January 27th, 2015
Written by JB Marwood, jbmarwood.com
The last few months have not been a good time to be Russian Prime Minister Vladmir Putin.
Although turmoil in Ukraine may no longer be making front page headlines, the conflict situation there is still on tentative ground. Western sanctions on Russia continue to cause economic problems and now the country has to deal with yet another problem.
Plunging oil prices, a result of dwindling demand and economic slowdown in Asia, has seen the Russian ruble collapse in value while inflation across the country has also spiked higher.
The Russian Central Bank has already deployed huge amounts of foreign currency this year, and there is now little chance for the bank to step in and prop up the ruble to prevent any further price declines.
Combined, this series of events are not particularly good for Russian prospectors and the Russian economy is now on the verge of recession, causing headaches for forex traders.
A quick glance at the chart for crude oil futures shows that oil has now dropped 40% from it's June high, taking the market below $63 a barrel, the lowest level in five years.
This fall comes as economic growth in China continues to slow, despite last month's surprise move by the People's Bank of China to cut interest rates.
It's also a reflection of increased oil supplies and a determined effort by OPEC to drive down prices to make the market more competitive with US Shale. Indeed, the most recent OPEC meeting saw big price declines in oil as the group decided against cutting oil production. This was against analyst expectations and is a big reason why oil is down at these low levels.
Oil exports are Russia's largest source of foreign revenue so the fall in market price is not good news for Russian business. As a result, Russian GDP has continued to slide in 2014 and Russia's Economic Minister now expects the country to slip into recession (that is, if the country is not already in recession). Last quarter's GDP came in at 0.7%, way below the 5% number in early 2012, and this is especially worrying given the high inflation rate, currently running at 11.50%.
Equally, if not more worrying, is the price of the Russian ruble which recently fell 6% against the dollar, it's biggest daily drop since 1998.
At the present time, USDRUB trades at an all-time high of $53.54. As the price chart indicates, this move has been aggressive; a term which no central banker ever wants to hear when discussing their own currency.
Central bank dilemma
The problems afflicting the Russian Central Bank are two-fold.
First, central bankers cannot inject any more life into the economy since inflation is already sky high at over 11%.
Secondly, the central bank has already spent large amounts of its foreign currency reserves.
According to Bloomberg, Russian foreign exchange and gold reserves have fallen to $420 billion. This is the lowest level since September 2009.
Thus, the fundamental picture for Russia could hardly look any worse. And this is also reflected in the Russian stock market which is currently not far away from it's financial crisis lows.
If there is a silver lining in all this, it's that Russia is now so beaten up that it must surely be near a market bottom.
The Russian stock market and the Russian ruble are among the most hated investments in the world right now and whenever that occurs, it's usually a sign that the worst is over. Or at least, near to being over.
Another thing going for Russia is that the country actually has very low debt levels. Russian Debt-to-GDP is currently running at just 13.41%. That compares to 101% for the highly leveraged US, 90% for the Eurozone and 220% for Japan. Even China has a higher debt-to-GDP ratio than Russia at around 22%.
As a result, contrarian investors are now looking ever more closely at Russian stocks, as well as the Russian ruble.
It's in severely beaten up markets that contrarian investors make their money. And with Russia, that is the opportunity.
About the Author
JB Marwood is an independent trader, writer, and stock market enthusiast. For more trading tips and strategies, check out his blog at: http://jbmarwood.com/blog