Why Russia’s Trade Pact Is Big News For RSX

by on July 14, 2010 | ETFs Mentioned:

As the economies of Western Europe have grown more intertwined over the past few years, Russia has been left on the sidelines. Blocked out of NATO and the EMU even as both organizations creep ever closer to its western boarders,  the once mighty superpower was quickly being boxed in and losing influence over former Cold War allies. However, Russia has experienced somewhat of a resurgence as of late and is seeking to regain its role on the world stage by further exercising its diplomatic and economic might. This is evidenced by the recent trade deal that was signed between the leaders of Russia, Kazakhstan, and Belarus, which is seen by many as a watershed event in post-Soviet relations. “This is a very positive paradigm shift in how Russia deals with the near abroad,” said Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow to the New York Times. “Previously, it was a one-way street where Russia was giving out economic favors in exchange for political favors.”

The deal, which was signed in the Kazakh capital of Astana earlier this month,  looks to push the economies closer together by forming a customs union that will fully abolish all duties and tariffs between the three. This pact, which can be thought of as a Russian NAFTA, is likely to have a huge impact on the Russian economy for years to come, especially as more ex-Soviet republics move to join the union. In fact, just days after the pact was announced, the leaders of Tajikistan and Kyrgyzstan, two countries heavily reliant on migrant labor remittances from Russia, said they were interested in joining the union. As these countries move closer together, three important events are likely to transpire that could give a boost to the Russian economy [also read ETF Plays To Follow Cisco Into Russia]:

1. Cements Moscow’s Status As Financial Capital

The deal could open up the other two nations to Russian investment and expertise, especially in the banking industry. That would be crucial for the extremely command-driven economy of Belarus, which is looking to privatize major industries in order to provide financing in light of the global economic slump. This should help Russia diversify away from natural resource production and develop its service sectors, a primary goal of the current administration. The pact could also eventually be regarded as the first step to a common currency among the ex-Soviet countries. “We’ve now neared a very high level of integration,” Russian President Dmitry Medvedev said during a bilateral meeting with his Kazakh counterpart, Nursultan Nazarbayev.  “Looking forward, there’s cooperation on the common economic space, and in the future … a common market and, I think, ultimately the creation of the foundations for a shared currency zone” [also see Three Country ETFs With Low Debt-To-GDP].

2. Access To Excess Labor Pools

One of the major problems facing Russia today is its shrinking population, development that is forcing the country to import thousands of workers in order to keep its economy going forward. This pact should allow for workers to more easily enter Russia, which could help to boost the economy in the near-term. Russia currently has a population growth rate that is among the 20 lowest in the world, has one of the lowest birth rates, and one of the highest death rates; if the Russians want to continue to grow the consumption and service side of the economy, many more workers and citizens from ex-Soviet nations will be needed [see Emerging Market ETFs: Where's The Consumer Exposure?].

3. Delay Russian Entry Into WTO

Despite the positives of the trade deal, it is seen by many as possibly delaying the country’s entry into the World Trade Organization. This is largely due to Russian leaders calling for a joint bid between the three for membership in the WTO, something that is unlikely to happen in the near future given how far behind the economies of Kazakhstan and especially Belarus are from complying with the WTO requirements. Russia is by far the largest non-WTO member in the world, and its continued absence from the organization is likely to restrict investment from those who are more attracted to countries with more liberalized and transparent trade practices [also read Seven Most Corrupt Country ETFs].

Russia ETFs In Focus

For investors looking to establish exposure to the Russian economy, there are two interesting ETF options:

Market Vectors Russia ETF (RSX)

RSX is one of the most established funds in the Emerging Markets ETFdb Category, with more than $1.7 billion in assets and more than 3.75 million shares trading hands on an average trading day. The fund contains 44 securities in total and has heavy weightings towards energy giants Gazprom (12.1%) and Lukoil (8.1%). Not surprisingly, the fund is heavily weighted towards the energy sector, which makes up about 40% of the total assets, followed by industrial materials (26%) and financials (12%). The fund has a heavy focus on giant and large cap firms, which combine to make up more than 80% of the fund’s total assets. RSX charges an expense ratio of 0.62% [see Top Ten Equity ETFs of 2009].


Although much smaller in terms of assets than its Market Vectors counterpart, RBL charges a slightly lower expense ratio, and may offer an interesting investment choice for long-term investors. The fund tracks the S&P Russia Capped BMI Index, a float-adjusted market cap index designed to define and measure the investable universe of publicly-traded companies domiciled in Russia. Much like RSX, this fund is heavily weighted towards energy companies which make up about 42% of total assets. Other large allocations include industrial materials (19%) and telecommunication (12%) firms, while technology firms and utilities receive minimal weightings [also see Russia ETFs Head-To-Head: RBL vs. RSX].

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Disclosure: No positions at time of writing.