What has caused Russia and the exchange traded funds (ETFs) that track the emerging market from getting slaughtered and relinquishing any hope of a near future turnaround?

The causes for this market’s downfall are many.

• First of all, there is a currency problem. The Russian ruble is depreciating at an alarming rate and the country’s foreign-currency reserves are diminishing as the authorities defend their mighty currency. In fact, the ruble has lost about 15% of its value since the summer, states the Economist. The country’s inflation is out of whack, pegged at 13.8% in November.
• A second reason is the dramatic decline in crude oil prices. Crude is trading around $40/barrel and the Russian government constructed their budget accounting for $70/barrel oil. Like all others, Russia hasn’t been immune to the credit crisis, it has taken its toll on the country and its ability to access cheap loans.
• To add to this turmoil, the stock market is off about 70% from its peak;
• Lay-offs are accumulating;
• Russian banks are being downgraded;
• and industrial production is plummeting. In fact, a former Russian deputy finance minister suggests that 2009 may see a decline in GDP of about 4% for the nation.
• During its golden years, Russia borrowed like crazy and used borrowed money to support higher living standards instead of diversifying, making the country highly dependent on crude oil and uncompetitive in a global marketplace.
• Lastly, bail-outs aren’t working. Much of the funds of Russia’s $200 billion bailout program are going offshore, instead of unblocking the financial system, which is killing consumer confidence.

Perhaps a spike in oil prices can help the Russians buy some time and get things under control again. But will the country learn from the most recent events?

An ETF that is indicative of this drastic decline is the Market Vectors Russia (RSX), which is down 67.4% year-to-date.

Tags: Currency ETFs, Eastern Europe, Emerging Markets, RSX, Russia