Russia – The strongest economy in emerging markets?
We often talk about how you can invest in different global economies through the US stock markets. In today’s video,we wanted to touch upon one such interesting economy that you can invest via Vested and that is – Russia. We’ll talk about how Russia has gone about creating one of the most stable emerging economies and which ETFs you can use to invest in the Russian market.
So, when you think about the Russian economy what comes to mind? For me, and probably for a lot of others, it is two wordsâ€” oil and sanctions.
The Russian economy has been dependent on oil for a long period of time. But things took a turn for the worse in 2014 when oil prices dropped sharply and western countries imposed sanctions on Russia for its invasion of Crimea.
The Russian stock market dropped by 30% in 2014 and remained nearly flat in 2015. The Russian Ruble also took a bad beating. It dropped from 33 rubles for a dollar in January 2014 to 69 rubles for a dollar in February 2015.
But Russia is no stranger to financial crises.
In 1998, the Russian government had to devalue its currency and also it defaulted on its debt. In 2008, Russia went through another financial crisis which wiped off $1 trillion from its stock market.
But the 2014 crisis was different. It was as if Vladimir Putin’s government had had enough. They set in place a series of measures that in fact turned the Russian economy around.
The Russian government went about putting in place measures to protect themselves from its two arch-nemeses – oil and sanctions.
First up, they introduced an import substitution policy. This policy encourages a higher quality of local companies and reduces Russia’s dependence on imports.
In addition, Russia, like China, has laws which protect home-grown technology companies. So what that has led to is local companies becoming dominant in the online fields such as e-commerce and search.
The Russian government, in order to reduce its dependency on oil, has started storing profits when oil prices are high so that they can use these profits when the oil prices drop.
All of these efforts have made Russia a strong contender for outperformance amongst the emerging markets. Let’s look at some interesting statistics that support this. As of December 2020,Russia had the lowest government debt to GDP ratio compared to 17 other emerging markets. The ratio for Russia stood at 17%, compared to India’s 76% and Brazil’s 82%. In addition to that Russia has the fifth-largest forex reserves standing at $580 billion, significantly higher than its low of $350 billion in 2015.
Another sign of the stability that Russia now enjoys is that the short-term debt that the Russian government owes to foreign lenders is only 10% of its forex reserves. Now when you compare this to other emerging markets the number is actually an average of 30%.
Lastly, Russia also has the fifth largest current account surplus among emerging markets and they also have the highest government account surplus.
All of these factors provide Russia a stable foundation to now go on and build its economy. This stable foundation also helps protect them from further sanctions.
We have talked about all the good things. However, there are some downsides. The Russian government will now need to work hard to improve the state of its economy which is being shattered by Covid and also to improve on its shrinking per capita income.
Ok, so if you are looking to invest in the Russian stock exchange via the US markets you can look at 2 ETFs – one is the iShares ETF which goes by the ticker ERUS or the Market Vectors ETF which goes by the ticker RSX.
In conclusion, today’s Russia is a lot more than just oil and sanctions. For someone that is bullish on emerging markets, it has become an economy that is hard to ignore.
Thanks and stay tuned for more.