Don’t Expect Central Bank to Help Russia ETFs Until Mid-2014

December 13th at 3:09pm by Max Chen

Investors in Russia exchange traded fund shouldn’t expect a helping hand from the government any time soon as high inflation leaves little room for the central bank to cut rates.

Russian monetary-policy makers are holding the benchmark rate at 5.5% as inflation hovers around 6.5% as of Dec. 9, reports Scott Rose for Bloomberg.

“There is a clear risk in my view that they’ll either not cut at all next year, or they’ll cut by less than the 50 basis points that’s expected,” Ivan Tchakarov, chief economist for Russia and the CIS at Citigroup Inc., saidin the article.

The central bank has set an inflation target of 5% next year. According to the regulator’s three-year monetary policy plan, the target rate will drop by a half point in each of the following two years.

“The latest rise in Russian inflation, coupled with mounting concerns over the rapid expansion of consumer credit, mean that even the modest cuts in interest rates that we had penciled in for early 2014 now look unlikely,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd., said in the article. “We’ve tweaked our forecast and now expect rates to remain unchanged throughout next year.”

The Economy Ministry projects the Russian economy will expand 1.4% in 2013 and 2.5% in 2014. The central bank, though, points out that the economy is growing “slightly below its potential.”

The three large-cap Russia ETFs, Market Vectors Russia ETF (NYSEArca: RSX), the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) and the SPDR S&P Russia ETF (NYSEArca: RBL), have been underperforming this year. Year-to-date, RSX is down 6.9%, ERUS is down 9.3% and RBL is down 6.3%. [As EM ETFs Wilt, Gazprom Upgrade Does Little for Russia Funds]

RSX is the largest Russia ETF available. The iShares ERUS ETF tracks an MSCI index and takes a heavier emphasis on large-cap stocks, with a 19.3% tilt toward Gazprom. The SPDR RBL ETF also has a heavy emphasis on large-cap oil companies, with a 16.4% weight in Gazprom and 12.3% in LukOil.

Market Vectors Russia ETF

For more information on Russia, visit our Russia category.