Why Russia isn’t the only BRIC worrying markets

Mass demonstrations across Brazil against corruption and waning economic growth have highlighted that Russia is not the only "BRIC" nation whose progress is veering dramatically off track.

Hundreds of thousands of protesters took to Brazil's streets on Sunday, including in the major cities of Brasilia, Sao Paulo and Rio de Janeiro. Estimates of how many attended varied widely, between 200,000 to as many as 2 million.

Many demonstrators called for the impeachment of President Dilma Rousseff, who is engulfed in a massive corruption scandal involving state-backed Petrobras—one of the world's biggest oil companies and a bedrock of the Brazilian economy.

Graft scandals involving politicians have long wracked the country, but Brazilians appear to be becoming less tolerant—particularly under a leader who has overseen tumbling growth rates and failed to rein in inflation.

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"People feel betrayed," Diogo Ortiz told Reuters on Sunday. The 32-year old advertising worker called the Petrobras scandal "a national and international disgrace."

Although Rousseff has been exonerated by the Brazilian Attorney General, much of the alleged bribery took place when she was head of Petrobras' board of directors; her political opponents question how she remained ignorant.

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Furthermore, several members of the ruling political coalition are among those accused of taking kickbacks. Earlier this month, the Attorney General asked the Supreme Court for permission to investigate 54 people, over what could be the country's largest corruption scandal yet uncovered.

In reaction to the protests, Rousseff's Workers' Party announced that an anti-corruption and impunity package would shortly be revealed, although it gave few details.

"For obvious reasons, we don't expect much from this package—it will likely be more of a PR campaign than a meaningful reform," said strategists led by Marc Chandler in a research note from private bank BBH on Monday.

Some Rousseff supporters have likened calls for her impeachment to an attempted coup—an emotive choice of language in a country that cast off its military dictatorship 30 years ago.

A more likely result, in Chandler's opinion, was increased popularity for a politician with an "anti-establishment" mandate—although exactly who remains unclear.

"The obvious candidate, Marina Silva, came out badly bruised from last year's electoral race," he said.

Although Rousseff has been helped in the Petrobras debacle by her reputation as a "clean" politician, her popularity has also been hit by her perceived mishandling of the economy.

Economic growth has slowed sharply during her time at the helm and it is unclear whether she will push ahead with the fiscal and monetary tightening measures viewed as necessary to stabilize economic sentiment and high inflation. Annual gross domestic product growth in the country has slowed from 7.5 percent in 2010 to 0.1 percent in 2014, while inflation has risen from 5.9 percent to 6.4 percent over the same period.

"The plan is probably to follow the usual political cycle: tighten in the next couple of years, to create space to ease ahead of the next elections in 2018. However, it's unclear how much pain the government will be able to take farther down the line, once the tightening really starts to be felt by the population and gets compounded by rising inflation and much weaker currency," said Chandler.

In some ways, Rousseff has been unlucky, taking office just before the commodity boom ended, and with it, Brazil's rapid consumption-based growth.

However, the center-left politician has also been accused of failing to hem in the overexpansion of the public sector and its growing interference in business.

In addition, Brazil's large currency account deficit has left it vulnerable—like Russia—to the tightening of U.S Federal Reserve monetary policy which some think could come as early as June.

So far this year, the Brazilian real has declined by around 20 percent against the U.S. dollar, leaving the currency at its lowest in over 10 years. In comparison, the Russian ruble has fallen by roughly 7 percent.

Brazil's benchmark Bovespa index has been volatile and is down around 2 percent on the year.

"We see Brazilian assets continuing to underperform within the emerging market universe," said Chandler.