Russia has been one of the main casualties of the emerging-market sell-off. The rouble has hit a record low against the euro and a five-year trough against the dollar. Russia’s MICEX stock index is close to a six-month low.
The economy looks “condemned to stagnation”, says The Economist. It has been coasting for ten years on the energy boom. Now that oil and gas prices are no longer surging, GDP growth is likely to fall back to 2% this year.
A “bloated and inefficient state”, rampant corruption, shaky property rights, high labour costs and a lack of investment are major obstacles to growth, especially now that consumption is ebbing. A decade ago the budget balanced with oil at $20 a barrel; today it needs to be around $103.
Yet the pessimism looks overdone. As The Wall Street Journal’s Richard Barley points out, Russia “doesn’t match the profile” of most of the countries “in the market cross-hairs”.
Its foreign-exchange reserves are healthy, its public debt is very low, it ran a current-account surplus of 1.5% in 2013 and a budget deficit (the annual government overspend) of just 0.5%. There is no immediate crisis. So Russia at least has time to make some necessary reforms.
Russia is “one of the most hated stock markets” in the world, says markets guru Jim Rogers. Its cyclically-adjusted p/e ratio is just under seven, the second-lowest in the world behind Greece. So the bad news is already in the price and the potential upside considerable.
One way in is via the iShares MSCI Russia Capped ETF (NYSE: ERUS). The JPMorgan Russia Securities Investment Trust (LSE: JRS) and the Blackrock Emerging Europe Trust (LSE: BEEP) are also worth researching.