Russia ETF: Why the Country Is Moving Beyond Oil

With a significant portion of its economy invested in energy, Russia’s economy and its related exchange traded fund (ETF) have become vulnerable to the global price swings of oil prices. As a result, the government is making an effort to diversify as it plans innovation and modernization.

The Russian economy slipped from its net worth of $1.7 trillion in 2008 to $1.2 trillion because of the financial crisis, writes Steve Sedgwick for CNBC. President Dmitry Medvedev has promised modernization, but the reality is that the country is still heavily reliant on its commodity-based economy.

The Russian government will be ordering ministries and state companies to use more of its $133 billion procurement budgets to buy products that qualify as “innovative” and made in Russia, reports Andrew E. Kramer for The New York Times. Finance Minister Aleksei L. Kudrin’s proposal would put the effective nationalization of parts of the economy and tight control of private-sector businesses to encourage innovation.

According to media reports, Russia’s GDP decreased by 7.9% in 2009 as prices for commodity exports plummeted, reports Polya Lesova for MarketWatch. The World Bank projected that Russia’s economy will grow 3.2% in 2010 on higher oil prices and better global demand.

Neil Shearing, senior emerging market economist at Capital Economics, believes that the Russian economy may post strong gains in the first half of the year as the government’s fiscal stimulus begins to show more results. He also expects oil prices to decrease in the second half, which would slow the pace of Russia’s recovery. Shearing estimates growth will be around 4% in 2010, followed by a likely fall back to 1.5% in  2011. [Why Russia May Be Riding a Bull.]

VTB Capital’s Russian Purchasing Managers’ Index increased to 50.8 in January, which pointed to an expansion across the sector over the past 18 months.

For more information on Russia, visit our Russia category.

• Market Vectors Russia (NYSEArca: RSX)

• SPDR S&P Emerging Europe (NYSEArca: GUR): Russia is 63.7%

• EGS Dow Jones Emerging Markets Energy Titans (NYSEArca: EEO): Russia is 32.5%

Max Chen contributed to this article.