Russia to benefit from slower European growth

Published: July 7, 2010

Troika Dialog analyst says the discount at which Russia trades could drop.

Slowing growth in Europe should encourage investment in Russia’s high-growth market, says Troika Dialog analyst Kingsmill Bond.

In a research note issued today, Bond says that this should ultimately reduce the discount at which the Russian market trades.

Bond notes that Russia does not suffer from Europe’s problems of high debt and large current account deficits. He adds that its dependency on foreign capital has dropped during the past two years and its strong macroeconomic framework means that spreads should stay low. But he says the ruble/dollar rate is likely to fall by around half the drop in the euro/dollar rate, as this is the nature of Russia's currency basket and trade patterns.

He says economic weakness in Europe splits the Russian market into four groups. Exporters with ruble-based costs stand to benefit from the weakness, while exporters of goods to Europe, for whom prices are determined by European demand, will lose out. For dollar-based investors, domestic stocks will lose out from a weaker ruble, Bond adds, but producers of non-tradables such as banks will be less affected than producers of tradables such as automotives or food, which will face more competition.