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Oil falls under $40, which is extremely negative for Russia. Yet, the ruble and the dollar-denominated RSX show relative strength compared to oil. I explain why this happened and where I think RSX is heading. It looks like December is a poor month for the Market Vectors Russia ETF (NYSEARCA: RSX ). Last year, RSX suffered a steep decline as ruble collapsed amid weak oil and sanctions on Russia. This year, oil falls further, with Brent oil trading at just $38.24 at the moment of writing this article. Yet, RSX has yet to touch lows seen in last December. In fact, RSX did not go lower than the August lows. However, in my view, this magic won’t last forever. On Friday 11, the Russian Central Bank left its key rate unchanged at 11%. The rate is high, but the Central Bank had little to do in current circumstances. Sanctions on Turkey will be contributing to food inflation, which is especially pronounced in winter as Russia does not produce much fruits and vegetables in this season. Oil keeps falling and threatens the ruble (more on this later). A weaker ruble will contribute to inflation. No matter how Russia tries to jump-start production of everything internally, this is plain impossible, and the country still depends a lot on imports. In this light, the Central Bank’s hands were tied and it was forced to leave the rate unchanged despite the fact that the high rate hurts the economy. Meanwhile, the ruble is showing some extra strength. At the moment of writing this article, ruble was 70.43 to the dollar, making the ruble-denominated price of oil stand at just 2,693. As a reminder, the Russian budget for the next year is based on the ruble-denominated price of oil at 3,150. The relatively strong ruble hurts exporters which make up the majority of RSX’s holdings . At the same time, the relatively strong ruble prevents the dollar-denominated RSX from falling further down. This situation will not last forever. I strongly believe that the ruble will return to more acceptable levels. If it does not do so on its own, then the Central Bank will be forced to help in order to maintain the budget and help exporters to gain from the ruble weakness. I expect that the ruble will have a downside correction of at least 10% from the current levels, which will inevitably add to RSX’s weakness. I believe that current oil prices are an immense drag on the Russian economy. This drag has been so far underestimated by the market. The Russian Central bank has cut the ruble’s liquidity with the wise use of repo, but these tricks can’t go on forever. To highlight what I’m talking about, I’ve made a screenshot from the official site of the Russian Central Bank. As you can see, the amount of bids received is twice more than the money allotted. To further enhance the thesis that the Central Bank is artificially cutting liquidity to support the ruble, here’s the screenshot of several repo auctions in January 2015: (click to enlarge) And these are numbers from this summer: (click to enlarge) All in all, I believe that the current balance is not sustainable. Ruble will fall and RSX will follow. If oil stays at current levels for longer, RSX will have even more downside. Scalper1 News
Scalper1 News