Russian ETFs Rally on Energy Sector as US Rhetoric Belied by EU Reticence

Michael Teague  |

The previous day’s decision to temporarily exclude Russia from the G-8, along with the announcement of new US sanctions against the former Soviet Union had little impact on emerging market investors, as Tuesday’s trading session opened with Russia ETFs continuing to gain momentum.

After a month of outflows, the iShares MSCI Russia Capped Index (ERUS), SPDR S&P Russia (RBL), and Market Vectors Russia (RSX) funds were all trading at least 2 percent higher and on substantial volume, driven by a rally in the country’s massive energy sector that was lead by gas giant Gazprom OAO. Russia’s economy relies heavily on its oil and gas industry, and most Russia-specific funds reflect this with the aforementioned all having at least 40 percent of their holdings in the country’s energy sector, with substantial portions devoted to Gazprom alone.

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Tuesday’s results provide further evidence that the much of the heated rhetoric exchanged between the US and Russia over the past month over the latter’s annexation of Crimea, particularly the threat of US sanctions, is more bluster than substance.

Indeed, despite President Vladimir Putin’s move last week to officialize his country’s annexation of a significant portion of its Western neighbor, the 28-member European Union has shown itself less eager than the US on the subject of economic sanctions that would target entire industries rather than individuals thought to have close ties to the Putin “regime.” Thus, even as elected US representatives continue their bi-partisan campaign of threats towards Russia, the annexation of Crimea is now an incontrovertible fact of the on-the-ground variety, about which little can be done without the consent of the Europeans who rely heavily on oil and gas exports from its Eastern neighbor.

But the rally for the Russian energy sector, which had taken a sizeable hit from political events (Gazprom’s stock, for example, had lost about 20 percent of its share price prior to the last few days) also reflects the options available to it. While the loss of westward exports would certainly not be a welcome development for the nation’s oil and gas producers, there is no shortage of options lying east. Just last month, Chinese imports of Russian crude hit record levels, a trend which many expect to continue into the future.

For the time being, at least, all of this appears to be shaping up into an opportune moment for investors, as the low valuations of Russian companies relative to those of other emerging market economies make for a variety of compelling risk plays.

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