A Leveraged Energy Bet With Russia

By Aaron Levitt | October 17, 2011 AAA

As the global economy continues to drag along in the short term, energy prices have fallen by the wayside. Overall, oil prices have fallen about $25, since its recent summer peaks, and natural gas remains at its lows. To that end, a variety of commodity rich nations have also seen their fortunes sputter; countries like Canada and Australia can now be had for well below their 52 week market highs. One such compelling buy could be Russia.

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As the R in BRIC, the natural resource-rich nation can act as leveraged play on long term rising energy prices. With nearly three fourths of its public companies in the oil and energy sector, Russia is poised to benefit from the long term trend for greater energy demands. The recent retraction in energy and emerging market asset prices, could offer investors a great opportunity to buy the nation. (To know more about BRIC Investment, check out: Understanding BRIC Investments.)

A Russian Bear
Over the last quarter, prices for Russian equities have fallen by more than 25%, nearly 8% more than broad-based emerging market proxies, like the iShares MSCI Emerging Markets Index (ARCA: EEM). However, now could be a good time to bet on the nation. Recent economic data provided by statistical agency Rosstat, has shown that the Russian bear could be awakening. Industrial production is up nearly 6.2% this year versus 2010, and civil construction output grew has grown by 12.1%. Unemployment has fallen and the nation has shown wage growth across a variety of professions. Analysts at Barclays estimate that this improving data will have Russia seeing GDP growth of about 5.3%, throughout the remainder of the year.

There are other reasons to be bullish on the nation. Overall, the long term energy and materials demand is rising. Russia is the second largest exporter of oil and the largest exporter of natural gas in the world. The country's proximity to the fast growing emerging markets in Asia, makes it a perfect partner for export. China and Russia have already embraced each other through trade agreements and Japan is seeing Russia as a major source of energy imports, as it rebuilds itself after its recent earthquake disaster.

Domestically, Russia's recent win for hosting the 2018 World Cup is helping spur new investments in infrastructure. Much of the nation still operates on decaying Soviet era projects. With a $280 billion stimulus plan, and the World Cup win providing a strategic time line, the emerging nation is committed to upgrading its transportation, communication and sewer capacity. These improvements will ultimately benefit the nation's 140 million citizens, through jobs and higher consumer spending.

Playing The Russian Rebound
While investing in Russia is no "slam-dunk," as there are plenty of risks (think political corruption), the recent slide in energy prices makes the nation an interesting portfolio option. Both Market Vectors Russia ETF (NYSE: RSX) and SPDR S&P Russia (NYSE: RBL) can be used by investors as over-all plays on the Russian economy. However, investors interested in the leveraged action on rising energy prices should use the iShares MSCI Russia Capped Index (Nasdaq: ERUS). This ETF features a 55% weighting towards energy stocks and a 16% weighting in materials. The fund is also the highest yielding of the three, with a 1.6% yield.

For investors wanting to go the individual route into Russian energy firms, Gazprom OAO(OTCBB: OGZPY) makes an ideal selection. The firm is one of the largest integrated energy companies on the planet, and through its Gazprom Neft (OTCBB: GZPFY) subsidiary, is the largest natural gas producer in the world. The firm has massive reserves and recently signed a 25 year J.V. deal with Total SA (NYSE: TOT) to help explore those assets. Gazprom currently trades for a ridiculously cheap P/E of 3.31, as of October 19, 2011.

The Bottom Line
The recent global softening has pushed energy prices downward, despite a bullish long term picture. For investors, adding Russia to the portfolio could be a great way to exploit the long term trends. The previous picks along with energy giants LUKOIL OIL (OTCBB: LUKOY) are a great way to do that.

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