August 2012 will be a major turning point in Russian economic history as Russia is set to join the World Trade Organization. This move is likely to have dramatic consequences for industries all around, as tariffs and subsidies are removed from the system. Part of the process will be painful, with some inefficient sectors set to be hit hard; purely domestic manufacturing for instance will be forced to become more efficient or simply go bankrupt as import tariffs on competitors are released. The benefactor may well be the more efficient Russian companies, instead of the more international names like Caterpillar (CAT) or Deere (DE), but one can not rule out a potential new market for them also. Of the two, I prefer Deere, given my long term belief in agriculture, and feel Deere is a stronger play on this trend.
In the short term a major winner may be the Gas market, especially for the likes of Gazprom (OGZPY.PK) who have been forced to suffer break-even pricing in Russia (where more than 50% of volumes of their Gas are sold in Russia), while enjoying their profits from only overseas sales. This dynamic will change dramatically; it is likely their export prices will remain flat or even come down some what, cementing their status in the European market, while the domestic gas prices will rise significantly boosting profits for Gas producers.
Higher energy prices for domestic companies will hurt competition on the international stage. The Russian fertilizer companies will lose their competitiveness, and as a consequence be forced to increase prices - quite likely given the cartel approach in this market - this should have a benefit for the non-Russian players such as CF Industries (CF), Potash (POT) and Mosaic (MOS), who will receive better prices or pick up market share. Going forward, this is a really attractive sector to be in, with the global population reaching 7bn and with it the global middle class surpassing well over 1bn, food production is going to be an on-going issue and fertilizers will be the answer.
If one wants to stick to Europe then Yara International is a fantastic play (YARIY.PK), they are the world's largest producer of Nitrogen based fertilizers. Lower European Gas prices, and higher Russian or even US, will be a huge competitive advantage for this Norwegian producer. Nitrogen based fertilizers are the most energy intensive, needing 5-6x more kJ/kg than Phosphate and Potash. Thus any change increase in competitiveness for Yara over competitors in this field, with have major implications on market share (revenues) and costs.
Ultimately at the end of this, the Russian consumer will benefit the most, and so too will the long term potential of the Russian economy, as it moves away from reliance on purely oil and gas. The World Bank has estimated that joining the WTO could increase Russian GDP by 11% more than it would otherwise be until 2020. This, on top of the general healthy state of the Russian economy, as discussed in my other article. Make Russia a truly golden opportunity. One can buy Russia through an ETF like ERUS that tracks essentially the Micex (the major Russian index). However, I feel a more stock specific approach will be the most rewarding approach, particularly the ones mentioned above. But if one wants to play a global economic recovery, sound Russian economic fundamentals and the entrance of Russia into the WTO all at once, then buying the index makes sense.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.