Global Investing

Oil falls. So does the Russian stock market

Russian equities have had their worst week since early-December, with losses of over 6 percent. But don’t look too far for the reason — world crude futures have fallen to three-month lows around $114 a barrel on worries that U.S. and world economic growth may not be picking up after all.  They too have fallen 6 percent so far this week. Check out the following graphics showing how Russian stocks and its currency move in lock-step with oil prices:

If anything, the falls on Russian assets are outpacing the weakness on global crude oil markets in recent months, possibly because the jitters that caused last December’s massive falls have not been entirely overcome. Anti-government demonstrators are no longer hitting the streets but  with President-elect Vladimir Putin to be sworn in next week, fears are the  Kremlin may prefer squeezing more cash from energy companies to implementing the reforms the economy desperately needs.  Latest plans flagged on Thursday  to raise oil and gas extraction taxes would seem to confirm these worries and are hitting energy sector shares — half the Moscow index.

All this has widened Russian stock valuations to almost record levels against the broader emerging equity set.  But that is unlikely to entice buyers if the oil price stays where it is — after all half of Russia’s revenues come from oil and it needs an oil price of around $120 a barrel  to balance its budget. Chris Weafer, chief strategist at Troika Dialog puts it succinctly:

Russia does not have a strong enough domestic story to compensate for the commodities export risk

Money in containers. Many see big bucks in Russia’s infrastructure push

A lot of things are wrong with Russia, one of them being its rickety infrastructure.

Many see this as an investment opportunity, however, reckoning the planned $1 trillion infrastructure upgrade plan will get going, especially with the 2014 Winter Olympics and 2018 soccer World Cup looming. Bets on infrastructure have also gathered pace as the Kremlin, seeking to placate a mutinous populace, has pledged reforms, privatisations and a general push to reduce Russia’s dependence on oil exports.

Takouhi Tchertchian at asset managers Renaissance says one sector – shipping containers — reflects the potential for gains from infrastructure improvements. Such containers, usually made of steel, can be loaded and transported over long distances, and transferred easily and cheaply from sea to road to rail.  But Russia has among the lowest levels of containerisation in the world, at around 4 percent compared to the emerging markets average of 15 percent, Tchertchian says. Even in India, almost 3o percent of goods travel by container while in a developed country like Britain, the figure is 40 percent.