Growth projections for Russia this year had been cautiously optimistic – until oil surged past $100 a barrel. Russia exchange traded funds (ETFs) could be looking at some big moves if prices stay high.
Russia’s economy is highly reliant on energy prices, so it tends to get hit hard when prices are low. In times like these, though, it’s one of the biggest beneficiaries.
As oil prices surpass $100 a barrel, Russia’s GDP is projected to hit 4.3% in 2011 – oil and gas make up half of Russia’s revenue and more than 60% of its exports. The country will likely remain dependent on its oil reserves.
Russia’s ETFs benefit, too. All three of them have energy as the top-weighted sector:
- Market Vectors TR Russia (NYSEArca: RSX). Sector allocations include: oil & gas 38.7%, finance 14.8%, iron/steel 14%, telecom 11.7%.
- iShares MSCI Russia (NYSEArca: ERUS). Sector allocations include: energy 53.3%, materials 18.3%, financials 14.1%, utilities 6.8%.
- SPDR S&P Russia (NYSEArca: RBL). Sector allocations include: energy 49.8%, materials 18.5%, financials 12.6%, telecom services 9.11%.
If you want to capitalize on higher oil prices, these ETFs could be a way to go. Have an exit strategy in place, however, because aside from an over-reliance on the energy sector, Russia has other problems that could cause shocks:
- The Russian economy is strongly tied to the commodities market. Potential investors must also be aware of political risks and corruption since the government owns a lot of companies. Still, there have been some foreign direct-investment deals in the oil sector, but investors will ultimately come to a market where the government and insiders own a majority of the stakes. [Russia ETFs: Government Opens Its Doors.]
- Prime Minister Putin will remain as the key decision-maker throughout 2011 while Dmitry Medvedev will stick around as president until May 2012, report Simon Saradzhyan and Nabi Abdullaev for ISN Insights. Social and economic disparity within the masses will continue and undermine the government’s goal of social economic reforms.
- If Russia is hit by another economic crisis, the government will have to spend all of its “rainy day” funds. The country’s 2011 budget is based on the assumption that blend oil prices will stay above $75 and the government calculates that average prices will stay around $80 this year. Russia will deplete its reserves if oil prices drop by more than 50% and remain at that level.
- Widespread corruption continues to eat away at the country’s profits, costing the country an estimated 2.9% of GDP annually, reports Liam Denning for The Wall Street Journal.
For more information on Russia, visit our Russia category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.