Reliance on Oil Depresses Russia’s Economy, ETFs

Economic growth for Russia is weak as forecasts have just been lowered, causing distress for shares and exchange traded funds (ETFs). Continued weakness in the Russian ruble also is inevitable, as macroeconomic fundamentals are pointing to a weaker currency in the short term.

Toni Vorbyova for Reuters reports that Russia did get props for Moscow’s response to the financial crisis, with its economy expected to grow 6% for 2008 and 3% in 2009. The deteriorating oil market, capital outflows and the weakening account situation are going to contribute to a slowdown.

Overall, the World Bank expects Russia’s reserves to fall by no more than another $100 billion during 2009. The bank says Russia has strong short-term macroeconomic fundamentals and is better prepared than many emerging economies to handle the crisis. However, the country is deemed too dependent on a single commodity - oil.

Michael Patterson and Fabio Alves for Bloomberg report that emerging markets are seeing trouble overall, as stocks representing this region fell to their lowest level this month and the recent retreat in bonds is signaling even more trouble. iShares Emerging Markets Index (EEM), the gauge of equities in 25 developing markets, has retreated nearly 60% this year, led by a 72% drop in Russia and a 66% decline in China.

Serious concerns for the health of the global economy are still fresh and are not showing any signs of subsiding yet.

• Market Vectors Russia (RSX), down 74.2% year-to-date

• iShares Emerging Markets Index (EEM), down 56.5% year-to-date

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