RUSSIA: The value of an economy founded on oil
RUSSIA HAS been the least hard-hit of the major emerging markets, down only 0.5 per cent for the month to date,
because it is so closely tied to the oil price. "It has huge reserves of oil and gas," says Mark Robinson,
manager of JP Morgan Fleming's Russian Securities investment trust. "Its oil companies directly own these
reserves, so buying their shares gives investors ownership of reserves that is not available so directly through Shell
or BP."
Oil prices currently hover around $40 per barrel and show no signs of falling. This is good news for Russia, which
has about a third of world oil reserves. Oil and gas shares account for around 65 per cent of the value of all shares
listed on Russia's stock exchange. Banks, telecommunications, and utilities account for much of the rest, but
Russia is really about oil.
And while other commodities are cyclical, oil is not. It is controlled by a cartel, the Organisation of Petroleum
Exporting Countries (Opec), which agrees how much oil members will pump. Russia does not belong to Opec, so has no
official say in these agreements.
Right now, Opec shows no signs of wanting to collapse its members' revenues. But even if it did, this might not
have too bad an impact on the Russian oil industry. The lifting price for Russian oil, the cost of getting it out of the
earth, is $1 to $1.50 per barrel, and the industry would break even at a barrel price of $14.
But the Russian stock market is volatile, like those of other emerging economies. "Invest for the long
term," cautions Lev Snykov, a Moscow-based analyst for Nikoil, one of Russia's largest private wealth
managers, "and don't be put off by short-term volatility." Beyond oil and gas lies the promise of a
fast-developing consumer economy. "Looking ahead we expect to see shares in banks, consumer durables, retailing and
utilities becoming more important," says Mr Robinson. "In ten years these sectors will be transformed. A lot
of future value is locked up here and will be released to patient investors."
How best to invest? You could approach Nikoil direct. The group manages over $300m (pounds 170m) of private money and
a good place to start is its website, www.nikoil.ru. JPMF's Russian Securities is an investment trust which can
bought through an execution-only stockbroker. Baring's New Russia Fund is an OIEC, similar to a unit trust, but
listed in Luxembourg.
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RUSSIA IN FACTS
