Along with most of the world, Russia’s economic future is a bit uncertain, especially as it tries to develop markets outside of commodities such as oil. Recent bouts with inflation and Mother Nature have kept investors in Russia’s exchange traded funds (ETFs) on their toes.
According to Tony Vorobyova of Reuters, Russia has been suffering from the worst heat wave on record. As a result, crops have been devastated, leading to worries about inflation.
Russia’s grain crop is forecast at 60 million metric tons, down from 97.1 million metric tons last year, and wheat prices rose as high as 9% last week.
So far, inflation has been modest, and Russia’s Central Bank is unlikely to raise interest rates, report Maria Levitov and Halia Pavliva of Bloomberg.
“As inflation risks linked to wheat price growth are not monetary- driven, we do not think that they can be mitigated by the Central Bank of Russia’s interest rate policy.”
Food makes up 38% of Russia’s CPI, with two-thirds of that potentially sensitive to drought. But even if higher food prices do not affect inflation very much, they will leave consumers with less to spend, thereby reducing economic activity. [Russian ETF: Jury Still Out on Growth.]
However, Russia has enough grain in storage to meet the projected shortfall. And according to Chris Weafer, a strategist at Uralsib, the government will do whatever it takes to keep domestic food prices low.
Despite Russia’s efforts to wean itself off of oil, a rebound in oil has pushed Russian Eurobonds due 2020 to 103.39 cents on the dollar, reducing the yield to a record 4.56%. In contrast, 5-year bonds are priced at 100.39 cents, report Denis Maternovsky and Michael Patterson of Bloomberg.
Despite the drought that has devastated Russia’s crops, investors seem optimistic about Russia’s future. [Russian ETF May Benefit From New Tech Initiative.]
For more stories on Russia, visit our Russia category.
- Market Vectors Russia (NYSEArca: RSX)
- SPDR S&P Russia ETF (NYSEArca: RBL)
Sumin Kim contributed to this article.