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It may be hard to find many beneficiaries when it comes to the current trend of growing trade barriers. There is no shortage of potential losers, as multinationals increasingly tend to depend on access to foreign markets, global supply chains and on production plants located all over the world to make their goods. One major economy on this planet however is isolated enough, while at the same time advanced and diverse enough to be able to provide goods and services to countries around the world, which are faced or threatened with sanctions or tariffs.
I am talking about Russia, of course. Given current trends, investors have to consider the positive impacts on the VanEck Vectors Russia ETF (RSX). Obama called Russia a “gas station,” and many people seem to believe it, mostly out of ideological convictions and bias, but there are in fact many economic developments which have been ignored, in order to maintain this view. It is a distorted view, which may lead to people missing out on a great potential investment opportunity.
Sanctions and tariffs may aid Russia in capturing manufactured and agricultural goods markets in affected countries.
One of the headline effects of the Iran sanctions, which were unilaterally imposed by the US last year was the loss of about $40 billion in aircraft deals by Boeing (BA) and Airbus (OTCPK:EADSY). Russia is currently in the final development stages of an aircraft, the MC-21, which is set to become a direct competitor for the Boeing 737 series in terms of capacity, range and other metrics. The American sanctions regime is determining the final planning stages of its design, opting for domestic suppliers, in order to avoid US sanctions.
This will make the aircraft untouchable when it comes to America’s extraterritorial reach. Iran will likely be a major customer for that plane, especially if the current sanctions regime will persist, as other potential partners, such as the Europeans backed out, even though the EU continues to be in favor of the nuclear agreement. This is just one example where Russia can become the go-to entity for a growing number of countries faced with such sanctions.
American farmers may emerge as major losers of the US-China trade war, but Russian farmers can only smile as the back and forth punches keep coming between the two economic powerhouses. Just as an example, soybean production is expanding exponentially in Russia’s Far East, and the government is aiding it all by providing new transport infrastructure linking the region to China. This by itself would not necessarily be much reason to get excited about the RSX ETF as an investment. The fact that Russian agricultural exports are growing at a fast pace should be a reason to be positive on it when we ponder the related economic activities, which inevitably get stimulated by it.
Russian agricultural exports reached $25 billion last year, up from $20 billion in 2017, and we are likely to see a further increase this year. As such, Russia is now one of the top ten exporters of food globally. Not to mention the drive for increased self-sufficiency on the domestic market in the aftermath of the Ukraine crisis, which led to domestic producers displacing many EU and American food producers. What this all means is that Russian producers of agricultural equipment are seeing a boom in business.
Data source: Export.gov.
Note: 2015 data is not available.
As we can see, production of agricultural equipment, while not a great part of the Russian economy at the moment, is nevertheless booming. Most of it is meant to satisfy the local market but exports are growing rapidly as well. While some foreign brands are responsible for some of the production of agricultural equipment in Russia, its top producers are domestic brands. Not only is demand rising fast, but Russia also aims to have up to 80% of agricultural equipment to be produced domestically by 2021, which will be up from over 50% currently.
Based on all factors, it seems there will be a boom in this industrial sector in Russia. This industry may also be aided by perhaps exclusive market access for some of Russia’s domestic agricultural equipment producers in countries such as Iran, Cuba, Venezuela and any future nation which might become the target of sanctions.
Improvement in industrial and agricultural sectors will have a positive effect on most other sectors.
As one might expect, the RSX ETF is heavily dependent on energy, but materials, financials, communications, consumer staples make up a considerable portion of it as well.
Source: VanEck
It is true that Energy will perhaps continue to drive this ETF to a greater degree than anything else. Thing is however that not much is expected from other sectors. Russia’s overall economic direction is assumed to be completely dependent on oil & gas prices and export volumes.
Source: Knoema
As we can see, most international institutions are forecasting a stagnated state of economic affairs for Russia, mostly based on the assumption that energy exports, as well as prices will remain mostly stagnant. We should keep in mind however that over 80% of Russia’s economy is not oil & gas-related. Energy does dominate its exports, but growth in weapons, aircraft, machinery, agricultural products as well as other goods are far surpassing economic growth, therefore, we are looking at an economy that is becoming increasingly diverse.
If the sanctions regimes being imposed by the likes of the US, EU and others will continue to expand, affecting more and more countries, I think this will only continue to benefit Russia, which is likely to profile itself as an independent state, not affected by extraterritoriality, thanks to its self-sufficiency. In a way, it might become its specialty.
We should also keep in mind that the energy outlook being assumed by the market, which is all-important to this ETF, is not written in stone either. I personally believe that Russia is set to see a significant increase in natural gas exports, as I pointed out in an article I wrote back in February. Oil prices will most likely average much higher than it is currently being assumed for most of next decade as well. I think we are at the beginning of the end of the US shale boom, as prime acreage is increasingly becoming saturated, which will lead to the supply/demand balance tightening, given that conventional oil production has already stagnated.
I do believe that energy will do better than expected next decade, helping Russia’s economy gain investment income, which can then facilitate further gains by its other sectors, which as we can see are growing at a pace that is faster than Russia’s overall economy, therefore, they are growing in importance. While there are still some geopolitical worries when it comes to the Russian economy, therefore, investor anxiety in regards to the RSX ETF is warranted. I think the positive developments and long-term outlook, in the absence of a severe geopolitical event make it look very promising. It is definitely an investment worth considering in my view.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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