Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald. Edited by Filip Fortuna.
Russia has produced more oil than Saudi Arabia this year, and more than Iran and Iraq combined. Given the run up in crude prices since the summer, you'd expect Russian stocks to outrun the other emerging markets. Indeed, Russian stocks have jumped about a tenth in dollar terms over the past three months, which is more than the broader Msci Emerging Market index. Yet a performance report card for Russia might read, could do better. Russian equities have a long way to go to catch up with the broader index over the longer term. Even after the bounce, MSCI Russia still trails by over 30 percentage points this year alone.
Since oil prices touched bottom back in January 2016, the best gainer in that market has actually been Sberbank, Russia's largest bank. It has become a proxy for the Russian market, says Credit Suisse. As the rouble has strengthened, inflation has dropped. Interest rate spreads have widened for banks. Russia's oil-linked shares, on the other hand, have not done as well since January 2016. Partly, that is due to a stalling crude price in the first half of the year, which points to higher rouble costs for oil producers, while oil prices in the local currency actually hardly changed. Not anymore.
Oil prices in roubles have soared back to the pre-crash levels of three years ago. And Russian oil companies appear to have more than enough cash flow to pay higher dividends. One of them, Tatneft, the other day more than doubled its dividend for this year. And that comes after a more than 1/3 lift the year before. Analysts at Renaissance Capital expect more strong results from other peers, such as Lukoil and Rosneft. Russia looks cheap, on a deep discount to the emerging markets. At half the price to earnings ratio of emerging markets, at 14 times, the spread is historically wide. No doubt that current economic sanctions against Russia, and the threat of more given ongoing investigations by the US special council, does not help matters. Even so, energy stocks represent about half of the larger market in Russia. Oil and rouble terms is high enough to make a difference. Expect some of Russia's valuation discrepancy to close in the coming months.