Providers bank on Russia recovery

Arc Capital and Income has launched the second tranche of its Emerging Markets Russia plan for UK investors. The latest issue follows the launch of four new tradeable Russian sector indexes on March 31 by the Vienna Stock Exchange (VSE), which are designed for use in structured products.

Russian equity markets suffered heavily during the banking crisis, leading to a suspension of trading on the rouble-denominated Moscow Interbank Currency Exchange for two days in early October 2008. The RTS, the Russian benchmark share index, lost half its value in the same month.

However, VSE anticipates positive economic developments in Russia, and says that the launch of the indexes gives investors an opportunity to benefit from the recovery of the Russian economy from a low entry point, according to Heinrich Schaller, joint CEO of VSE. Oil and metal prices in particular are expected to rally once demand returns. "We assume that markets are close to the bottom," says Schaller. "We expect a volatile development in the nearer future but that stability will return mid-term."

All the sector index constituents are based in Russia, and include Oil & Gas, Metals & Mining, Telecoms and Utilities. "In our view, Oil & Gas is the most important and representative sector for the Russian economy," says Schaller. Other sectors did not meet liquidity or representativeness criteria, but an additional Russian sector index may be launched in future if there is sufficient market interest and the criteria can be satisfied, he adds.

Russian economic performance is anticipated to be closely correlated with a commodity rebound. Arc's kick out trade is being mooted as an indirect commodities play by the UK distributor, which will offer exposure to oil prices in particular.

The product is linked to the RDX index, which comprises 14 Russian blue-chip companies traded on the London Stock Exchange, including Gazprom and LUkoil.

The five-year investment will mature in one year if the index is at 90% of its initial level, paying a 20% coupon. It accumulates a 20% return each year that it does not mature, up to a maximum of 100% at maturity provided the index has met the conditions at the final anniversary. Capital will be repaid in full with no return if it does not meet the conditions, unless the RDX has fallen by more than 50% at maturity, in which case principal loss will be 1:1 with the index.

Raffeisen Centrobank issued open-ended certificates linked to the RTX Oil & Gas, denominated in euros, on the VSE on April 1.

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