In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Slowing Drag...
Is It Time to Short Russia?
03/26/2013 7:00 am EST
Remember Russia? From its lofty position as one of the hard-charging BRICs, the country seems to have fallen off the investors’ radar in recent months, notes Stoyan Bojinov of ETFdb.com.
Commodity prices across the board have endured a dismal decline over the past few months as global economic growth expectations have kept a lid on investors’ confidence. Uncertainty has been plaguing virtually every corner of the financial market thanks with continued debt woes in Europe. Crude oil in particular has been hit quite hard; fossil fuel futures have lost upwards of 20% since hitting $110 a barrel on March 1, 2012, showcasing the rampant volatility that is associated with energy prices.
What’s worse than investing in a sinking commodity? Investing in the producers of said commodity. This is because commodity producers will typically experience even greater swings in prices given that their profitability hinges on the market price of their goods. From a macroeconomic perspective, this means that commodity-centric nations are among some of the riskiest investments given their dependence on prevailing natural resource prices. With Greece, Spain, and Italy hogging the headlines every day it seems, it’s no wonder that many have overlooked developments in Russia.
Russia’s Economy Running Low On Fuel
Russia is one the leading producers and exporters of oil and natural gas in the world. As such, the economic prosperity of the nation is highly correlated to conditions in the global energy market. As you may have already guessed, being a commodity producer when prices for your goods are falling is a tough spot to be in, especially when oil and gas production accounts for the majority of our economic output.
Consider the current economic backdrop as it relates to Russia. The nation’s top exporting partners are the Netherlands, Italy, and Germany; the lineup of European buyers is quite concerning at the moment given the towering debt that seems to be slowly crushing the currency bloc. Aside from looming pressures stemming from Europe’s fragile financial sector, Russia has also had to deal with slowing energy demand from its biggest partners, further adding to the list of worries surrounding this oil-producing giant.
NEXT PAGE: Ways to Play
To top it off, geopolitical uncertainty in the Middle East has escalated into war in Syria, creating even more volatility in the energy market and further hurting Russia’s commodity-centric economy. Russia’s involvement in this conflict has done little to quell instability or restore confidence in the nation’s wobbly economy. In fact, domestic unrest in the nation has been fueled by protests following the latest Parliamentary election, which many deemed as fraudulent. Political unrest and economic uncertainties from the Eurozone have mixed to create a perfect storm so to speak, paving the way lower for Russian equities alongside worsening economic growth prospects.
A report by the Center for Strategic Research in Moscow warns that a fresh economic downturn across Europe may translate into serious civil unrest in Russia as the country struggles to deal with falling energy prices and political instability on virtually all fronts. Furthermore, Bank of America forecasts that if a breakup of the Eurozone sends oil below $80 a barrel, Russia could suffer a 10% devaluation of the ruble, seeing as how oil and gas exports account for roughly half of its total revenues. As such, the nation could face a worrisome wave of capital outflows if economic growth prospects continue to deteriorate.
Ways To Play
Investors who wish to follow Warren Buffett’s advice and buy in at a time when everyone else is selling have a number of Russia ETFs available at their fingertips:
Van Eck Market Vectors Russia ETF (RSX): This is the biggest and most popular offering in the space with nearly $1.7 billion in assets under management.
SPDR S&P Russia ETF (RBL): This is the cheapest Russia ETF available, charging 0.59% in annual expense fees.
Direxion Daily Russia Bull 3x Shares (RUSL): This ETF offers triple leveraged exposure to those with a stomach for risk who wish to make a (very) bullish bet.
Those who wish to make a bet against Russia but wish to avoid taking an outright short position in any of the above mentioned ETFs may opt for the Direxion Daily Russia Bear 3x Shares (RUSS); this product offers triple leveraged exposure to the same index as RUSL, giving seasoned traders an opportunity to make a (very) bearish bet.
Disclosure: No positions at time of writing.
By Stoyan Bojinov, Contributor, ETFdb.com
Related Articles on ETFs
In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Robert Powell is a long-time financial journalist and retirement expert, as well as the editor of Th...
In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Cry for Me B...