Interesting Facts about the Russian Economy

“I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma, but perhaps there is a key. That key is Russian national interest.” –  Sir Winston Churchill, 1939

The Russian economy is the largest among East European countries. At about $2.4 Trillion in 2011 Russia is the 7th largest economy in the world, according to the CIA’s The World Factbook site. The commodity-based Russian economy is heavily dependent on exports of oil, gas and other minerals. Unlike the other BRIC countries, Russia is a long way from having a diversified economy. Despite having one of the largest economies Russia is not an attractive destination for global investors.

In this post, let me know summarize some of the key points from a research report titled “Diversifying Russia, Harnessing regional diversity” published by the European Banks for Reconstruction and Development.

  • Oil and gas exports account for about 70% of total goods exports.
  • Oil and gas revenues also contribute about half of Russia’s Federal government budget.
  • The public sector accounts for more than 40% of total employment though private sector employment is growing slowly.

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  • Only 10% of the total manufacturing employment is employed in sectors not directly to related oil, gas or other natural resources.
  • In a recent survey, Russia lagged way behind advanced and emerging countries in management skills.
  • About 75% of R&D is conducted by public institutions.
  • Only 1% of national income is spent on R&D, well below the OECD average.
  • Russia lags in innovation by private companies compared with other countries including China as the lack of finance capital, poor intellectual property rights, etc. constrain the growth of startups.
  • Due to the legacy of the Soviet Union, Russia has more researchers per million of the population than other countries such as China, Brazil, etc.
  •  The performance of Russia’s benchmark RTS index is highly correlated to the price of crude oil:

 

 

Source: Diversifying Russia, Harnessing regional diversity, European Bank for Reconstruction and Development

The multi-year performance of Russia’s RTS index is shown below:

 

Russian companies trade on the NYSE include the integrated mining and steel company Mechel OAO (MTL) and telecom providers Mobil’nye TeleSistemy OAO (MBT) and VimpelCom (VIP), headquartered in The Netherlands.

Related ETFs:

Market Vectors Russia ETF (RSX)

SPDR S&P Russia ETF (RBL)

Disclosure: No Positions

New Requirements for Canadian Tax Withholding for US Investors

The current Canadian Withholding Tax Rate for Dividends for US-based investors is 15.0% for stocks held in taxable accounts. This is a reduced tax rate since the actual tax rate on dividends paid by Canadian corporations to non-residents is 25%. Due to a tax-treaty between the US and Canada, the reduced tax rate of 15% is applied to US investors.

Canada does not apply withholding taxes on dividends paid by Canadian corporations to US investors holding stocks in their retirement accounts such as IRAs. This is due to a special exemption in the tax treaty between the two countries.

Effective January 1, 2013 the Canada Revenue Agency (CRA) is implementing new requirements for receiving the reduced withholding tax rates on Canadian-sourced income payments. In order to receive the reduced tax rate, US investors have to file the NR301 form – Declaration of Eligibility for Benefits under a Tax Treaty for a Non-resident Taxpayer – with  the CRA through their brokers before Jan 1, 2013.

Otherwise, US investors will be subject to the regular 25% tax rate.

More info on this form including FAQs can be found at the CRA website here.

Additional resources (Updated Aug 29, 2020):

Are European Financials Pointing to a Bull Market?

Financials are the pillars of most major economies. The finance sector is also the key barometer of equity markets.A strong and sustained growth in equity prices is unlikely without the participation of the financials. This is especially true in developed markets where credit plays an important role in the economy.

UK-based Fund manager Sanjeev Shah of Fidelity Special Situations Fund believes equity markets are in the early stages of a bull market. From an article in Trustnet:

The manager believes financials will help to sustain the rally in the short-term, although in the long-run he points to more sustainable themes.

“I think we are in the early stages of a new bull market in equities, and in the short-term I believe financials have the opportunity to continue to provide leadership,” he said.

“However over the longer term it will be themes such as the emerging market consumer, the digital economy and internet which could provide leadership. I believe the commodity bull market is over.”

The manager thinks that fears surrounding financials prior to the crash of 2008 were just; however he adds that times have changed and the unloved sector will continue to strengthen.

“As a result of the financial and eurozone crisis, there has been a lot of concern regarding financials. This was justified given high levels of leverage and the need to write down assets,” he said.

“This led to financials becoming extremely disliked by investors and very cheap in a historical context. Crisis brings opportunity and there will be winners and losers in the new environment. HSBC is a potential winner given its strong capital and funding position.”

A quick check of European bank stocks trading on the US exchanges shows that financials have indeed recovered and most are up by double-digit percentage this year.

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Unlike their US peers, European banks have not yet built a solid capital position and are still in the process of writing off bad assets from their books. However compared to last year most of these banks are showing signs of improvement which is reflected the run in their stock profits. For example, ING Group(ING) has been getting rid of non-core business units in many countries to raise capital. In the U.S. it sold the ING Direct unit to Capital One Financial (COF) last year and in Scotiabank(BNS) acquired its ING Direct Canada unit.

It should be noted that some of the sharp increases in stock prices shown in the chart above are misleading since these stocks jumped from a very base. Llyods Bank (LYG) closed at $3.13 on Friday which is nowhere near where it used to trade before the global financial crisis. Generally stocks under $10 are highly volatile and can easily be moved around even with light volumes.The same can be said of some of the other banks shown as well. In addition, many of these banks currently pay much reduced dividends than before the crisis and some banks such as ING have still not reinstated their dividend payments which were suspended before. Hence from an investment perspective, it is not clear if the recovery in financials is indicative of a start of a bull market in Europe.

Disclosure: Long ING, SAN, BBVA, LYG

RBC: Top 30 Global Stock Picks for 2013

This time of the year asset management firms and others usually publish their top stock ideas for the following year. I found the following list from Canada’s RBC Dominion Securities interesting:

 

Source: RBC’s 30 top stock picks for 2013, The Globe and Mail

The above list does not include stocks from Asia, Latin America, Africa and the Middle East. These stocks have the potential to outperform the market according to RBC’s analysts. On the selection criteria  used, the article noted:

The bank culled the names for its best performers from among the 1,500 companies its analysts cover in Canada, the U.S., the UK and Europe. The analysts were told to offer their “best money-making ideas in absolute terms using a risk-adjusted approach.” The only restriction was that they had to pick larger-sized companies with market capitalization of at least $2-billion and a minimum of $20-million in daily trading value, stocks that would be suitable for a global institutional investor.

I am not yet convinced of investments in U.S. stocks based on the housing market recovery theme. Though most of the homebuilders and related companies have had a nice run this year, the real estate market does not seem to have bottomed out  according to my non-scientific observation.

Disclosure: Long PNC, SWDBY, TD

Ten British Stocks To Consider for 2013 and Beyond

The British equity market offers many excellent companies for investors looking to add some exposure to UK and also earn a higher total return. Five reasons for investing in British stocks are listed below:

  1. The current dividend yield for UK is 3.4% compared to 2.2% for the US market.
  2. Due to the tax treaty with the US, the UK withholding taxes on dividends paid by British companies to US residents is 0%. However there is a 20% withholding tax applied to distributions made by UK REITs.
  3. More than 60% of FTSE-100 companies’ revenue come from other countries.
  4. Many British multinationals have strong presence in most of the emerging and frontier countries due to strong ties dating back to the colonial times.
  5. Among the European countries, the UK economy is one of the few economies that is in recovery mode. More importantly, the private sector is adding jobs and the public sector employment now remains at the lowest level since 2002, according to an article in The Guardian.

The following chart shows the effect of reinvesting dividends based on UK’s FTSE All-Share index:

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Source: The case for income investing, Cazenove Capital Management

Ten British ADRs are listed below with their current dividend yields:

1.Company:National Grid PLC (NGG)
Current Dividend Yield: 5.54%
Sector:Electric Utilities

2.Company: Diageo PLC (DEO)
Current Dividend Yield: 2.38%
Sector:Beverages (Alcoholic)

3.Company: Centrica PLC (CPYYY)
Current Dividend Yield: 4.50%
Sector:Natural Gas Utilities

4.Company: GlaxoSmithKline PLC (GSK)
Current Dividend Yield: 5.31%
Sector:Major Drugs

5.Company: Unilever PLC (UL)
Current Dividend Yield: 3.95%
Sector:Food Processing

6.Company: Vodafone Group PLC (VOD)
Current Dividend Yield: 6.09%
Sector:Telecom

7.Company: Royal Dutch Shell PLC (RDS.B)
Current Dividend Yield: 4.83%
Sector:Oil & Gas Producer

8.Company: Imperial Tobacco Group PL (ITYBY)
Current Dividend Yield: 4.36%
Sector:Tobacco

9.Company: British American Tobacco PLC (BTI)
Current Dividend Yield: 4.17%
Sector:Tobacco

10.Company: Aviva PLC (AV)
Current Dividend Yield: 6.59%
Sector: Life Insurance

Note: Dividend yields noted are as of Dec 21, 2012

Disclosure: No Positions