By Carl Delfeld of Chartwell ETF and Chartwell Partners Asset Management
The oil and commodity prices that have underpinned the Russian investment story and its exchange-traded-fund (RSX) are declining and this is one reason for its market being down by about a third this year. The Georgian conflict precipitated a 6% drop but the Russian market has bounced back from plunges of similar magnitude four times in four years. On a p/e of 8.6 times it is at discount of about 20% to the global emerging markets average of 10.7.
But the perception of escalating political risk will be hard to shake though Russia's apparent winding down of its offensive helped RSX recover 3% in early afternoon trading.
Russia has some political capital and leverage based largely on its petro-based wealth. The New York Times David Jolly reports that Gazprom, the state-owned Russian energy monopoly, supplies more than a 25% of European natural gas needs and Russia earns about $1.2 billion a day from its oil and gas exports posting a $18.9 billion trade surplus in June.
The Georgian conflict will only highlight political risks facing investors and escalate the risk premiums demanded by global markets trying to calculate Mr. Putin’s ambitions which no doubt include recovering his country’s national pride and territory.
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