Kevin Kerr: Hello once again from historic Tallinn, Estonia, here in Eastern Europe (NYSEARCA:VGK) — about an hour or so from the Russian border. There are big changes under way in this region as Russia, after an 18-year wait, joined the World Trade Organization (WTO) in mid-December.
This is big news, but not just for Russia. Today I’ll share with you the country positioned to benefit most from Russia’s big new move, and one company in particular that could be flying high with the new trade avenues that are opening up because of it.
A New Road to Russian Resource Riches
Russia is the last member of the major G-20 economies to join the WTO, after China joined in 2001. The WTO is a global body of 153 members that provides a forum for international trade agreements, which it monitors and enforces — that is, deciding when rules have been breached and when various punitive trade sanctions can be imposed.
Russia’s ascension to WTO membership likely means the removal of various trade barriers. This in turn may stimulate greater and more diversified trade between that country and the rest of the world.
At least …that’s what Russia is hoping for, and many nations who need Russia’s resources hope for it too. Some analysts are estimating that Russian membership in the WTO may grow its economy by tens of billions of dollars each year!
Even before joining the WTO, Russia was the 12th-largest global exporter in merchandise and 18th-largest global importer. In terms of trade with the European Union, Russia is the EU’s third-largest source of imports, right behind China and the United States.
And most people don’t realize it, but the EU is Russia’s biggest trading partner, with over 50% of the imports flowing into Russia originating from the EU. And the EU is the primary destination for Russian exports. So, trade between Russia and the EU is vital to both nations’ industries.
The Trouble with Russia
However, for all of its vast resources — especially oil and gas — Russia has had trouble competing within the global market and attracting foreign investment in infrastructure and also in research and development.
Foreign investors have always been put off from investing in Russia because of things like corruption, protection of minority shareholders, lack of a fair and impartial justice system, and outright bribery, among other unattractive things.
Only time will tell if Russia can comply with the rules of the WTO and attract more foreign investment for the vast resources they have. The bottom line is that Russia will have to open the door, at least a little bit, to foreign investment because it’s the only way Russia can compete in the global economy.
The deal still needs to be ratified in the next six months by the Russian parliament. So, many Russian politicians and officials have been talking up the deal all over the place.
“This will create the right conditions for the further improvement of our business climate, for an influx of foreign investment and for boosting Russian exports while also retaining the possibility of giving support to our key branches of domestic economy,” Russian foreign ministry spokesman Alexander Lukashevich said in a statement.
“We are achieving a completely new level of integration into the global economic system,” he added.
The United States may also present some hurdles to Russia finalizing its WTO membership. Some existing legislation, known as the Jackson-Vanik amendment, prohibited America from establishing normal trade relations with the Soviet Union because it did not comply with free emigration policies.
Most political observers feel that Congress will agree to eliminate the old laws (established in 1974), and that many of the other issues with Russia over agriculture and intellectual property rights were resolved long ago. On top of that, President Obama called Russian President Dmitri Medvedev to congratulate him on Russia’s admission, and basically welcome the country to “the club.”
So what does all this mean for us as resource investors, and how can we profit from it?
The Real Trade Winner … and it Isn’t (Just) Russia
While the EU will certainly benefit from Russia joining the WTO, the big winner is actually China.
China-Russian relations and trade will grow swiftly as Russia’s customs tariffs will be lowered to 7.8% from 10%. As Russia cuts down duties on 1/3 of its imports, that will make it easier for Chinese industrial and agricultural products to sell into the Russian market.
It’s truly a win/win for both nations. In addition to various energy products, Russia could also supply China with steel, chemical products and many other goods.
Other big winners are going to be the Russian people. After all, lower tariffs on imported goods will make them more affordable for the average citizen.
And finally, among the winners could be those of us who figure out how to trade on the new trading agreement.
As investors, we should look for ways to take advantage of an improved business climate in Russia and for key companies that may almost immediately take advantage of Russia joining the WTO.
One company that is ecstatic about Russia joining is Boeing (NYSE:BA). Boeing has been a big advocate of Russian membership in the WTO, and with good reason.
Boeing Chairman, President and CEO Jim McNerney was quoted on the company Web site as saying that “Russia is an important trading partner for Boeing and other U.S. exporters, and we’re excited about the prospects for increased trade and jobs, and enhanced global cooperation. …
“Russian airlines have become valued customers of Boeing products, purchasing 147 commercial airplanes from us in the past 10 years. The Boeing Design Center in Moscow and our titanium parts production joint venture with Russian Technologies, Ural Boeing Manufacturing, are powerful examples of U.S. and Russia economic partnership.
“We see Russia’s membership in the WTO as a win-win for both of our countries.”
Boeing is trading at $74 with a market cap of about $55 billion. The company is ramping up sales of its new 787 aircraft, and the stock looks situated to head toward at least $85 in 2012.
The opening up of the Russian markets may just be the extra catalyst a company like Boeing needs to ratchet up its share price big-time.
There are many other companies that are well-positioned in Russia that may benefit significantly from a more transparent, secure and accountable trading partner. You may also want to keep an eye on two Russia Exchange-Traded Funds, the Market Vectors Russia ETF (NYSEARCA:RSX) and the SPDR S&P Russia ETF (NYSEARCA:RBL), to get more familiar with the trading action there.
Only time will tell what the trading landscape with Russia will be now that it’s a member of the WTO, but one thing is certain. The change certainly opens up a lot of doors for possibilities to grab big profits on key players in the region.
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