After a couple of years of dismal performances, Russia exchange-traded funds are on the mend in 2016, thanks in large part to rebounding Brent crude prices. With the United States Brent Oil Fund, LP (NYSE: BNO) up more than 41 percent over the past 90 days, the Market Vectors Russia ETF Trust (NYSE: RSX) is higher by almost 36 percent over the same period.
Among diversified emerging markets ETFs, the WisdomTree Emerging Markets Eqty Incm Fd (NYSE: DEM) has one of the largest allocations to Russia at 14.2 percent, a significant overweight to the country relative to the MSCI Emerging Markets Index. DEM is higher by 27 percent over the past three months.
Russia And Russia ETFs
There is more good news for investors in ETFs such as DEM and RSX, the largest Russia ETF listed in New York. Moscow plans to boost dividends from its state-controlled companies this year, including some that dot the lineups of ETFs such as DEM and RSX. Russian state-controlled firms expected to deliver higher payouts this year include Rushydro and energy giant Gazprom.
Related Link: Some Good News For Russia ETFs
Gazprom and Rushydro combine for about 10 percent of RSX's weight with the former being that ETF's second-largest holding at a weight of 8.3 percent. The $1.36 billion DEM, which yields almost 5.4 percent, also features Gazprom as its second-largest holding at a weight of 4.1 percent.
The Kremlin And The Market
Moscow has previously taken a heavy-handed approach to dividends paid by state-controlled enterprises, making Russia one of the highest-yielding and fastest-growing dividend destinations among emerging markets. However, Moscow's dividend efforts were crimped by falling oil prices the past couple of years and there are concerns about the impact renewed dividend largess will have some corporate credit profiles.
“The Russian government's plan to increase the dividends it receives from state-controlled companies in 2016 will increase pressure on the credit profiles of some Fitch-rated companies, including Rushydro and Gazprom, Fitch Ratings says. Continued demands for higher payouts over the next few years could have a wider impact, but this would depend on how flexible the government was willing to be for companies with big investment plans, or those that might struggle to raise debt,” said Fitch Ratings in a recent note.
The ratings agency said the aforementioned Rushydro is the most vulnerable of the companies that are expected to receive pressure from the Kremlin to boost dividends due to the firm's already high leverage. Fitch added that Gazprom is already using half of earnings to pay dividends.
“Gazprom's (BBB-/Negative) recommended dividend is already 50 percent of its earnings under Russian accounting standards, adjusted for non-cash items. But we estimate its profit under IFRS could be double the figure reported under Russian rules. The government has said companies should pay 50 percent of whichever profit figure is higher, so unless it is given an exception it could have to double its planned dividend,” added Fitch.
Disclosure: Todd Shriber owns shares of DEM.
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