Russia Breaking Out?

For the first time in a long time—despite how antithetical it may sounds if you’ve been listening to our “I wouldn’t touch Russia with a ten foot pole” call over the last months—we’re getting bullish on Russia from a trend perspective as the fundamentals are lining up with our multi-factored quantitative models.


Here are the main Macro Factors that line up with this call:

1. Market Performance - The Russian Stock Market (RTS) is up 11.5% from its October lows (or +9.2% since its Nov. low). As reference, major European indices (Germany, France, UK) as well as the SP500 are all trading below their November lows. The RTS, after an intermediate bottom on February 20th, is up 18.4% YTD and up 12.5% March-to-date. These are alpha-generating numbers you cannot afford to ignore.

2. China is the Client - Importantly Russia understands that China is an very important client. On February 18th China announced it will lend $15 Billion to Russia’s state-owned oil firm Rosneft and $10 Billion to pipeline monopoly Transneft. In return the Russian firms ensured China will receives 300,000 barrels of crude a day for 20 years and the completion of the long-awaited extension of Russia’s Siberia-Pacific coast pipeline to China. The agreement will boost Russia’s energy firms who have struggled to raise capital since crude prices crashed since their summer highs last year.

The deal signifies that Russia’s export focus (oil and natural gas in particular) have shifted from the West (Europe) to its new market, China. Russia took a sharp hit from the EU in reaction to its decision to turn off natural gas supplies to the Ukraine and most of continental Europe over New Years over contract disputes. EU officials have already formally convened this year to discuss alternate sources of energy; certainly this helps confirms that Russia’s attention for a new market is East.

3. Stability at Home: we’re bullish on a relative basis Russia’s ability to purge itself of the financial crisis. The RTS is down 75.4% since its high on 5/19/09. Russia has mark-to-market pricing and has faced the reality that oil is currently down in the $40-50 range. The market has shown a more stable trading range (a “bottoming”) since January 20th. Equally, the Ruble has stopped going down, a bullish signal for the investors.

4. The USD/Oil Equation: with the Ruble signaling more stability in the intermediate term, this is bearish for the USD, which is perversely bullish for global equities and commodity reflation. On a trend basis we see oil breaking out if we can get through the $44.50 line.

What might not be discounted in today’s price is the potential for Russia’s debt credit rating to be downgraded, but our quantitative models are close to signaling an entry point opportunity via the Russian etf - RSX.

Matthew Hedrick
Analyst