Russia Rises Despite Risks

November 28, 2007

SAN DIEGO (ETFguide.com) - Russia has come a long way since its 1998 debt default and currency devaluation.

Booming crude oil prices is lifting Russia's oil production and exports. Also, as a major producer of other commodities, Russia has been enjoying the worldwide rise in  commodity prices.

The jump in crude oil prices and upward trend in Russian equities is hardly coincidental.

Over the past 3-months the Russia ETF (Ticker: RSX) has skyrocketed by 20.67 percent. During the same time frame, crude oil has also spiked ahead and flirted with $100 dollar a barrel.

The Russia ETF is managed by New York-based Van Eck Global and was launched in April 2007.

The fund currently has 38 holdings and follows the DAXglobal Russia+ Index. The index contains publicly traded companies that are domiciled in Russia and listed on global stock exchanges. Many of the holdings are concentrated in oil, gas, mining and other commodity related businesses.

While financial markets around the world are reeling from the deepening sub-prime mortgage crisis in the United States, Russia appears to be better insolated than most.

Still, Russia is not without risks.

Under President Vladimir Putin, Russia has been moving away from a free market system toward a rigid form of state capitalism. The government has re-nationalized important industries and turned other sectors into state controlled enterprises. Is Russia returning to its communist roots?

Also, Russia's banking system is fragmented and lacks financial transparency. Despite an invasion of foreign banks into Russia, Sberbank, the Soviet-era monopoly savings bank still dominates the landscape with a retail market share of roughly 50 percent.

Then too, there's possibility that oil and commodity prices will trip and fall. How would Russia's market react to this sort of unexpected reversal? Probably not well.

Despite these risks, Russia continues to hum along.