Russia’s stock market is now the second-best-performing big emerging market after China, even beating the Dow year-to-date, but that hasn’t really turned investors on all that much.
“Underweight Russia,” says Andrew Miller, the CIO of Mondrian Investment Partners in London. “We are value managers, and Russia looks cheap, but it’s cheap for a reason. We only own a few energy companies that are dollar earners, and that is where we will stay,” he says.
The VanEck Russia (RSX) exchange-traded fund ended last week up 14.4% year-to-date, beating the MSCI Emerging Markets Index and MSCI China, which is up 23.6%. The Dow Jones Industrial Average is up 13.2% this year.
Russia has been closely tracking the whims of FTSE Europe but still beating it. Russia investors are also doing better than those who put money into other big emerging markets like Mexico, Indonesia, South Africa, and Thailand.
Earlier this year, Russian aluminum giant Rusal had its sanctions lifted, sending its stock price up over 50% in Hong Kong. Rusal was majority owned by sanctioned Russian billionaire Oleg Deripaska. Deripaska is still sanctioned, though his punishment seems to have little to do with the Russian collusion investigation by Special Counsel Robert Mueller. The metals magnate remains sanctioned from traveling to the U.S. and selling personal assets in dollars, but his company is now free to do business with Western companies without the fear of retaliation from the U.S. Treasury Department.
Worth noting, Russia’s benchmark index did not see any significant bounce at all after the release of the Mueller Report on Friday, March 22, suggesting Wall Street had already given up on that story and was not expecting any more sanctions anyway. Stocks on the Moscow Stock Exchange (MOEX) rose 2.5% from Monday, March 25 to the close on April 12.
Nevertheless, the Moscow Stock Index has been in rare form this year. It rose three times last week, hitting an all-time high of 2559.72 points on Friday. The RTS index, calculated in dollars, hit a 13-month high of 1253 points.
Rising oil prices and a decrease in geopolitical risks have all helped.
Russia once again returned to its Cold War status of villain back in 2014 after it annexed Crimea, then a piece of Ukrainian real estate. The U.S. does not recognize Crimea as part of Russia. Sanctions began in 2014 and have taken worsening forms ever since.
Russian investors are doing well because emerging markets, in general, are doing well ever since Jerome Powell got an earful from ex-Fed chairs Ben Bernanke and Janet Yellen during a public event in Atlanta. Since then, Powell’s Fed has been declawed. Rate hikes are on pause. Three months ago, the market expected three rate hikes this year and two more next year.
Since the beginning of the year, 71 of the 94 major world indices have gone up. Asian indices rose the most, led by China. Even Europe is up despite political turmoil in the U.K. with Brexit and France’s Yellow Vest movement forcing a pause in economic reforms in France.
For Russia, the fact that the U.S. Senate is no longer jawboning about tougher sanctions is a tailwind. Tailwinds in Russia don’t blow all that strong, but this is as strong as it gets and the MOEX and RTS indexes are showing off with record and near-record highs.
Although the termination of the Special Counsel investigation into possible Russian government support for the Trump campaign in 2016 is a positive, Russian investors still have one thing to be mindful of here: Venezuela.
Washington has already included Vladimir Putin’s support for Bashar Assad of Syria in its August 2016 sanctions law signed begrudgingly by President Trump at the time. There is a chance that bigger Russian companies helping out Venezuelan leader Nicolas Maduro could face sanctions for their operations there.
A Russian bank called Evrofinance was sanctioned last month for helping Maduro launch his crypto coin, the Petro, seen as an end-around U.S. sanction. Evrofinance was a joint venture between Venezuela state-owned investment bank known by the acronym Fonden and a 25% stake by Russian bank VTB and a 25% stake by Russian gas company Gazprom.
Russian oil firm Rosneft is a major equity holder of Citgo, the U.S. subsidiary of Venezuelan oil firm PdVSA. Additional sanctions on Rosneft are plausible if the U.S. is continually frustrated in getting Maduro to step down. Washington considers Juan Guaido, National Assembly president, as the true leader of Venezuela. Some 50 other countries have also thrown their support behind Guaido.
This just means that Russia is not out of the woods yet in terms of sanctions.
“We face a little bit of sanctions fatigue around here these days,” said Republican Senator Marco Rubio of Florida, the sponsor of one of the bills circulating around the Senate targeting Russia. “Hopefully we’ll get more people on board.”
“Sanctions can often be a double-edged sword,” Republican Senator Ron Johnson of Wisconsin, chairman of the Homeland Security Committee, told Bloomberg on April 8. “So we really should take a little bit of a step back and assess where we are and what we can really do.”
Good news, Mr. Putin.
Some U.S. investors aren’t all that excited about Russia either. It seems no one is really down for chasing Russia’s historic gains this year.
“We’ve got nothing in Russia,” says Teresa Barger, CEO and fund manager for Cartica Management. “Our strategy is to be medium-term investors. If we were tactical we would invest in whatever country just got beaten up most because over the next period of time it will outperform as we are seeing with Russia, and then it will all even out,” she says. “We are too concerned about sanctions risk. In other sectors, we are concerned about government interference. We have been in the consumer segment in Russia before and never saw government intrusion … but with Russia, all things are possible.”