Signs of Life from Russian Economy

May 16th, 2016 by

The global markets are now wondering, Is Russia’s battered economy staging a turnaround? There are finally some early signs pointing that way, but one can never be too sure with the maligned superpower.

Tough Times

Cool PutinEver since (and even after) the era of Communist rule, Russia’s government and state bureaucratic machinery has been laughably plagued by corruption. It is hardly a secret that official economic numbers are fudged and that Vladimir Putin is a former agent of the notorious KGB secret police organization. Credibility is not high on its list of virtues. (To be fair, China and the United States are likewise among the most habitual offenders in the “fuzzy economic math” department.)

Beyond the dubious makeup of the Russian government, the country’s economy is often characterized as a glorified banana republic—an economy almost wholly dictated by a single export. In Russia’s case, it’s energy commodities (oil and natural gas) rather than bananas. Russia actually ranks as the world’s largest overall energy exporter.

Moreover, the Russian economy has been suffering under the weight of international sanctions from the U.S. and E.U. due to its aggressive campaigns in its eastern neighbors Ukraine and Crimea (an historically significant peninsula that is an autonomous entity within Ukraine’s government).


russia sanctionsThe combined effect of the oil crash and the end to the commodities boom in general have damaged Russia’s export profits. On top of that, the sanctions from the West have added another layer of difficulties for the country’s economic competitiveness. Putin’s administration has been forced to strengthen its ties with its nearby trading partners in China and Iran as a result.

Another strategy has been to shore up Russia’s financial risks with large official purchases of gold. Needless to say, the country’s currency, the ruble, has undergone unpredictable volatility in the past several years due to these pressures. The economy has entered into a recession that saw worried citizens buying furniture and kitchen appliances as a more reliable store of value than the ruble. The volatility index for the country’s benchmark stock index has seen the highest volatility in the world, generating a 40% reading.

Rebound for Russia?

russia-flag-oilWhile hedge funds profited handsomely from this volatility, the Russian economy apparently bounced from its bottom. The ruble is the second-best performing emerging market currency so far this year. It is up 13% against the dollar after plunging by 20% in 2015. In addition, the price of oil recently rallied, proving to be a boon for the Russian export market. Crude oil benchmark prices on both sides of the Atlantic were up more than 2% during trading on Monday.

Investors looking for value haven’t ignored the possibility that the Russian market found its bottom and has nowhere to go but higher. According to Bloomberg, “Funds with a geographical focus on the country have gained an average 29 percent since the start of 2015, more than any others geared toward major developing nations, according to industry tracker eVestment. That’s 8 times more than China-focused funds and 16 times the return of firms investing in India. The MSCI Russia Index rose 17 percent during the same period.”

Recent data showed that the country’s GDP contracted less than expected during the first quarter. This has lent hope that the outlook isn’t nearly as bad as once thought. Whether or not investors take these glimmers of optimism as a reason to be confident in Russia will go a long way toward determining what the economy’s long-term fate will look like.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.