EM: Russia Bucks Trend Of Equity Outflows


By Gordon Platt

Higher oil prices, and the fact that Russia is the world’s largest oil producer outside the turbulent Middle East and North Africa region, have kept fresh money flowing into Russian equity funds, even as investors pulled a total of $25.6 billion out of emerging markets equity funds in the first quarter of 2011, according to EPFR Global, a research firm that tracks investment fund flows and asset allocation.

The Russian equity market has been one of the best performing in the world during the past two years, with a gain of about 150% in 2009 and 22% in 2010.

Russian equity funds have attracted fresh money in all but two of the 26 weeks since the beginning of the fourth quarter of 2010, EPFR Global says. Investor enthusiasm for Russia’s commodities story is the main reason, according to the Cambridge, Massachusetts–based firm.

Exchange-traded funds (ETFs) have been a preferred method of accessing the Russian equity markets. If ETF investors take fright once oil prices retreat, there is a risk of a serious correction, since ETFs are readily traded and have some of the characteristics of hot money, says Chris Weafer, chief strategist at Moscow-based investment bank Uralsib.

The Russian government is using incremental oil revenues to fund social programs ahead of the 2012 presidential election, rather than investing in productive undertakings, Weafer says.