in St Petersburg. Now, that stadium has been stripped of this year’s Champions League final because of the war, and Kingspan’s recent heavy investment in the country will produce a much different kind of return as the rouble crashes and Russia turns in on itself.

German chancellor Olaf Scholz spoke this week of a new struggle between democracy and autocracy that will have consequences for economies as well as people. Putin is an extreme but his fellow Bric leaders, each of them pure-bred autocrats, now also radiate a different hue to the warm glow in which their predecessors basked, at least when the Brics seemed to be all in western investors' eyes. Investing in a blatantly autocratic state now seems a different proposition compared to 2004. Now the risk really must be considered along with the reward.

Lula da Silva has been replaced by Jair Bolsonaro, a supposed strongman who is so economically and morally inept that he has allowed at least 650,000 of his compatriots to die in the pandemic, while Brazil's economy slid into recession in the last quarter despite massive transfusions of public cash. India has turned into an ethno-nationalist autocracy under Narendra Modi, while its economy stutters.

Then there is China, under the blatantly authoritarian leadership of Xi Jinping, now a key friend for Putin in this world. Many western and Irish investors have done well in China over the years, such as PCH International's Liam Casey, or the property developer Richard Barrett. But perhaps the next generation of western investors will not find as much potential to make a fortune in Xi's darker, more assertive state.

China’s economy has fundamentally shifted in recent years, away from trying to attract foreign investment and towards domestic consumption, while its borders have been effectively sealed to foreigners because of its baffling zero Covid policy. Its growth is slowing and who knows what its future holds in coming years as Xi and Putin seek to establish their new world order. Suddenly China seems a colder house for western business people – just ask Dublin aircraft leasing executive Richard O’Halloran, who was recently released from three years enforced detention there over a deal that went awry.

Even the former Goldman executive O’Neill, the man who first coined the Bric term, is worried about what the future holds, according to a pessimistic piece on China he wrote last month for Project Syndicate.