Russian Economy in for a Siberian Winter?

Russia equities experienced significant volatility for the month of November. The DAX Global Russia + Index was up 2.5% for the month, however, getting there was a bumpy ride. The volatility level of the index was at 58 for the month.

Despite weakened confidence relative to the global slowdown, higher oil prices have sustained growth momentum in Russia. As a result, Russia’s budget is expected to be balanced for 2011 with the potential for a minor surplus, however, due to greater spending in 2012-2013, deficit is expected for the respective timeframe.

The rate of inflation decreased more than analysts predicted for the month due to an economic cash shortage and a strong agricultural harvest for 2011 which has translated into weaker growth in food prices. Analysts predicted a rise of 0.6% for the month while the actual increase came in at 0.4%. After a drought damaged Russia’s agricultural harvest in 2010, consumer prices soared to 8.8% for the year. This year’s harvest has slowed food price inflation from 6.2% to 5.3%, contributing to a lower overall increase. (Source: Bloomberg)

From January to September of 2011, Russian foreign direct investment rose 43% to $11.7 billion compared to the same timeframe in 2010. Mining, manufacturing and finance received the majority of the investment with finance receiving the most with $65.7 billion in inflows. (Source: Silobreaker)

Despite the favorable economic news, Russia still has its fair share of risk. Oil prices, financial markets and political tensions play important factors in the country’s economic stability moving forward.

A significant decline in oil prices could have damaging effects on Russia’s economy. A point worth noting is that Russia’s GDP (Gross Domestic Product) is expected to come in around 4% for 2011 which would be relatively unchanged from 2010, however, oil prices are approximately 30% higher. There is an apparent disconnect between oil prices and Russia’s GDP which can likely be attributed to increased Government expenditures which has left little capacity for the probability of a stimulus from oil revenues.

Will Russia’s economic environment remain cool or is it in for a Siberian freeze?

Consider RUSL and RUSS for capturing the volatility of the The DAX Global Russia+ Index.

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