Many investors seem to have misperceptions when it comes to Russia’s economy and the companies located there. Our Emerging Markets Equity Institutional Portfolio Manager Nicole Vettise explains how Russia’s economy offers investors a mix of old and new industries, and compelling areas of investment opportunity as a result.

The double-headed eagle that features on Russia’s coat of arms is said to reflect its geographical position, facing both East and West. Maybe a more apt interpretation is Russia’s continued dominance in the old economy while thriving in the new.

In our view, Russia is in an enviable position when looking at a number of fundamental factors; it has very little sovereign debt, a current-account surplus and considerable foreign exchange reserves of US$570 billion, equivalent to 33% of its gross domestic product (GDP).1

Oil—an old economy sector—is Russia’s bread and butter, representing 35% of its GDP and 70% of exports. Therefore, it’s fortunate that Russia enjoys a number of advantages over many (or most of) its international peers such as low cost of production, costs denominated in local currency and—perhaps driven out of necessity from years of sanctions—a keen interest in developing its own technology to improve efficiency.

Take one of Russia’s top tier vertically integrated oil companies. It benefits from a strong balance sheet, long-term reserves estimated to be more than 18 years and is free cash flow positive with oil priced at just US$15 a barrel. Furthermore, it operates in a progressive-tax-regime environment, so when the price of oil declines, the government bears the cost and margins are almost unchanged.

In recent years, the company has been embracing technology and innovation through its own research and development lab, investing in upgrading its refineries and developing techniques to improve efficiencies and drive down costs.