The Russian revival is an opportunity for EM investors

What comes to mind when thinking about the Russian economy today? For me, and perhaps even for most people it is two words — oil and sanctions.

Russia has always relied heavily on oil exports. However, in 2014, a significant drop in oil prices, coupled with Western sanctions imposed to punish Russia for invading Crimea, plunged the country’s economy into crisis. The Russian stock market fell 30% in 2014 and was very flat in 2015. Despite the intervention of the Russian Central Bank, the Russian currency fell from 33 rubles to the dollar in January 2014, to 69 rubles against the dollar in February 2015.

Russia is no stranger to financial crisis 1998 The Russian government devalued the ruble and evaded its debt as a result of the 1998 financial crisis. Another crisis hit the Russian economy in 2008 and wiped out more than $ 1 trillion in market capitalization from its stock market.

But the 2014 crisis was different. It is as if the Russian government has decided that they have enough. The crisis marked the beginning of a series of corrective measures taken by the Vladimir Putin government, which has since overturned the Russian economy and left the country one of the most stable emerging markets.

Failures

Over the past few years, the Russian government has taken steps to protect its economy from fluctuations in oil prices and from external sanctions. The government has introduced an import alternative policy aimed at improving the quality of Russian companies and reducing the country’s dependence on imports.

Like China, Russia has enacted laws to promote domestic technology companies against global technology giants. Local companies dominate the online marketplace for e-commerce and search.

To reduce its dependence on oil price volatility, Russia has begun to stockpile additional profits when oil prices are high, so that these reserves are spent when prices are low.

All these efforts have made Russia a strong competitor for performance in emerging markets. By December 2020, Russia had the lowest government debt as a percentage of gross domestic product (GDP), compared to the 17 largest emerging markets. Russia has a debt ratio of 14%, compared to 72% for India and 89% for Brazil. Russia has the fifth largest foreign exchange reserves in the world with $ 580 billion in reserves as of March, up significantly from $ 350 billion in 2015.

In addition, short-term debt payable to foreign lenders is only 10% of its foreign currency reserves, more than 30% on average in emerging markets. Finally, Russia has the fifth largest current account surplus and the largest government surplus in emerging markets.

All these factors provide the much-needed sustainable foundation for building the Russian economy and help protect the economy from the threat of further sanctions.

However, in order to further improve the economy, the Russian government must focus on reviving GDP growth and reducing per capita income, which has been tainted by Kovid.

Russian ETFs

For investors who have confidence in the revived and insulated Russian economy, exposure to the Russian stock market can be made through exchange-traded funds (ETFs) available on US stock exchanges. Under the Reserve Bank of India’s Liberalized Remittance Scheme, an Indian resident can send up to 000 250,000 per annum to invest in international markets.

Leading Russian ETFs include Market Vector Russia ETF (RSX) and Eichers MSCI Russia ETF (ERUS). The oldest and largest ETF with 7 1.7 billion assets in RSX management, ERUS $ 475 million.

In the end, the Russian economy today is far more than just oil and sanctions. If you are a bullish investor in emerging markets, it is hard to ignore the reviving Russia that Putin is tearing to pieces.

Viram Shah Co-Founder & CEO, Waste Finance Inc.

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