Russia’s stock market – what should investors do?

The dispute in Crimean peninsula is a worldwide issue that involves not only Russia and Ukraine, but also other European countries and even United States. Many ECON 411 colleagues have mentioned about these disputes in their blog posts, explaining how Russia is pressuring European countries by discontinuing the export of its natural gas; and how US tries to pressure Russia by making plans to export its shale gas. It is interesting to see how territorial disputes eventually affect economy of different countries. Recently, Wall Street Journal article The World’s Riskiest Stock Market? pointed out that Russia’s stock market is one of world’s cheapest, yet risky market.

Russia’s RTS (Russian Trading System Cash Index) is down 21% this year, mainly due to the fear of Ukraine crisis. The article denotes “This year, more than $600 million has left exchange-traded funds and mutual funds that invest primarily in Russian stocks, according to EPFR Global in Cambridge, Mass.” And, it pointed out that investors can find good returns in Russian stocks because of this geopolitical event. The diagram below shows how Russian RTS index dropped from 1,400 to 1,136 in less than two months. The steep decreasing slope due to Ukraine conflict means that investors can earn reward if they invest in Russian market.

russian rullete

I tried to relate this situation to the book “A Random Walk Down Wall Street” by Burton G. Malkiel. The author emphasizes “risks has its rewards.” Especially, chapter 9 – Reaping Reward by Increasing Risk explains that in order to get a higher average long-run rate of return, one must increase the risk level of the portfolio that cannot be diversified away. The author classifies risk into “systematic risk (or market risk)” that captures the reaction of individual stocks to general market swings (as in Russia’s situation, regarding Ukraine dispute) and unsystematic risk due to factors peculiar to a single company (such as a strike, or discovery of new product, etc). And, as the systematic risk increases, the return from market increases as well, which supports the article’s point (The graph between systematic risk and return from market is shown in Pg.223).

“No risk, no profit” is a common sense to investors. Therefore, for investors Russian-Ukraine dispute can be a great opportunity to invest and earn larger amount of return. However, investment always comes with a risk. Especially, as Russia’s systematic risk is quite substantial right now, I think it is important for investors to diversify their portfolios (by not only investing in Russia, but also investing in markets with less risk), in order to avoid heavy loss while aiming for higher return.