Seeking Alpha
Portfolio strategy, oil & gas
Profile| Send Message| ()  
From an international investor’s perspective, is there any actionable investment idea resulting from oil prices north of $80 per barrel? Short answer…yes! For the purposes of this discussion, I want to focus on Russia.

Investing doesn’t have to be super-complicated. All other things being equal, an investor should prefer investing capital with a company that is making solid capital investments relative to a comparable company that is cutting capital investments. This is the very essence of why markets exist in the first place: the allocation of capital to the best projects. This is true on the macro level as well. A country that is making investments today in order to prosper tomorrow should be preferred to a country that is consuming today at the expense of tomorrow. This brings me to the focal point of this discussion: Russia.

Russia is emerging as a very significant player in the world economy. Energy prices, for better or worse, have and will continue to play a significant role in the ability of Russia to develop a more robust economy and simultaneously increase political stability (including reducing corruption). The higher the oil price, the easier it is for them to invest in new technologies, infrastructure, and entrepreneurship. Given the choice between excessively spending petrodollars on consumption goods that come from high oil prices or investing petrodollars back into the economy, it seems clear that Russians choose to invest. The figure shown below is a graph of the change of investment as a percent of GDP compared to oil prices. I used data gathered from the OECD from 1996-2007 and simple WTI prices (which is clearly not a Russian crude oil but nonetheless shall suffice for this discussion). (Click charts to enlarge.)

It seems fairly clear that as price of oil rises, the relative share of investment as a percent of GDP tends to increase. This seems to prove the argument above, given the choice to increase consumption vs. make investments, the Russians seem perfectly willing to invest capital back into their economy.
Ok, so perhaps the next logical question should be, “are the Russians any good at making capital investment decisions?” Seems like a very relevant question considering that if they are not effective at making sound investments, allocating additional capital to investment would prove quite futile. However, data seems to suggest that the Russians have been very effective at making sound capital investments. The chart shown below displays the relationship between GDP growth and the change of investment as a percent of GDP. Based on data from the OECD for the past 15 or so years, as the Russians have increased investment as a percent of GDP, GDP growth tends to rise. This supports the argument that the Russians are effective at making capital investment decisions.

So at this point, the argument is that with oil prices starting to inch above $80 per barrel, Russia will increasingly be able to invest in their own economy and thus prosper in the future.
There is also an additional blunt argument behind investing in Russia with oil prices above $80 per barrel. Russia’s economy is highly dependant upon the prices of energy and other natural resources. Thus, there is a direct relationship between oil prices and GDP growth. The graph shown just below provides a visual of this relationship.

And for one final point, just in case you are wondering whether any of these effects translate into Russian equity prices…take a gander at the final chart. Quite clearly as price of oil rises, the Russian equities markets rise as well. This is simply because there is a significant portion of Russian equities that are in fact energy companies of various sorts.

So assembling all the pieces together….oil prices north of $80 per barrel will lead directly to substantial gains in Russian Equities as well as the Russian economy. Furthermore, higher oil prices will enable additional investment which will lead to increased future growth in GDP. All in all, this seems to point to higher Russian stock prices.

Disclosure: Long call spreads on RSX
Source: The Bullish Case for Russian Stocks