At the beginning of the second quarter of the year, the Russian’s stock and money markets demonstrated an extremely negative reaction to the new sanctions imposed by the US Ministry of Finance against natural persons and companies. It took only a few days in order to the RTS index lost 13.5% while the USDRUB exchange rate grew by approx. 9%. However, after that, the Russian stock market, supported by growing oil prices, could stabilize and by the end of quarter erased approx. 50% of its losses, showing zero YTD performance. The Fund decreased by 7.5% for the same period bringing its half-year performance to +2.75%.

President Putin was inaugurated into his new six-year term during the quarter. Announced reforms will address the politically difficult subject of an increase in the pension age – long-awaited and positive for the budget system.  Further, we should see a long-term increase in spending on infrastructure, education, healthcare funded by increased VAT, oil sector taxation and better budget administration and a drive to increase the dividend payments from state-owned enterprises

Looking ahead, we believe that the Russian market will remain unstable for some time because it will be subject to both favorable and unfavorable factors.  Today the main risk for all markets, not only for the Russian market, is an escalation of tensions, reciprocal restrictions and instability in trade relations between the major economies, which can undermine the global trade and will have a very negative impact for confidence and investments all over the world. However, in this situation, the Russian market will be more attractive among emerging markets because a lot of negative factors are already priced in. Moreover, the Russian economic recovery continues amid relatively high oil prices, strengthening of macroeconomic stability and gradual monetary loosening. Russia’s debt continues to be one of the smallest in the world while there are significant foreign and gold reserves.

Unfortunately today many investors do not invest in Russia fearing the risks associated with sanctions and geopolitical tensions but as soon as the first signs of softening will be visible, the situation will improve dramatically.