Oligarchs See Value in Holdings of Russia ETFs

March 20th at 12:10pm by Todd Shriber

Heading into Thursday’s trading session, the Market Vectors Russia ETF (NYSEArca: RSX) was down 18.8% this year, easily making the largest Russia ETF the worst performer among the four major single-country ETFs tracking BRIC nations.

To paint a picture of just how poorly Russian stocks have performed in 2014, RSX’s year-to-date loss is great than the losses incurred by the iShares China Large-Cap ETF (NYSEArca: FXI) and the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) COMBINED.[Brazil ETFs Stumble]

Although Russian equities have come under increased pressure in the wake of the country’s invasion of Ukraine, President Vladimir Putin has recently been able to assuage markets that the annexation of Crimea is enough and that his country has no plans to acquire additional territory.  [Russia ETFs Deal With Putin]

That has allowed RSX and rival ETFs such as the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) and the SPDR S&P Russia ETF (NYSEArca: RBL) to rally in the past week, stoked by buying of inexpensive Russian stocks by Russian oligarch investors.

Vagit Alekperov, CEO of Russian energy giant OAO Lukoil, has stepped up his purchases of his company’s shares, reports Halia Pavliva for Bloomberg. Alekperov is not alone. OAO Novatek bought 2.5 million shares between March 11 and March 14 while oil giant OAO Rosneft insiders have been buying shares of that company, according to Bloomberg.

Lukoil, Novatek and Rosneft combine for over 18% of RSX’s weight and 21.3% of ERUS. Increased insider buying share repurchases at Russian firms comes against the backdrop of some of least expensive stocks in the emerging world. Russia’s benchmark trades at 4.8 times earnings, barely more than a third the valuations on Indian stocks and just over half the P/E on Brazil’s benchmark Ibovespa. Russia typically trades at a discount to the MSCI Emerging Markets Index, but stocks there have been deeply discounted relative to their historical valuations for close to a year. [It's Expensive to Bet Against Russia ETFs]

Mattias Westman, the chief executive officer of London-based Prosperity Capital Management told Bloomberg share repurchases low valuations at Russian firms could be “substantial.” Increased buybacks would be coupled with Russia’s rising dividend footprint.

Russian companies, among the emerging world’s most prodigious generators of free cash, are under pressure by Putin to ratchet up dividends to 35% of net income in the coming years. Russia’s rise as a legitimate emerging markets dividend destination gives it an 18.7% weight in the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM), far larger than rival funds. Last  year, Russia was the fastest-growing dividend payer in the WisdomTree Emerging Markets Equity Income Index, DEM’s underlying index. [Russia's Dividend Rise]

Market Vectors Russia ETF