Russian Stock Market Soars In 2016

by: VanEck

Russia was among the top-performing emerging markets in 2016. Its stock market gained 47.44% in USD based on the MVISTM Russia Index (MVRSXTR). Russian small caps were even more impressive, having gained 103.8% in USD based on the MVISTM Russia Small-Cap Index (MVRSXJTR).

Investors may not have been aware of this market surge given news headlines dominated by claims of Russia's interference in the U.S. election. But behind the bluster is an economy that has undergone some notable transformations in the past five years. As shown in the chart below, the country's economy appears to be righting towards a return to growth, albeit uneven and gradual. What has been most critical to Russia's improving economic health is much-needed fiscal and monetary policy reforms and the tailwinds of the early-stages commodities rally.

Commodities Provided a Boost

At the end of 2015, we predicted that the end of the commodities bear market might occur in early 2016, and given last year's commodities rally, we appear to be well into a new recovery cycle. This was particularly good for Russia given its economy's heavy reliance on energy resources.

The company is expected to see positive growth in 2017-2018, given that headline financial and economic indicators and trends are now picking up, according to the Brookings Institute. Even with sanctions still in place, conditions have improved to the point that in September 2016, Standard & Poor's upgraded its outlook on Russian credit from negative to stable, citing the easing of external risks.

Russia GDP Annual Growth Rate % is Moving Positive (2008-2016)

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source:, Federal State Statistics Service. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Stability Reinforced by Russia's Conservative Monetary Policy...

In our view, the country's "moderately tight monetary policy" has been, and remains, excellent. While focused on bringing inflation down, the Central Bank of Russia has let the ruble currency float freely. In addition to further evidence (for example, in the latest purchasing managers' indices) that Russia's growth outlook is gradually improving, the country's medium-term fiscal policy framework continues to look conservative.

Elvira Nabiullina, the bank's head, was named the best Central Bank Governor in Europe in 2016 by international financial magazine, The Banker. We believe this shows that the efforts of the Central Bank have been recognized by its peers.

At VanEck, we continue to believe in the need to take a long-term investment view. The fact that the stabilization of Russia's economy has been in the works for some time perhaps emphasizes this. After taking decisive action by tightening rates in 2014 to stem a rapid devaluation of the ruble, the Central Bank was able to ease interest rates significantly in 2015 to give the economy breathing room to grow. 2016 was quite a stable year, as the Central Bank eased interest rates only twice.

Russia Interest Rates: One-Week Repo Rates % (2012-2016)

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source:, Central Bank of Russia. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

... And its Measured Approach to the Fiscal Budget

Along with central banking policy, the country has also become more conservative with its fiscal budget. As recently as 2014, Russia's government had forecast oil at $100/barrel for its 2015-2017 budget. This was obviously not the case, as oil prices tumbled from above $100/barrel in 2014 to below $40/barrel at the end of 2015, before rebounding to above $50 at the end of 2016. In contrast, the revised budget for 2017 assumes a much more conservative $40/barrel price for oil until 2019.

Is Russia the "Trump Trade" for Emerging Markets?

In addition to these very encouraging developments, President Trump's presence in the White House suggests at least an end to the escalation of sanctions. This would be a particularly good prospect for Russia, not least because it has simply paid down its debt and de-levered during the sanctions period.

Some are saying it is the one country that is likely to benefit from the changing administration in Washington. Given Trump's election, there is optimism that further sanctions are unlikely, at least from the U.S. This may not be the case for Europe, but overall markets are anticipating an easing bias in sanctions against Russia.

Russians may someday proclaim that Communism failed, Western sanctions failed, but Russian markets did not fail. VanEck gives investors access to the country's equity markets through two ETFs: the VanEck Vectors Russia ETF (NYSEARCA:RSX) and the VanEck Vectors Russia Small-Cap ETF (NYSEARCA:RSXJ). Also, our actively managed VanEck Emerging Markets Fund A (MUTF:GBFAX) held a 3.5% exposure to Russia as of 12/31/16.

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