Why the oil price drop could affect your ETF investments in Russia

By

Updated

Russia: The world’s leading oil producer

With its resource-rich landscape, Russia is the world leader in oil production. Russia is home to most of the largest oil and gas companies, including Gazprom (OGZPY), Lukoil (LUKOY), Rosneft (OJSCY), and Novatek (NOVKY). Russia also has the largest petroleum industry in the world. However, the Russian oil industry claims to be in need of huge investment.

Article continues below advertisement

Drop in global oil prices hit Russian exports

The sanctions imposed by the West against investments into Russia were already bedeviling Russia’s investment-thirsty oil industry.

Moreover, with the recent slide in global oil prices, Russia’s economic woes have been exacerbated. Oil happens to be critical to Russia’s export earnings. The Russian economy is suffering losses at a rate of $90 billion–$100 billion a year due to the oil price drop and the weak ruble, according to a statement from Russian Finance Minister Anton Siluanov on Monday, November 24.

However, Siluanov disagreed that the sanctions, the sharp fall in oil prices, and the depreciation of the national currency will have any major negative effects or cataclysmic consequences for the Russian economy.

Growth in Russia

Growth in the Russian economy plunged in the first quarter of 2014 to a 0.9% annualized growth rate versus the 2% recorded in Q4 2013. The economy has since dipped further to 0.8% growth in Q2 2014 and to 0.7% in Q3 2014.

The economy faces plummeting investor and business confidence due to the crisis in Ukraine. The performance of exchange-traded funds (or ETFs) investing in Russia serves as a good gauge of the Russian capital markets and investor sentiment. These funds include the VanEck Vectors Russia ETF (RSX), the iShares MSCI Russia Capped Index Fund (ERUS), and the SPDR S&P Russia ETF (RBL). They invest in Russian equities like the energy giant Gazprom (OGZPY) and Rosneft Oil Co. (OJSCY).

Advertisement

More From Market Realist