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We’ve had a watchful eye on Russia all year as it plays into one of our main macro themes, owning countries that will benefit from commodity reflation and can supply THE client (China) with the resources it needs for domestic growth.
As we’ve noted in previous posts, despite the risk premium associated with owning the Kremlin’s leadership and negative fundamentals, you can’t argue with the Russian stock market’s (RTS) +27% YTD performance, despite today’s pullback.
Below are negative and positive fundamentals and data points to consider when owning Russia:
1.      Increased corporate debt default risk. By some estimates Russia has $780 Billion of corporate debt, $135B-$220B of which is short term debt due this year.  The deterioration of internal credit markets has pushed rates up to 15% and 20%, prohibiting refinancing of many loans.
2.      Uncertainly and lack of transparency with respect to Russia’s banking crisis.
3.      IMF forecasts the economy to contract 6% this year, versus government’s forecast of 2.2% contraction.
4.      Unemployment currently stands at 9.5% and should continue to climb this year and next, according to anecdotal evidence.
1.      Russia will likely remain a strong horse as long as commodities reflate. Our underlying thesis here is that if the USD can break down equity and commodity asset classes will get a bid to reflate.  Oil is up 16% YTD.
2.      Monetary Policy. On 4/24 the central bank lowered its main (refinancing) interest rate 50bps to 12.5%, the first cut in nearly two years. (See charts). Additionally the central bank raised its minimum reserve requirements on all retail deposits to 1% as of May, and will increase the rate at an interval of 0.5% until August.  The take-away here is that Russia has plenty of room to cut, unlike the US, UK, Switzerland, Canada, and Sweden to name a few. The ability of Russia to influence the direction of its economy through monetary policy is bullish, and raising reserve requirements shows central bank leadership to demand higher standards for lending.
3.      Currency. The Ruble has shown relative stability versus the USD and EUR in Q1.
4.      Russia’s international currency and gold reserves, the world’s third largest, increased to $900 Billion. Russia’s strong reserves (at the very least) bode well should the government need to address corporate or sovereign default issues. 
Look for us to buy Russia via the etf RSX if we can get our price from a technical level. We last bought Russia on 3/27 and sold it on 4/09 for a 15.79% gain.
Matthew Hedrick

Mother Russia’s Allure - image001