Some Good News For Russia ETFs

Obviously, the best news for the Market Vectors Russia ETF RSX and rival Russia exchange traded funds is that Brent oil prices are soaring. Over the past 90 days, the United States Brent Oil Fund USO is up more than 40 percent, a surge that has lifted RSX by 33.5 percent over the same period.

Russia, the largest oil-producing nation that is not a member of the Organization of Petroleum Exporting Countries (OPEC), prices its oil in Brent terms. Hence, the mention of BNO. The $1.9 billion RSX, the largest Russia ETF trading in New York, reflects the Russian economy's dependence on energy commodities with a 38.5 percent weight to the energy sector. That is more than double the ETF's second-largest sector weight, which is materials at 17.5 percent.

However, there is more to the story with RSX and Russian stocks. Though the economy there is mired in its worst post-Soviet era recession, some data points suggest things are not as bad as previously believed regarding Russia's economy.

“External risks have abated over the last 12 months. Fears about a sharp draw down in reserves to cover capital outflows and sizeable debt maturities have eased. A sharp external rebalancing, (imports fell 35% in 2015), helped by a steep depreciation of the real exchange rate, saw the current account surplus (5% of GDP or USD70bn) cover a capital account deficit,” said Fitch Ratings in a recent note on Russia. 

Last week, the ratings agency affirmed a BBB- rating with a negative outlook on Russia foreign and local currency Issuer Default Ratings (IDRs).

While that rating and the negative outlook are not going to excite investors, Russia still sports a current account surplus and oil's rise has helped the ruble strengthen against the dollar. A stronger ruble can help damp Russians' demand for foreign currencies, in turn giving the current account surplus some breathing room.

“Risks to public finances have increased, reflecting a renewed decline in oil revenue, delays in announcing a revised 2016 budget, the lack of a medium-term fiscal framework, as well as likely challenges in executing fiscal reforms given the electoral calendar. Uncertainty about deficit financing, once the Reserve Fund has been depleted in 2017, also presents risks. Discussions on a new budget rule are only expected after the September parliamentary elections,” according to Fitch.

Russian stocks remain among the developing world's least expensive as highlighted by RSX's price-to-earnings ratio of 8.8, which is well below the low double-digit multiple found on the MSCI Emerging Markets Index.