Russia seems to be facing woes on multiple fronts as I had described previously. Western sanctions and the sharp decline in the price of oil late last year had partially lead to a drastic fall in the Russian ruble – and all these have sent Russia’s economy into a tailspin.
Not surprisingly, stocks in Russia have followed suit. The Lyxor Russia ETF (SGX: JC7), an exchange-traded fund listed in Singapore and which tracks the DJ Rusindex Titans 10, an index representing “the largest and most liquid Russian Depository Receipts (DRs) that trade on the London Stock Exchange,” has slumped by nearly 40% since hitting a high of US$4.06 in July 2014.
Russia bolstering ties in Asia
In the wake of prolonged Western sanctions due to its aggression in the Crimea region of Ukraine, Russia has been busy strengthening ties with China in addition to searching for new partners for economic cooperation.
China-Russia bilateral relations will reach a new high as China plans to boost trade between the two countries to US$100b this year, up from US$95b in 2014. To that point, China’s Foreign Minister Wang Yi said at a press conference on Sunday:
“The practical cooperation between China and Russia is based on mutual need, it seeks win-win results and has enormous internal impetus and room for expansion…
…[C]omprehensive strategic partners of coordination, China and Russia have a good tradition of supporting each other.”
China also seemed to not have been swayed by Western sanctions against Russia when it decided to strengthen economic ties with the beleaguered country. This can be seen from the following statement by Wang given in the same Sunday press conference:
“China-Russia relationship will not be affected by international vicissitudes and not aimed at any third party. China’s relations with Russia were based on mutual needs.”
But while the new discussions with China are important, Russia is also not placing all its bets on China.
For instance, 2014 was a pivotal moment for India-Russia relationships when both countries inked 20 high profile deals within 24 hours during the 15th India-Russia Annual Summit in December.
Russia’s economic woes
Despite Russia’s efforts to bolster ties and strike out economic deals with Asian countries, the European nation’s economy has shown no real signs of being able to turn-around its woes anytime soon.
Newswire CNN ran an article recently which managed to articulate Russia’s problems well.
The article mentioned Russia’s debilitating inflation rate, which hit some 16.7% in February this year following the ruble’s plunge. It also brought up reports by the World Bank which point to Russia’s slowing industrial activity and consumer demand. Russia’s central bank now expects things to get even uglier as it predicts the country’s economy will contract by 3.5% to 4% this year, worse than a previous forecast of a 3% shrinkage.
With all that said, as one of the largest exporters of crude oil, oil prices have a strong correlation with Russia’s economy. Therefore, oil prices may have to rise significantly in order for Russia to be on a sustainable road to recovery.
So, if you believe that oil prices will definitely rebound in the future, Russia’s current dire economic situation might be an opportunity to invest in Russia-related companies that have been beaten down as a result of Russian woes.
As an example of how such companies are depressed now, we can look to Singapore-listed instant coffee maker Food Empire Holdings Limited (SGX: F03). The firm, which counts Russia as its largest geographic market, has seen its price-to-book value hit 0.8 at the moment, the lowest it’s been over the past five years. .
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.