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By Chris Aylott

Of all the emerging markets, Russia has the most complex relationship with the West. The Russia Market Vectors ETF (NYSEARCA:RSX), reflects this, and its unusual mix of natural resources and modern technology is a snapshot of Russia itself.

Russia has strong historical and geographic ties to Europe. However, it is just now joining the West and catching up from centuries of mismanagement. Democracy, modern business practices, and the consumer market have had only 20 years to take root, and they are struggling against corruption and authoritarianism.

What makes Russia important is its sheer size and natural resources. Metals and energy were more than 80% of Russia’s exports in 2011. It is the world’s largest oil producer, and the biggest exporter of natural gas, nickel and palladium. RSX reflects this, with at least 60% of its holdings devoted to metals and energy.

Communications are critical to keeping a country the size of Russia together. Russian telecom underwent substantial reforms and upgrades in the first decade of the 21st century, and it is now Russia’s most modern industry. As a result, telecom companies make up about 10% of RSX, just a little behind the amount allocated to banking (11%).

When you consider these traits, the breakdown of the Russia Market Vectors ETF’s top 25 holdings makes a lot more sense. Like the Russian economy it represents, RSX is driven by energy, metals, finance and telecom, with retail and other underdeveloped industries filling out the portfolio.

RSX Top 25 Holdings

NAME SECTOR ORIGIN WGHT
Gazprom OAO ADR (OTCPK:OGZPY) Energy Russia 8.19
Rosneft Oil Company OJSC GDR (OTC:RNFTF) Energy Russia 7.55
Sberbank of Russia OJSC Banking Russia 7.23
LUKOIL Oil Company JSC ADR (OTCPK:LUKOY) Energy Russia 6.73
Novatek OAO GDR Energy Russia 6.10
MMC Norilsk Nickel JSC ADR (OTCPK:NILSY) Metals Russia 4.76
JSC Uralkali GDR (OTC:URALL) Mining Russia 4.60
Gazprom Neft OJSC Energy Russia 4.50
Surgutneftegas OJSC Energy Russia 4.26
Bank for Foreign Trade Vneshtorgbank JSC VTB Bank GDR Banking Russia 3.97
VimpelCom Ltd ADR (NASDAQ:VIP) Telecom Netherlands 3.15
Mobile Telesystems OJSC ADR (NYSE:MBT) Telecom Russia 3.11
Rostelecom OJSC Long-Distance and International Telecommunications (OTCQX:ROSYY) Telecom Russia 2.83
Novolipetsk Steel OJSC GDR Metals Russia 2.51
OAO Severstal GDR Metals Russia 2.47
Federal Grid Company Of Unified Energy System OJSC Energy Russia 2.43
Tatneft OAO GDR Energy Russia 2.35
Inter RAO UES JSC Energy Russia 2.11
OJSC Magnit GDR Retail Russia 1.98
United Company Rusal PLC Metals Russia 1.90
Federal Hydrogenerating Co JSC ADR Energy Russia 1.84
JSFC Sistema JSC GDR Consumer Russia 1.65
Evraz PLC Metals U.K. 1.63
Polymetal International PLC Metals U.K. 1.40
X5 Retail Group N.V GDR Retail Russia 1.30

The world is hungry for energy and metal, which makes RSX a good investment. However, Russia is a perfect example of the “Resource Curse” or “Paradox of Plenty.” Its economy is so dependent on natural resources that its economic growth and industrial development have been stunted. Corruption, revenue volatility and social unrest are continuing problems that could flare up into an investment disaster.

Source: Russia Market Vectors ETF Is An Investing Conundrum