Russia's shift towards capitalism has been long and arduous. Organized crime, government corruption, corporate collusion and a lack of economic efficiency have made the region financially unstable. The government's debt default in 1998 punished virtually everyone that invested in Russia. Incredible growth is nevertheless now apparent, even in the face of instability.
Russia's economy and stock market have grown at rates not found in the world's largest and most stable markets. Russia's weak economic state has left room for significant growth potential, which is only now being realized.
Russia's biggest exchange, with a market capitalization of over $300 billion, is the RTS Exchange. Stock, bonds, futures and options are all traded on the RTS. The standard measure of the Russian market, the RTS Index, has risen in value over 65 percent since the beginning of the year. The index is composed of the 50 most liquid stocks that trade on the exchange. These returns are quite remarkable, especially compared to the Dow Jones and S&P 500 - both of which have remained virtually flat.
These financial returns mirror the economic growth of the whole country. GDP growth has averaged 6.7 percent annually since 1998, well over twice the rate of the United States. Economic growth has been driven by significant expansion in both the industrial and service sectors, and a rise in global oil prices.
Growth has been disproportionately centered on large
corporations, as barriers of entry remain high. The country continues to have poor banking and economic policies. This may help the short-term international investor - who can now expect outstanding returns in Russia's most stable industries - but not for the country's long-term economic situation. Competition is necessary for extended growth and prosperity.
Russia's economy depends on oil reserves. It is the world's second largest exporter of oil (after Saudi Arabia), earning approximately $125 billion so far this year through international sales. The industry is controlled by Transneft, the government's pipeline monopoly, and a few conglomerates. These large corporations' recent earnings have pushed the RTS Index to new highs. While record oil prices have hurt consumers in many regions around the globe, Russia and those that have invested there have prospered. The flow of money has helped the growth of Russian corporations in other sectors.
Even with significant growth it would be hard for any investor to have complete confidence in the Russian stock market and economy. Natural gas, metals and oil are the lifeblood of the nation's financial systems. These are all commodities with volatile prices that fluctuate wildly. A significant decrease in the value of any of these goods could cripple the Russian economy, cutting the profits of companies in virtually every sector. Coupled with Russia's rocky financial and economic past, this leaves many hesitant to invest in this promising yet unstable market.
It is quite simple for one to invest in Russia's market. ING Russia A (LETRX) is a mutual fund that has made over 40 percent this year. Third Millennium Russia (TMRFX) is a fund that has made just under 35 percent. Neither of these two American funds that invest in Russia have been able to replicate the results of the RTS Index. Mutual funds frequently use market indexes as a benchmark for performance.
The astounding returns on recent investments in Russia are undeniable. Others still remain skeptical. Corruption and an overreaching government - in addition to the volatility of the oil market - how left some questioning how much longer this growth can be sustained.
