Are you ready to gamble your money on Russia?

Are you ready to gamble your money on Russia

Growing unrest spreading through the Middle East has sent oil prices soaring.

This may be bad news for motorists, but experts say it bodes well for those who have gambled their money on Russia.

Since Egyptian protesters took to the streets in late January, the price of Brent Crude Oil has shot up some 20 per cent to over $113 (£69) a barrel.

 

Staggering: The Russian market has grown by a 483 per cent over ten years

The violence in Libya, the world's 12th largest exporter of oil, has pushed prices up further.

Analysts at Nomura and KBC have warned prices could tip US$200 (£123) a barrel.

 

Mark Dampier, head of research at financial adviser Hargreaves Lansdown, says: 'Russia is perhaps the one market that will benefit from the Middle East problems.'

Oil is the engine of the Russian economy. Along with gas revenues, it makes up around 50 per cent of its budget revenues. A 20 per cent price rise adds 16 percentage points to the country's growth. As such, there is generally a close relationship between the performance of Russian shares and the oil price, with shares lagging slightly.

The Russian market has rebounded 141 per cent since the start of 2009, according to analysts Morningstar, while oil prices increased 164 per cent.

But remember that just as rising oil prices can send share prices hurtling skywards, a crash in oil prices can have the opposite effect.

Russia is plagued by corruption - so much so that it is often referred to as a 'gangster state'. The threat of military action is never far away, and lax regulation of companies is also a major concern for investors.

In 2008, the Russian market dropped 64 per cent, with the average fund losing £640 on each £1,000. Some funds that had taken greater risks lost more.

If you invested £1,000 in JP Morgan Russian Securities at the start of 2008, you'd be left with £300 by the end of the year, according to Morningstar.

But for investors who went in early and stuck with it, the potential rewards have been huge.

The Russian market - as measured by a basket of its biggest shares - has grown by a staggering 483 per cent over ten years.

Out of the so-called favoured emerging market BRIC countries - Brazil, Russia, India and China - only Brazil , with 543 per cent growth, posted a bigger increase. Even those who have been wary of Russia are starting to take note.

Hannah Edwards, from fund manager BRI Asset Management, says her firm has largely steered clear of Russia because of weak company regulation.

One of the alarming results of this, she says, is many firms have overvalued their businesses. But she adds:

'We are starting to think Russia is too big to ignore and have increased our exposure in recent months.'

The most obvious result of higher oil profits is a boost in the profitability of Russian oil giants such as Rosneft and Lukoil.

Investment firm Barings Asset Management estimates an oil price average of around US$150 a barrel would increase their profitsby up to 80 per cent in the short term. Matthias Siller, manager of Baring Russia fund, says higher oil prices will also generate increased tax revenues for the Government.

He says: 'We expect infrastructure and social security spending to increase, with a positive impact on the earnings outlook for banks, real estate companies, the construction sector and retail.'

Mark Dampier, of Hargreaves Lansdown, argues Russia currently represents a better choice than other BRIC countries. He likes JP Morgan Russian Securities and Neptune Russia & Greater Russia.

But he says a better option for investors wanting slightly less risk is opting for a fund which doesn't put all its eggs in one basket. He likes Allianz BRIC Stars, which also invests in Brazil, India and China.

Hannah Edwards also likes Neptune Russia & Greater Russia.

Read the experts' emerging market fund tips online at www.thisismoney.co.uk/emerging