Russia: Reward Outstrips the Risk

Position: Long Russia via the etf RSX

Everyone's aware of the geopolitical risk associated with Russia.  Below are negative and positive factors for framing this debate; we believe reward outstrips the risk. As always, price rules.

Negatives:

  • Russia has a massive amount of debt to refinance this year (~$100 Billion)
  • Siberian Services (an oil drilling company) defaulted on $100 Million of debt today. This is the second case of default in Russia this year (Finance Leasing Co.)
  • Volatility of Medvedev and Putin Government remains a constant
  • Inflation at 14% in March Y/Y
    • Volatility in the Ruble (despite intermediate stabilization) is always a credible threat. Should inflation extend itself, it will put further pressure on the price of imports


Positives:

  • Russian stock market (RTSI) is up +36% since March 1st or +17.2% YTD
  • Russia benefits from Commodity Reflation
    • Economy is levered to basic materials and energy commodities
    • In Q408 natural gas and oil accounted for 46% of total export revenues.  (Down from over 50% in 1H08)
    • Credit Suisse upgraded Russian stocks today, citing stabilization of oil prices
  • Proximity to THE client, China
    • Russia has what China needs-Oil.  Russia did a major oil deal with China in mid- February '08. In return for 300,000 barrels of crude a day for 20 years, China loaned $15 Billion to Russia's Rosneft (oil firm) and $10 Billion to Transneft (oil pipeline co.). The loans will help capitalize their balance sheets and promote expansion
  • Increased Ruble stabilization versus its trading band
  • Early cycle in mark-to-market prices to expedite its purge
  • Putin issued a $90 Billion stimulus package yesterday
  • International reserves up last week $2.7 Billion to $388 Billion, third largest in the world


We're currently long Russia via RSX, which we bought for a second time this year on 3/27.

Matthew Hedrick
Analyst

Russia: Reward Outstrips the Risk - ruskie