31st May 2011
The World Leader Slips to World Laggard
Russia's RTS Index was the world's best performing index in the first three months of this year but has now fallen by around 11% in value so far this quarter (Source: Bloomberg). Moves in this market are often attributed to sentiment over the oil price due to the significant revenues generated by the country exporting this commodity. Therefore speculation over economic growth (read: oil demand) is highly influential. This year has been no different. Turmoil in the Middle East can be attributed as one of the main drivers of a strong rally in oil in the first quarter and concerns over economic growth has caused a reversal since that time. However, is this too simplistic a view and aren't there other factors to which an investor in Russia should be paying attention?
It is clear to see why investors play so much emphasis on the oil price as a dictator of Russia's financial health. Supplying some 11.4% of the world's oil supply last year, Russia is the "biggest single source outside the opec cartel". Although official figures calculate its contribution to Russia's GDP at 9%, it is important to be aware that speculation over tax avoidance suggests the value may be nearer to 25%. Nevertheless, what is often overlooked is the specific oil price factored into their budget. For this year, a price above $75/barrel will produce a deficit reduction. With Brent currently standing at $115/barrel, a fall in the Russian Index in reaction to a fall in the oil price to anything above $75/barrel may be missing the point.
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