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Must-know: Will the Russian economy crash like the Boeing 777?

Part 11
Must-know: Will the Russian economy crash like the Boeing 777? (Part 11 of 12)

Why dark clouds surround the investment climate in Russia

Investment climate in Russia

Even though Russia’s stock market is among the cheapest in the world in terms of equity valuations, international money has been reluctant to invest in the country. A poll of foreign investors by Bloomberg earlier this year found that Russia is considered the worst of the world’s biggest economies to invest in, with nearly 56% of respondents saying they wouldn’t invest. Another 75% said they were pessimistic about President Putin’s policies and how they will affect Russia’s investment climate.

ETFs investing in RussiaEnlarge Graph

The plight of Russian billionaires

This year, billionaire Alisher Usmanov, Russia’s richest man, who owns metal conglomerate USM Holdings Ltd., has already seen the value of his wealth shrink $2.5 billion because of market fears. Leonid Mikhelson, who controls gas giant Novatek, has seen $2 billion vanish. Investment mogul Mikhail Fridman has also lost $906 million.

Flight of capital

The International Monetary Fund (or IMF) has forecasted that the flight of funds from Russia this year will amount to ~$100 billion. It has already become difficult to acquire capital in Russia itself, with both domestic and foreign investors withdrawing their money from the country in recent months. Also, with the additional sanctions, financial markets across the globe, and especially in the U.S., that are conducting business with or investing in Russia would like to reconsider.

The Russian stock markets have dipped since the country became involved in Ukraine’s civil conflict earlier this year. The MICEX, Russia’s main stock index, hit its lowest point since mid-May on July 29, when it closed at 1,357.84 points. Russian stocks have been the worst performing emerging-market equities so far this year, down 12%, compared with an overall gain of 6% for the benchmark MSCI Emerging Market Index.

Impact on U.S. investments

As a result, this could also affect the U.S. economy. A large number of investors invest in Russia through exchange-traded funds (or ETFs) like the Market Vectors Russia ETF (RSX), the iShares MSCI Russia Capped Index Fund (ERUS), and the SPDR S&P Russia ETF (RBL) which are heavily invested in top Russian firms like energy giant Gazprom (OGZPY) and Rosneft Oil Co. (OJSCY). Since the U.S. announced additional sanctions against Russia, these ETFs have seen a price decline of 7.48%, 7.52%, and 7.68%, respectively, from July 16–25.

Following the July 17 downing of a Malaysia Airlines passenger jet in eastern Ukraine, widely blamed on Moscow-backed rebels, U.S. ETFs that invest in Russia have seen one of their biggest net outflows for the year. An aggregate of $28.54 million in investments had already been pulled out for the five days ending July 18. Russia is currently leading all other emerging market countries in outflows.

While the investment climate in the country seems to be surrounded by dark clouds, Russia does see its silver lining in China. Continue reading the next section in this series to learn more.

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