The Russian economy is highly correlated with oil prices. Crude oil constituted 68% of the country’s total exports in 2013, according to the EIA (U.S. Energy Information Administration). The fall in oil (BNO) prices heavily affected the performance of the economy. Similarly, the reversal of oil (USO) prices helped its index to recover.
The VanEck Vectors Russia ETF (RSX), which tracks the performance of Russia, showed a massive recovery. On a year-to-date basis, this ETF had returned 20% as of June 30, 2016. However, the iShares MSCI Brazil Capped ETF (EWZ), which tracks the performance of Brazil, provided a return of 46% during the same time period.
The current PE (price-to-earnings) multiple of the VanEck Vectors Russia ETF (RSX), which tracks the performance of Russia, is 9x. China’s (MCHI) current PE multiple is 10x and Brazil’s (EWZ) is 12x. India and Mexico are trading at much higher PE multiples than other emerging economies. Russia is trading at a lower valuation than other emerging markets (EEM) (VWO).
If crude oil prices maintain their rally, then major Russian crude oil producers such as Gazprom (OGZPY), Lukoil (LUKOY), and Tatneft (OAOFY) could benefit. Crude oil is the backbone of the Russian economy and it would benefit from higher prices. You may be interested in reading our series What’s Bill Gross’s Take on Brexit, Global Growth, and Bond Markets?