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From Russia With Cash ... Sort Of

RSX: From Russia With Cash ... Sort Of

The Market Vector Russia ETF Trust RSX is one of this year's best-performing emerging markets single-country ETFs. RSX, the largest and most heavily traded Russia ETF listed in the United States, is up 23.8 percent year-to-date, an advantage of 860 basis points over the MSCI Emerging Markets Index.

All Things Russian

Of course, much of the rebound in Russian stocks is attributed to rebounding oil prices because Russia is the largest producer in the world that is not a member of the Organization of Petroleum Exporting Countries (OPEC). To be sure, things are not perfectly sanguine in Russian equity markets or the local economy. For example, earlier this year, Moody's Investors Service put the country on review for a possible sovereign ratings downgrade.

Still, the cash flow situation for Russian oil majors is decent, all things considered. That is something to note when considering an ETF like RSX, which allocated 37.9 percent of its weight to energy stocks, more than double its 18.4 percent weight to the materials sector.

“All Fitch-rated Russian oil producers (Gazprom PAO (ADR) OGZPY, NK Lukoil PAO (ADR) LUKOY, Gazprom Neft' PAO (ADR) GZPFY, Novatek OAO - ADR OTCNVATY NOVKY, Tatneft' PAO (ADR) OAOFY and Bashneft OTCBNSFF) reported lower dollar operating earnings in 1H16 due to weaker oil prices,” said Fitch Ratings in a recent note. “On average, their 1H16 per barrel EBITDA decreased by 23 percent year on year, outperforming the average Brent price fall of 29 percent from USD58/bbl in 1H15 to USD41/bbl in 1H16. In addition, 1H16 results were hit by the tax hike announced in October 2015. These negative factors were partially offset by the weaker rouble, which resulted in lower costs on a dollar basis, and by progressive oil taxes that fall as a share of revenue as oil prices fall.”

Gazprom, Lukoil, Gazprom Neft, Novatek and Tatneft combine for a quarter of RSX's lineup and all four of those stocks are found among the ETF's top 10 holdings.

Other Drivers For RSX

Another sector has helped drive RSX higher this year as well. Financial services stocks are RSX's third-largest country weight at 14.7 percent, indicating it is advantageous for the largest Russia ETF to get some help from this sector. Additionally, Russian banks are key contributors of dividends from that market along with energy companies.

Still, oil majors and their ability to generate cash are likely to remain key drivers of RSX's performance.

“Russian oil and gas producers should remain free cash flow neutral, provided taxation is unchanged and the rouble broadly follows oil prices. Based on our conservative 2017 Brent price assumption of USD45/bbl, Russian majors on average may report post-dividend FCFs of minus USD1/bbl, ranging from Novatek's USD1/bbl to Lukoil's minus USD1.5/bbl. This should not be a problem for credit profiles as Russian oil and gas players are only moderately leveraged,” added Fitch.

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