Emerging market economies: Russia
The Russian economy has experienced a great deal of change since the collapse of the Soviet Union in the early 90s. We examine Russia’s economic background and discuss how to trade its currency and stock market.
Overview of the Russian economy
Russia is the 12th largest economy in the world by total gross domestic product (GDP),1 which measures $1.719 trillion.2 Russia is part of a group of five emerging markets known as the BRICS – the others being Brazil, India, China and South Africa.
Despite the 2014 recession, harsh sanctions and political isolation, Russia has relatively low external debt levels, and healthy international reserves. It has come a long way since the downfall of the Soviet Union, which was characterised by a ‘command economy’ – where the government creates the country’s economic plan and allocates all its resources. Today, Russia has a mixed economy with several characteristics of a traditional ‘market economy’, where economic activity is driven by the laws of supply and demand, and only some remnants of its command economy.
Russian GDP has experienced steady growth since 1998. In 2018, it increased by 1.8%, thanks to solid international growth and rising oil prices.3
What are the biggest industries in Russia?
The biggest industries in Russia are the service industry, the industrial sector and the agriculture industry.
- The service industry accounts for the largest portion of GDP at 62%.4 However, this industry only picked up after agriculture took a hit in the post-Soviet era. Sectors that fall under this category include finance, tourism and hospitality, retail trade, arts and culture, healthcare and real estate
- The industrial sector includes mining, construction, manufacturing, water, gas and electricity – with fuel and energy being one of the main exports of Russia. This sector contributes to roughly 32% of the country’s GDP.5 The success of the industry is mostly due to Russia’s availability of natural resources like oil, natural gas, platinum and gold
- The agriculture industry is responsible for 4% of Russia’s GDP,6 and includes fishing, crop cultivation and livestock, to name a few. Russian produce includes rice, maize, wheat, potatoes, tomatoes, apples and more. Though it contributes a small percentage to the GDP, it employs more than 10% of the Russian population7
History of the Russian economy
Until 1991, Russia’s economy was largely crafted by the financial policy of the Communist Party. All decisions regarding economic activity were made from the top down. Even after the Soviet Union crumbled, Russia’s economic growth rate remained sluggish, and its markets were volatile. However, the country was hard at work trying to stabilise and restructure the financial system and started opening its local markets to the rest of the world in an effort to create a market economy.
The ‘golden decade’ (1999 to 2008) produced an average annual growth rate of 7%,8 propelled by the boom in oil and other commodity prices. However, the global crisis of 2008 caused another economic plunge. From 2010, growth rates were recovering, only for another slowdown to hit in 2013, caused by the country’s structural problems. As a result, 2014 was a trying year for Russia – GDP dropped, and the downturn also affected stock market prices and the Russian ruble (RUB). This was the start of the recession, which lasted until 2017.
Future of the Russian economy
The future of the Russian economy is uncertain, with the country still in recovery after the recession. A modest growth forecast of 1.5% is predicted for 2019, with worsening foreign economic situations putting a lot of pressure on oil prices and the RUB.9
Russia has two sovereign wealth funds, the Reserve Fund and the National Wealth Fund, which are used to help the country in times of crisis. Since 2014, Russia has used more than half of its Reserve Fund, which could possibly be topped up by solid oil prices. If not, Russia may have to dip into its National Wealth Fund in the future. To add to this, poverty is on the increase, though the Russian government maintains that its goal of halving poverty to 6.6% by 2024 is possible.10 Poverty has a knock-on effect on the economy, because it reduces spending and deprives the government of much-needed revenues.
Inflation is also on the increase, exceeding predictions. It rose from 3.4% in October 2018 to 4.3% in January 2019. It is expected to dip to 3.8% in 2020 and return to the target value of 4% between 2021 and 2024.11
Ongoing sanctions, export controls and security restrictions imposed by the US, EU and many other nations could be detrimental to Russia’s long-term growth. However, some Russian economists believe that while development opportunities will wither under these measures, overall macroeconomic stability will not be shaken.
What have been the effects of sanctions on Russia?
How to trade the Russian economy
You can trade Russian markets using derivative products, such as CFDs. These enable you to speculate on both rising and falling prices, which means you can take advantage of market movements in times of economic growth as well as downturns.
How to trade the Russian ruble
You can gain exposure to the Russian currency, the RUB, by trading forex pairs. Two of the most popular forex pairs to watch are USD/RUB and EUR/RUB. These pairs show how many RUB are needed to purchase a single unit of USD and EUR respectively.
If you think the Russian economy will grow and the RUB will increase in value, you could open a short position on one of these forex pairs. But if you think the future does not look promising, and the RUB will decline in value, you could open a long position instead.
How to trade the Moscow Exchange
You can trade a wide range of shares on the Russian stock market, the Moscow Exchange (MOEX), or you can track an index such as the MSCI Emerging Markets Index UCITS ETF.
The MOEX was created in 2011 when two exchanges, namely the Russian Trading System and Moscow Interbank Currency Exchange, merged. MOEX markets include forex, derivatives, equities, bonds and precious metals.
A total of 219 companies are listed on the Moscow Exchange, with a market cap of more than $210 billion.3 The official indicator of the MOEX is the Russian Trading System Index (RTSI), which comprises 50 of the most liquid Russian stocks, based on market capitalisation. In May 2008, the index hit an all-time high of $2487.92 before a huge drop to $492.59 by January 2009. This volatility can be attributed to the oil price shock of 2008.12
Alternatively, traders can take a position on the future price of individual stocks on the exchange. Some of the most popular companies listed on the RTSI include conglomerate company AFK Sistema, aluminium company Rusal, mining company Mechel, retail chain Lenta, and oil and gas company Tatneft.
Russia is still experiencing some political and economic difficulties. It is important to keep up to date with any news and announcements that can impact the Russian economy and implement a suitable risk management strategy to protect against adverse market movements.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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