By Ben Baden

When gas prices move higher, the Russian economy generally benefits

Of the rapidly growing "BRIC" countries -- Brazil, Russia, India, and China -- Russia has always been a sort of odd man out. While the others have registered double-digit or near double-digit growth for years, the Russian economy has grown at a much more moderate pace. Experts have even argued that Russia shouldn't be grouped with Brazil, India, and China because its population is much older and its economy is much more industrialized, therefore it's not expected to grow at a rate comparable to the others. But lately, Russia's economy has been benefiting from what many other nations, including the United States, are struggling with. "[Russia is] truly one of the major global beneficiaries of higher gas prices," says John Derrick, director of research at U.S. Global Investors.

While higher oil prices are a cause for concern in the United States, they are providing a lift for resource-rich Russia, the world's largest producer of oil and second-largest producer of natural gas as well as the largest non-OPEC exporter of oil. Vlad Milev, manager of the Metzler/Payden European Emerging Markets Fund (symbol MPYMX), says the country's entire economy is reaping the benefits. The Russian government takes a portion of oil revenues and distributes them throughout the economy, Milev says, which creates a trickle-down effect for other Russian businesses and consumers. "So that gives a boost to the economy as well," he says.

So far this year, emerging markets have struggled to keep up with developed nations like the United States for a number of reasons, most notably unrest in the Middle East and higher inflation concerns. Year-to-date through March 28, the MSCI Emerging Markets Index lost about 1 percent, according to Bloomberg. (The S&P 500, on the other hand, gained about 5 percent over the same time period.) Of the four BRIC markets, Russia is leading the way. The MICEX Index, which is made up of 30 Russian stocks from 10 sectors of the economy, has returned 15 percent so far this year. The next-best BRIC performer is China, with a 5 percent gain for the Shanghai Composite Index. Brazil's Bovespa Index was down 2 percent as of March 28, and India's Sensex Index lost 10 percent over the same period of time.

Russia has also gotten a boost from the ruble, which has gained about 7 percent against the U.S. dollar so far this year. Derrick calls the ruble a "commodity currency" because it generally benefits from higher commodity prices. "Roughly half the return [so far this year] has been currency related," says Derrick, who also helps manage the U.S. Global Investors Eastern European Fund (EUROX). "The dynamics are pretty favorable for the ruble."

The largest Russia-focused exchange-traded fund, Market Vectors Russia (RSX), has had a tremendous run of as late. In 2009 alone, the fund gained a whopping 139 percent. But because of a 74 percent loss during 2008's downturn, the fund has lost an annualized 3 percent over the past three years. Over the past year, the ETF has returned about 21 percent. It's been a wild ride for investors in Russia-focused funds, but experts say with higher commodity prices on the horizon, the outlook is fairly positive for Russian stocks. "A lot of people ignore Russia to their peril," says Christian Magoon, CEO of asset management consultant firm Magoon Capital.

Investing in Russia comes with its fair share of risks. The government has a history of corruption. In 2010, Russia ranked 154 out of 178 countries on the Corruption Perception Index, measured by Transparency International. What's more, many of the country's largest companies are state-owned or partially owned by the Russian government. If you want to invest in Russia, says Derrick, "you have to be comfortable with that idea."

The energy sector holds many of Russia's most promising stocks. About half of Milev's fund is invested in Russia, mostly in energy companies like Gazprom, one of the world's largest natural gas companies, and oil giants Lukoil and Rosneft. So far this year, the three have been strong performers returning 26 percent, 27 percent, and 34 percent, respectively. "Overall, Russia is really well-positioned to take advantage of the environment right now," he says.

Derrick's fund also has large investments in the energy sector, including Gazprom and Rosneft, as well as natural gas producer Novatek and TNK-BP, a joint venture between some Russian companies and BP. The fund's largest holding is in Sberbank, Russia's largest retail bank, which Derrick says is a bet on the Russian consumer. "The consumer in Russia is very unlevered," Derrick says, meaning consumers there are not as burdened by debt as, say, consumers in the United States who are still recovering from the financial crisis.


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