With oil now hitting a fresh $110 a barrel high and some analysts predicting higher highs later this year, investors may want to look at Russia for investment possibilities. With nearly three fourths of its public companies in oil and energy sector, the nation is heavily tied to the commodities sector. As the R in BRIC, Russia and its energy-weighty RTS index have risen about 18% in the first quarter, mirroring the 16.8% gain in crude prices. This return has been greater than its BRIC siblings of Brazil, India and China. While there certainly plenty of risk in Russia, the potential for higher gains on the back of crude oil are equally as great.
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Considering the Oil Giant
Despite the fact that oil and Russian equities have surged over the past few months on the turmoil in the Middle East, they could be a good bet for the remainder of the year. With the global economy beginning to finally move in the right direction, energy and materials demand is rising. The nation's proximity to the fast growing emerging markets in Asia makes it a perfect partner for export. Moreover, the recent crisis in Japan will help boost Russia's economy as well. Analysts estimate that Japan will need will need to import an extra 5 million barrels of oil a day to make up for lost power sources and rebuilding destroyed infrastructure will increase its need for iron ore and steel, benefiting Russian companies like Mechel (NYSE:MTL).
Future Earnings Potential, Cheap Stocks
This continued and growing demand for commodities has Russian firms looking relatively cheap as future earnings are projected to climb on oil prices. Currently, Russian equities are still one of the cheap emerging market plays. The average P/E ratio is about 13.5 times for global emerging markets versus only about 9.1 times for Russia. Even when subtracting the energy sector from the equation, Russian equities still trade at a reasonable price to earnings ratio of 11. The Russian economy expanded nearly 4.5% in 2010 and analysts expect similar results in 2011.
Perhaps more importantly, Russia is also making progress towards its international standing. The government has shifted focused towards attracting foreign investors and gaining entry into the World Trade Organization. Recently, Russian President Dmitry Medvedev has ordered government appointees to vacate top level corporate board positions in an effort to make the country attractive to investors. Moves such as this have prompted companies like Collective Brands (NYSE:PSS) to expand in the nation.
Adding the Russian Bear
With Russia pledging significant spending on infrastructure and energy prices still rising, there may be still time to cash in on the Russian Bear. With more than 142 million new consumers embracing capitalism, the nation boasts the highest disposable income in the BRIC and its citizens will be beneficiaries of all these petrodollars. For investors wanting to make the most of Russia's energy sector, the iShares MSCI Russia Capped Index (NYSE:ERUS) allocates nearly 55% towards energy via oil giants like Gazprom (OTCBB:OGZPY). The popular Market Vectors Russia ETF (NYSE:RSX) offers a more balanced approach to the Russian market with only about 37% of its holdings in oil & gas.
One of the best ways to play an emerging market is through its stomachs. As incomes rise, so does the consumption of calories and quality of foods eaten. Soft drink giant PepsiCo (NYSE:PEP) recently saw opportunities in the region and purchased a 66% stake in Russia's leading dairy Wimm-Bill-Dann Foods (NYSE:WBD). As one of the largest dairy and beverage manufacturers in the nation, Wimm will be major benefactor of the nation's new wealth related diet.
Finally, just as commodities have helped strengthen Australia and Canada's currencies, the Rubble has shown strength over the last few months. The CurrencyShares Russian Ruble Trust (NYSE:XRU) allows investors to bet on the continued rise of the Russian currency and energy prices.
With energy prices continuing to rise, the BRIC nation of Russia could be a good bet for the remainder of the year. Its abundant natural resources reserves make it an ideal candidate to prosper from the growing world economy. And with its recent steps to reform its corrupt image, the risk/reward ratio is finally moving into investors favors. Adding the nation via funds such as the SPDR S&P Russia (NYSE:RBL) or individual stocks like Mobile Telesystems (NYSE:MBT) might be the best way to play its opportunities. (Brazil, Russia, India and China are becoming more popular for investing, but there is still plenty of risk among BRIC countries. Check out Understanding BRIC Investments.)
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