Russia has become a premier emerging market and member of the BRIC nations (the emerging markets of Brazil, Russia, India, and China) following its explosive700% growth between 2001 and 2006. Driven by large crude oil reserves and moves towards free-market initiatives, the country became a popular destination for manyinvestors. The country's 2014 military intervention in Ukraine and a downturn in commodity prices have hurt its prospects, but investors should still keep an eye on this $1.6 trillion economy.
Note
Following Russia’s military assault on the neighboring nation of Ukraine in late February, the U.S., the EU, and other nations imposed strict sanctions on Russia’s largest financial institutions and enterprises, including Russia’s central bank and energy giant Gazprom. The sanctions have pushed the Russian financial system and markets into a new, and potentially prolonged, crisis.
Stocks in Russia are traded on the Moscow Exchange, which is the result of a merger between the Russian Trading System (established in 1995) and the MICEX Group (the oldest exchange in Russia) in 2011.
Since then, the exchange has expanded to include financial instruments ranging from cash equities to commodity futures.Learn more about investing in Russian stocks.
Key Takeaways
- You can invest in Russian stocks through mutual funds, ETFs, and ADRs that help you avoid the risks of direct investments.
- Before and during investing in Russian stocks, ensure you're familiar with the economic factors and conditions the country faces.
- It might help to compare Russian stocks you're looking at to domestic stocks to see if the returns are worth the additional risks you take on.
How To Buy Russian Stocks
The easiest way to gain exposure to the Russian stock market is by purchasing U.S.-traded mutual funds, exchange-traded funds (ETFs), or American Depository Receipts (ADRs). Since these are traded on U.S. exchanges, investors can avoid the complexities and risks associated with directly investing overseas, such as tax concerns, execution risk, and strange trading hours.
The Moscow Exchange has different times for different markets. The securities market is open from 9:30 a.m. until 11:50 p.m. Moscow time (GMT+3); derivatives, foreign exchange, and the commodities markets are open from 7:00 a.m. until 11:50 p.m.; and the standardized OTC market is open from 10:00 a.m. to 5:00 p.m. Moscow time.
Some popular Russian fundsand ADRs available in the U.S. include:
- Voya Russia Fund (Mutual Fund: LETRX)
- VanEck Vector Russia ETF Trust (NYSE: RSX)
- Gazprom OAO (ADR) (Pink Sheets: OGZPY)
Many other U.S. brokerages offer access to Russian stocks through ETFs and mutual funds, but they often charge higher commissions for international trades. However, investors in the U.S. are limited in what they can directly invest in due to sanctions against Russia, specifically government bonds and funds that might invest in energy or defense.
How To Analyze Russian Stocks
If you choose to invest in Russian ETFs or mutual funds, you'll want to look at the country's economic health before making an investment decision. A wide array of information on this subject, including current events analysis and economic data, can be found on the World Bank's website. In addition, the International Monetary Fund (IMF) also provides valuable economic data.
Macroeconomic factors to consider include:
- Credit ratings: The country's credit rating represents the likelihood of a default on sovereign debt, which could negatively impact bonds and equities.
- Growth rates: The country's economic growth rate is a good indication of how much growth investors can expect to see from stocks within the economy.
If you prefer to invest directly in Russia's RTS, you can analyze stocks using the English version of the RTS website. From there, you can find a link to the public company's website, where annual reports and other important disclosures are typically found. These reports are helpful when evaluating individual stocks or bonds rather than the broad economy.
Company-specific factors to consider are the same as you'd consider with a company based in the U.S., including:
- Valuations: How does a company or fund's valuation compare to domestic equities or other emerging market options?
- Financial performance: Have a company or fund's earnings been growing over time? Do the companies offer a dividend?
You should consider both macro and microeconomic factors when evaluating an investment. Also, look at how the investment compares with other investments in the fund's portfolio. For example, Russia's economy may have contracted 0.2% in 2015, but the country's equity market may have appreciated if these losses were better than expected. For example, GDP growth in 2018 surpassed expectations at 2.3%, and the World Bank's forecast for 2021, 2022, and 2023 just as lucrative—3.2%, 3.2%, and 2.3%, respectively.
Risks Associated with Russian Stocks
Russia has become a risky emerging market ever since its 2014 military intervention in Crimea, Ukraine. Meanwhile, its reliance on crude oil exportshas made it vulnerable to slumping oil prices amid global trade concerns. Many investors are also waiting to see the effects of recent key economic reforms that included regulation and supervision in banking, liquidity buffers, and fortification of capital. These reforms should make the market less risky, more transparent, and hopefully, make it easier for investors to access.
The reforms are too recent to have much of an effect yet, so some key risk factors you should consider are:
- Less stability and transparency: The U.S. stock market is widely considered to be a safe haven for investors, so most foreign markets, including Russia's equity market, tend to be both more volatile and less transparent by comparison.
- Exposure to energy markets: Oil and gas account for about half of Russia's revenues and more than 45% of its exports. Some Russian ETFs hold as much as 20% of their assets in the energy sector. Commodities carry lots of risks, which translate to significant fund risk.
- Potential for social unrest: Socioeconomic problems could cause issues for investors. Throughout 2018, 2019, and early 2021, multiple protests have seen thousands take to the streets of Moscow.
- Depletion of reserves: Russia nearly depleted its reserve funds throughout 2017. The sovereign wealth fund is back up to $172 billion, but it shows how quickly the country can turn.
Russia continues to take steps to mitigate uncertainty and economic fluctuations, tackle poverty, get people back to work, and deal with financial corruption. The World Bank has predicted a marginal economic recovery during 2021, but it might be years before any measures taken can be analyzed.
Investors should consider these risks in the context of their portfolios. In a diversified portfolio, it might make sense to include exposure to Russian equities or bonds despite their higher risk. A diversified portfolio may increase long-term risk-adjusted returns.
