Despite being the “R” in the BRICs, Russia gets very little investor attention and most portfolios severely underweight the emerging giant. After all, political corruption has been a national hallmark since the fall of the Soviet Union.
However, as one of the leading energy exporters, Russia stands to benefit from overall increasing global energy demand. For aggressive investors, the nation can provide a great high-risk/high-return bet on world’s need for more energy.
Abundance of Energy Resources & Growing Revenues
Russia’s sheer size has provided it with an abundance of natural resources. Aside from its rich mineral wealth, the nation is blessed with some of leading oil and natural gas reserves on the planet. Currently, the nation is the largest exporter of natural gas and second-largest exporter of oil.
Russia’s proximity to the fast-growing emerging markets in Asia is helping boost energy export growth. China and Russia already have embraced each other through trade agreements, and most recently the Asian Dragon tapped Russia for energy to reduce its dependency on Iranian supplies. Japan also has seen Russia as a major source of energy imports, as the island nation rebuilds itself after the recent earthquake and tsunami disaster and moves beyond nuclear power.
Europe also remains heavily indebted to Russian energy; more than 25% of Europe’s natural gas is imported from the nation. The recently completed $10 billion Nord Stream pipeline underscores the fact that European demand will continue to be satiated by Russia. The 760-mile pipeline connecting Russia to Germany will carry about 970 billion cubic feet of Russian natural gas per year. And construction already has started on a second pipeline through the Baltic Sea into Europe.
All of this export growth coupled with rising energy prices is benefiting the overall Russian economy and its producers. More than 20% of Russian GDP stems from the oil and gas industries. The U.S. Energy Information Administration predicts that every $1 rise in the price of crude oil ultimately boosts the Russian government’s tax receipts by 0.35% of GDP. As oil prices continue to rise above $100 per barrel, the Russian economy should benefit in spades.
The nation’s E&P firms are seeing results as well. State oil company Rosneft (PINK:RNFTF) revenues increased by 46% year-over-year to reach $92 billion in 2011. The gain was driven by higher crude oil and petroleum product prices.
Taming the Russian Bear
With energy demand and fossil fuel prices continuing to rise over the longer term, Russia’s oil-based economy can act as leveraged play of this relationship. For retail investors, adding exposure to the nation can provide a high-beta opportunity to one’s commodity holdings. Analysts at UBS (NYSE:UBS) recently upgraded Russian equities to overweight based on rising oil prices.
The most liquid and easiest way for retail investors to gain exposure to the Russian economy is through the Market Vectors Russia ETF (NYSE:RSX). The fund includes a 40% weighting to the energy sector, with top holdings in energy giants such as LUKOIL (PINK:LUKOY). The exchange-traded fund charges 0.62% in expenses and has produced a 42.41% annualized return of the past three years as energy prices have risen from credit crisis lows. For those investors looking for more “oomph” from their investment, the Direxion Daily Russia Bull 3X Shares (NYSE:RUSL) adds additional leverage to the Russian energy story.
Perhaps the single-best way to add Russian energy to a portfolio is through a stake in Gazprom OAO (PINK:OGZPY). The firm is the largest natural gas producer in the world, and through its JSC Gazprom Neft (PINK:GZPFY) subsidiary, has a host of strong oil reserves as well. Gazprom recently signed a 25-year joint venture deal with Total SA (NYSE:TOT) to help explore those frozen assets. The Russian energy giant currently trades for an extremely cheap forward P/E of less than 3 and could make a great single bet on the BRIC’s continued and future energy dominance.”
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.