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Why Russia’s Plans to Raise Crude Prices Might Have Failed

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Russia plans to raise crude prices seem to fail

Russia was first to initiate a production freeze talk. Later, it was joined by OPEC (Organization of Petroleum Exporting Countries) countries like Venezuela, Saudi Arabia, and others. Initially, Iran was neutral. However, it decided to move away from the agreement because it could hurt its economy. After Mohammad Bin Salman Al-Saud’s—Saudi Arabia’s deputy crown prince—interview, it became obvious that Russia plans to raise crude prices by boosting confidence among investors and capping the production at January 2016 levels may not succeed.

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Russian economy and crude oil prices

The above graph shows Russia’s GDP (gross domestic product) growth year-over-year and Brent crude oil prices over the last ten years. According to Russia’s state statistics, in 2014, mining energy–producing minerals attracted 14.7% of the total fixed capital investment in the country. According to the U.S. Energy Information Administration, in 2013, crude oil accounted for 68% of the total exports and 16.4% of the GDP. Europe (FEZ) and Asia account for a significant portion of Russia’s crude and natural gas exports. Russia’s main trading partners are Germany and China (FXI). In 2014, Russia (RSX) exported 4.7 million barrels per day of crude oil and lease condensate. The Russian economy is highly correlated to oil prices. Experts have observed that when crude oil prices fall, the Russian economy contracts.

Stock and ETFs impacted by the above development

ETFs tracking the Russian market such as the VanEck Vectors Russia ETF (RSX) and the iShares MSCI Russia Capped ETF (ERUS) will be impacted by the slowdown in the Russian economy. Russian oil and gas ADRs (American depositary receipts) such as Gazprom Pao (OGZPY), Lukoil (LUKOY), and Tatneft (OAOFY) also track the above development.

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