Although Dmitry Medvedev was elected as Russia’s president nearly a year and a half ago, many Russians remain convinced that prime minister Vladimir Putin continues to call the shots. The skepticism over the president’s independence runs so deep that Medvedev joked this week that he would undergo blood tests to prove the two men aren’t “of the same blood.” In recent weeks, both have made overtures indicating that Medvedev will continue in charge for the foreseeable future. Last week, Putin ruled out competing with Medvedev for the presidency in 2012 (he will be eligible again under Russia’s constitution), and pledged to work with the president to accomplish an ambitious economic agenda.
For his part, Medvedev has not hesitated to criticize the economic policies put in place by his successor. In a bold move last week, Medvedev posted a proposal to make broad changes to Russia online, and yesterday stood by his critiques during a question and answer session that lasted nearly three hours.
Among Medvedev’s goals for Russia: develop the “primitive” economy that relies heavily on oil and gas revenues and root out pervasive corruption. The president openly acknowledged that the challenges he faces in these endeavors are monumental. Medvedev anticipates eliminating corruption could take more than a decade, and understands that convincing businessmen to invest oil profits in tech companies will be a hard sell.
Medvedev also indicated that he will move to integrate Russia with the global economy, and blasted the U.S. for blocking the country’s entry into the World Trade Organization.
As a commodity rich country, Russia relies heavily on revenues from the export of gold, minerals, and nearly every type of fuel. Russia’s failure to diversify its economy went without consequence during years of high oil prices. But as a global economic downturn led to a prolonged lull in many commodity markets, the Russian economy began to feel the pinch (for ongoing coverage of commodity ETFs, sign up for our Free ETF Newsletter). While the abundance of natural resources is a boon to the economy as prices rise, declines in oil prices can have a profound impact on government budgets and overall macroeconomic health.
Yesterday, Russia’s central bank cut the refinancing rate for the seventh time in the last five months following news that the country suffered a record economic decline in the second quarter of the year. Some analysts anticipate a “painfully slow recovery” in Russia, the result of years of systematic mismanagement of monetary policy.
But there are some reasons to be hopeful. Last week, Russians hailed news that General Motors had agreed to sell a majority stake in its European operations to a Canadian-Russian consortium, a move than many hope will help to diversify the Russian economy.
Still, despite Medvedev’s commitment to change and economic development, many investors believe Russian equities bear enormous risk. The road ahead for Russia is long and filled with challenges. But if a renewed focus on market development takes hold, there may be hope yet for investments in the country.
ETF Plays On Russia
Russia is a component of the BRIC block of countries, meaning that exposure to Russian equities can be gained through several ETFs dedicated to this group (see a complete list here). But there are also a couple of exchange-traded products focusing exclusively on the Russian market.
Van Eck’s Russia ETF (RSX) is predictably dominated by holdings in the oil and gas industry (44% of the fund). Beyond this sector, iron and steel (17%) and telecommunications (13%) also receive significant weightings. RSX has been one of the top-performing equity ETFs in 2009, gaining almost 105% since the beginning of the year. Despite this remarkable rally, RSX is has not quite regained its level of a year ago, having lost about 5% over the last 52 weeks.
Rydex offers investors the CurrencyShares Russian Ruble Trust (XRU). XRU is designed to track the performance of Russia’s currency, and has seen a bumpy ride in 2009. Although well above its March lows, this fund is down 4% on the year and 10% over the last 52 weeks.
Despite recent rate cuts, Russia’s refinancing rate remains the second highest in Europe (the refinancing rate now sits at 10.5% while the repurchase rate charged on central bank loans is 9.5%). Holdings in XRU are currently earning an interest rate of 5.55%, and the fund charges expenses of 0.40%.
In a recent entry on his official blog, Medvedev wrote: “An ineffective economy, a semi-Soviet social sphere, a weak democracy, negative demographic trends and an unstable Caucasus. These are very big problems even for a state like Russia.” While the risks involved in investments in Russia are significant, the country also offers potential for significant reward. If the country reduces its dependence on oil and gets serious about eliminating corruption, the potential for economic growth is great.
Disclosure: No positions at time of writing.