With the ceasefire anything but, and the fighting raging in eastern Ukraine, or as the pro-Russian separatists call it, Novorossiya or New Russia, it may seem strange to talk about buying rubles. Russia seems intent on furthering territorial gains in the east; the Donetsk airport seems especially coveted. A destabilized and economically weak Ukraine appears to be the Kremlin’s goal. Armored columns continue to pour across the Russian border and soldiers on both sides continue to die.
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Over the past year, the Russian currency has weakened more than 32% against the greenback.
The conventional wisdom is the ruble’s freefall will continue, with no end in sight. However, when there is blood in the streets, it’s usually a good time to buy.
Russia’s economy is hurting and it’s about to get a whole lot worse; it is almost certainly already in recession. Capital flight has already exceeded $125 billion this year. Russian banks and state-owned companies cannot roll over their foreign currency debt due to Western sanctions. This is causing severe pressure on earnings. The federal government will most likely have to provide funds to several Russian entities to keep them afloat. Whether this comes from the $420 billion in foreign currency reserves (left after the Central Bank’s attempts at stabilizing the ruble) remains to be seen.
The Russian federal budget receives approximately half its funding from the sale of hydrocarbons. It is said the budget is balanced at a crude price of about $100 or higher. With West Texas Intermediate holding a mid-seventies handle, the federal coffers are under pressure.
Some argue it is for this reason that Russian President Vladimir Putin has wanted a weaker currency. He sells oil abroad in dollars. The ruble at lower levels has made this commodity more valuable to Russia as an export. The surge in receivables in rubles has helped plug the deficit. However, Putin cannot let the ruble freefall.
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“We are now seeing speculative jumps of the ruble, but I think that it should stop in the near future, given the actions that the Central Bank is currently taking in reply to the actions of speculators,” Putin said this month to the Business summit at APEC Forum.
The economic pain has also imperiled the government’s spending priorities, such as Putin’s military buildup.
Ivan the Terrible coined a term long ago which is still in use in Russian society, the oprichnina, or the wealthy palace guard that keeps the tsar in power. Putin has the same, only now they are wealthy oligarchs and defense industry professionals. These people are hurting economically. Putin cannot allow the ruble to fall too far and jeopardize his power base.
Recently rumors have been swirling that Russian Interior Minister Vladimir Kolokoltsev may have been forced to resign and could be soon replaced. His office controls a large part of Russia’s internal federal police and paramilitary. He is known as a capable technocrat that has revitalized Russia’s security apparatus. However, he is not in Putin’s inner circle. This is significant because it means Putin may be trying to further consolidate his power as economic conditions worsen. This means that he could be feeling pressure from the oprichnina, and may be forced to prevent further devaluation of the ruble.
The Kremlin is also likely to be feeling pressure from other areas. It is rumored that thousands of Russian soldiers have died or been wounded while on exercises in Siberia. Moscow can no longer hide the fact that she is at war and her sons are dying. Sooner or later, the Russian population will start to push back on this military adventurism. The fact that Putin has further inflamed the public ire by banning Western food imports has not helped the situation.
Perhaps this is why Putin made noise about cooperating with Western partners while at the G-20 gathering in Australia, even though he did park warships off the coast. I think the Kremlin may be looking for a way out of this crisis. And that is why I say it is time to look at going long the RUB.
All opinions expressed by L.Todd Wood are solely Wood’s opinions and do not reflect the opinions of FBN, Fox News Network, LLC or their parent companies or affiliates. Woods’ opinions are based upon information he considers reliable, but neither FBN, nor its affiliates and/or subsidiaries, nor any companies with which such participants are affiliated, warrant their completeness or accuracy, and they should not be relied upon as such.
Past performance is not indicative of future results. Neither Wood nor FBN guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment advice. Investments or strategies mentioned in this article may not be suitable for you and you should make your own independent decision regarding them. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You should strongly consider seeking advice from your own investment adviser.
L.Todd Wood is a former emerging market bond trader and is a contributor to The Moscow Times. His first thriller novel, Currency, deals with overwhelming sovereign debt. LToddWood.com