Russian Resilience: An Economy Driven By Pragmatism And Consistency

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If history has taught us one thing about Russia, it is that its resilience should not be underestimated. Its legendary winters have forged a determination in its people that, when tested, particularly by foreigners, sees them dig in for a long hard fight. After the end of the siege at Leningrad (January 1944), Russians proudly proclaimed, "Troy fell, Rome fell, Leningrad did not fall." The length: 900 days. The toll: 670,000 to 1,500,000 people.1

Given the country's recent history, it should come as no surprise that Russian markets are staging a comeback.

Russia in Recovery

The Russian economy may have contracted in the first quarter (1.2% growth year on year), but it was less than expected.2 During the same period, the economy benefited both from higher oil prices and a stabilization in the ruble's exchange rate. In June, stating steady inflation as a reason, the Bank of Russia lowered its key interest rate by 50 basis points to 10.5%.3 At the half year mark, Russia's stock market had risen 8.49% in local currency (ruble) terms for the six-month period and 24.78% in U.S. dollar terms.4 As of July 25, the MVISTM Russia Index (MVRSXTR) was up 23.21% YTD. At the same time, small-caps as measured by the MVIS Russia Small-cap Index (MVRSXJTR) soared 40.47% in the first half of the year.

2016 YTD Total Returns 12/31/2015-7/25/2016
MVIS Russia Index (MVRSXTR) versus MVIS Russia Small-Cap Index (MVRSXJTR)

Source: MVIS and VanEck.

Pragmatism and Consistency

Why does Russia remain resilient? On the economic front at least, two characteristics stand out: pragmatism and consistency.

A good illustration of Russia's pragmatism is the reaction of Minister of Finance Anton Siluanov at the beginning of March, to Moody's Investors Service placing Russia on review for a downgrade. Assigning no blame, Siluanov noted that the rating agency's move indicated "…the need to adapt the budget system to the new reality in the commodities market."5

When it comes to consistency, you need to look no further than the Central Bank of Russia. Following the imposition of sanctions, the central bank continued to opt for a more orthodox policy response than was initially expected. This has allowed Russia's currency to act as a shock absorber, and it has worked. The ruble sold off almost 75% in 2015 and inflation at the end of this year could be as low as 7%. Russia continues to pay its debts despite having its market access severely restricted under sanctions and as a result the government's external debt has approximately halved in the past two years (falling to $31.5 billion).4

"Russian Markets Did Not Fail"

Russians may someday proclaim, Communism failed, Western Sanctions failed, but Russian markets did not fail. The Russian equity markets can be accessed through VanEck Vectors Russia ETF (NYSEARCA:RSX) and VanEck Vectors Russia Small-Cap ETF (NYSEARCA:RSXJ).


1 Russiapedia: Russian history: The Great Patriotic War

2 Focus Economics: Russia Economic Outlook

3 Ibid.

4 Bloomberg

5 Reuters: Moody's warning highlights pressure on Russia to adapt to lower oil

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