Can The Russia ETFs Keep Rising?

by: Alan Longbon


Private financial assets in the Russian financial sector are benefiting from large positive fiscal flows.

Government policy has changed tack in 2016 and is expanding the private sector massively.

External sector remains positive, private credit creation remains positive.

To assess this question, one applies a balance of national accounting framework.

The national accounts can be summarized in the following formula:

Private Sector [P] = Government Sector [G] + External Sector [X]

See the methodology section below for more detail on this formula.

The private sector is where the stock market is located and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks.

  2. Externally from overseas commerce.

  3. Government spending.

In an ideal scenario, the private sector would receive large and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow overall even if one or two of the three flows are negative. The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks.

We will look at each inflow in turn and start with the private sector.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The chart shows that private credit creation is growing steadily and adds about 800000 RUB Million per year to the private sector.

The chart below shows the stock market.

The chart indicates that the stock market has recently broken over the previous 2008 high and is now is now moving at all time high levels. This is a bullish chart.

The chart below shows GDP.

The chart shows that GDP has fallen by over 25% since peaking in 2013. This is not a bullish development. Russian GDP is in the same league as countries such as Australia, Spain and Mexico which makes it hard to believe the stories of how it is menacing the borders of Europe and how we need to bolster NATO and get ready for an invasion. There is not a large economic machine backing the threat. More propaganda than real.

(Source: Trading Economics, GDP in USD Billions)

The following chart shows the M2 money supply. M3 total broad money supply figures are not available however would be trending the same as M2 but be a higher amount.

The chart shows that the money supply has been steadily increasing. Given that GDP is falling this means that one can expect inflation for the worst reason in that the economy has declined while the money supply has increased. The shattered oil price also plays a role as this is a large export for Russia.

The chart below shows inflation. Inflation has been over 16% in 2015 however is now relatively at just under 5%. It would seem that the worst of the GDP drop is behind us and a flattening of the curve can be expected and perhaps even a return to growth.

In any private sector, one would like to see the customer base expanding and ever more transactions. The chart below shows population.

The chart shows that after a long period of population decline since 1991 caused by the fall of the Soviet Union and the neo-liberalisation of its economy, the trend has now changed for the better. Since 2013 there are more Russians being added to the private sector which means more transactions, more workers, more customers, more demand.

One must also have jobs for this population with which to earn income and makes sales to. The chart below shows total employed persons.

The chart reveals a steady growth in the number of employed persons making things and with pay packets to spend to buy them with.

The flipside of employed persons is unemployed persons, and this is shown in the chart below.

The chart shows that the unemployment rate has been steadily falling since 1999 and is now below 6%.

It is not just people that suffer unemployment. Plant capacity can be unemployed too. The chart below shows capacity utilization.

The chart indicates that capacity has been steadily rising since bottoming in 1998. But has been relatively flat at 65% since 2008.

Russian households have very little debt when one compares them to other countries in the world as the chart below shows.

(Source: IMF)

They tend to own their homes as the chart below shows.

They are building more of them as the chart below shows.

And the price of accommodation in Russia is falling as the chart below shows.

When one does not need to spend the greater part of ones income on rent or loan payments for ones accommodation one has a lot more disposal income for other purchases.

Before real inflation can set in, an economy must exceed its productive capacity and Russia has not done this yet. Inflation has been achieved by decreasing GDP and not by outrunning its productive resources through full employment and capacity utilization.

The bottom line is if the private is generating a positive income flow from private bank lending and the answer is yes and it is adding 800000 RUB Million per year to the private sector and the private sector has a growing population and workforce and excess capacity to produce more. Fertile ground for investing.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports less imports and also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. The chart shows that the balance is positive but weakening.

The chart shows an external sector net add to the private sector in the order of 22000 USD Million per annum (1210000 RUB Million) for 2016 and 2017 is likely to be the same.

Important for external sector results is the currency exchange rate, and this is shown in the chart below.

The chart shows that the Ruble has been steadily gaining strength since March 2016 which is actually not helpful to the external sector as it makes exported goods appear more expensive.

Currencies tend to gain strength when their asset backing improves. This points to an improvement in GDP coming and is also reflected in the falling unemployment rate and the rising employed persons rate. The down side to this trend is that exported goods to other countries appear more expensive and so demand for them falls.

Government Sector

The government budget value is shown in the chart below.

The chart shows the government of Russia had a change of policy in 2016 and started injecting money into the private sector. This is after many years of running budget surpluses that were draining the private sector of money.

The government is currently adding about 1000000 RUB Million per month into the private sector, and this is very positive for it and is currently the largest net inflow driving the value of private financial assets in the private sector, such as stock and bonds, higher.

The table below shows taxes. Taxes drain money out of the private sector and destroy financial assets.

(Source: Trading Economics)

The tax rates are compared with the rest of the world are relatively moderate.

The corporate tax rate is higher than the personal income tax rate which one rarely sees in this neo-liberal world where business interests have triumphed over the interests of the general population. Both are low though in a world sense.

Sadly there is a sales tax adding 18% onto each transaction that people make and causes large dead weight accounting losses as such a tax is so expensive and wasteful to administer and tends to smother small enterprise.

The role of all these taxes is to dampen aggregate demand, and it does this very well.

Russia is a currency sovereign and does not need to tax or borrow money from the private sector to fund itself as it is the source of the money. Draining the private sector of taxes, or borrowing from it is akin to putting seawater back into the sea. The rate for Social Security for Employees is at the right setting for a currency sovereign.

Sectoral Analysis Methodology

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it only needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is constantly growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

This relationship can be expressed by the following formula:

Private Sector = Government Sector + External Sector

GDP = Private Sector + Government Sector + External Sector

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector and external sector are both in plus and trending upwards.

Applying the Numbers

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result.

Private Sector Credit Creation

External Sector

Government Sector







(all in RUB Millions)

14000000 RUB Millions (245727 USD Millions) added to the private sector each year if current trends prevail. It happened in 2016 and is on track to occur again in 2017. This is what is driving the stock index upwards.

One can see the government budget makes a critical difference to the private sector flow results, which without it would be an order of magnitude smaller. This is important as private credit flows are determined by the general population and international flows by overseas players and are market driven. Government expenditure flows are a planned choice and not driven by market forces.

The largest flow is from the government sector since 2016 up until then the government was a fiscal drag on the economy and had been draining it for decades. There is just a chance that Vladimir Putin has completed National Reserve Accounting 101 and has seen that Russia is sovereign in its currency and is now putting those sovereign currency powers to use to help and improve his country.

The bottom line is that the private sector does have a positive income flow allowing all private financial assets in the sector to grow in value. Stocks and bonds trading on the local stock market have fiscal space to expand into at the macro level, as do other private financial assets and one can have a generally bullish attitude to investing there.

One can investment long the Russia via these ETF funds.


ETF Name


VanEck Vectors Russia ETF


iShares MSCI Russia Capped ETF


Direxion Daily Russia Bull 3x Shares ETF


VanEck Vectors Russia Small-Cap ETF


Direxion Daily Russia Bear 3x Shares ETF



If government fiscal policy were to change then one can short the funds listed above or use an inverse fund. This will be easy to track as the government publishes its intentions ahead of time in its annual budget making investment decisions very easy. If one wanted to short Russia (and benefit from further leverage), if the government changed its fiscal policy, one could use the Direxion Daily Russia Bear 3x Shares ETF (NYSEARCA:RUSS).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.