Some Good News For The Russia ETF

The VanEck Vectors Russia ETF RSX, the largest Russia exchange traded fund trading in New York, slipped 1.37% Friday, extending its month-to-date decline to over 6%.

Late in the day, some positive news for RSX emerged.

What Happened

On Friday, Fitch Ratings boosted its rating on Russia's long-term issuer default rating from BBB- to BBB with a stable outlook. While RSX has recently struggled against the backdrop of declining oil prices, the Fitch upgrade brings a measure of confidence for Russian assets, which are typically more volatile than the broader emerging markets complex.

“Russia has entrenched a credible and consistent policy framework that will deliver improved macroeconomic stability, reduce the impact of oil price volatility on the economy and support increased resilience to external shock,” Fitch said in a note.

Why It's Important

An important backstop for RSX and Russian equities is a proactive central bank that is managing inflationary pressures and recently joined the global easing party.

“Inflationary pressures have eased and average inflation will remain close to Russia's inflation target of 4% in 2020-2021,” according to Fitch. “After responding decisively to increased inflationary risks in late 2018, the Central Bank of Russia has reversed this monetary tightening through 25bp cuts in June and July, bringing its key rate to 7.25%."

Fitch said it expects the Central Bank of Russia to remain focused on a sustainably low level of inflation by way of "a prudent easing cycle, strengthening transmission mechanisms, cementing institutional credibility and sustainably anchoring expectations."

What's Next

RSX holds just 26 stocks, and while the fund devotes just under 12% of its weight to the financial services sector, the improving condition of that sector in Russia could bode well for the health of markets there.

“Russia's net external creditor position (forecast at 35% of GDP in 2019) is underpinned by the deleveraging of banks and corporates and greater exchange rate flexibility,” according to Fitch. “External debt service will be in line with the current forecast for the 'BBB' median, averaging 13.5% of current external receipts in 2019-2021. The sovereign's net foreign assets will strengthen to 29% of GDP in 2019.”

Russia is seemingly always near controversy, but there's no denying the country is fiscally sound. As Fitch point out, Russia has low government debt and robust foreign reserves, a compelling combination in the current environment.

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