Tag Archives: ruble

RSX: Ready For December Wipeout

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.

Investing In The Russian Market: Oil ETFs Are Better Than Russia-Focused ETFs

The Russian Central Bank surprisingly cuts the key rate to 15%. The implementation of the anti-crisis plan meets first obstacles. ETFs that focus on Russia are unlikely to rise at the same pace as oil ETFs in case of an oil price upside. Russian market has recently been under serious pressure due to sanctions, falling oil prices, devaluation of the ruble and weakening economy. A number of investors believe that the Russian market is cheap right now and await an oil price upside, hoping that it will provide significant upside to ETFs that focus on Russia, like the Market Vectors Russia ETF (NYSEARCA: RSX ), iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) and SPDR S&P Russia ETF (NYSEARCA: RBL ). However, I would like to argue that investors will be better off investing in oil ETFs, like The United States Oil ETF (NYSEARCA: USO ) or The United States Brent Oil ETF (NYSEARCA: BNO ), if they believe in a bright future for oil prices. Currently, energy accounts for 43.04% of RSX holdings , 49.63% of RBL holdings and 51.97% of ERUS holdings . This means that approximately one half of holdings of these ETFs is not directly related to oil prices. One could argue that oil prices are the single-most important factor for the Russian economy. When oil prices rise, the economy and all its sectors feel better. While this is partly true, I think that there are negative factors that will pressure RSX, ERUS and RBL. The first factor is the continuing devaluation of the ruble. In my view, rising oil prices will not provide a corresponding upside for the currency. This point was recently highlighted by the surprise cut of the key interest rate by the Russian Central Bank on January 30. While Brent oil prices have enjoyed a significant upside since then, the ruble remained roughly unchanged. When the Central Bank was raising its key rate to 17% in December, it stated that these measures were necessary because of ruble depreciation risks and inflation risks. While commenting on the reduction of the key rate from 17% to 15%, the Central Bank stated that it saw a stabilization of inflation and depreciation expectations. In my view, this is a rather strange conclusion. The Central Bank stated that annual consumer price growth rate was 13.1% as of January 26. In comparison, 2014 inflation totaled 11.4%. These numbers show that inflation is increasing rather than stabilizing. The Russian ruble started this year at 59.18 to the dollar. It is trading at 68.92 to the dollar as I’m writing this article. In my view, a 16% devaluation of the ruble cannot be called a “stabilization of depreciation expectations”. Meanwhile, a 15% key rate is still prohibitive for most businesses, and the recent interest rate cut might signal a shift in the Central Bank’s policy. Further rate cuts will lead to more downside for the ruble, pushing RSX, ERUS and RBL lower. The second thing that I’d like to mention is the government’s anti-crisis plan . While the government is sure that it has enough reserves to ensure the implementation of this plan, the process is not going smoothly. The Russian Ministry of Finance stated (please note that the link is in Russian) ( Google translate link ) that it would not be able to allocate enough funds for several anti-crisis measures. While the Ministry of Economic Development proposed to spend 40 billion rubles ($580 million) on credits for Russian regions in the first quarter of 2015, the Ministry of Economic Development is ready to allocate just 10 billion rubles ($145 million) for these measures. In my view, it will take time before the Russian government is able to develop a unified position on the implementation of the anti-crisis plan. Meanwhile, the economy is suffering, and Morgan Stanley is predicting that Russia’s GDP will drop by 5.6% in 2015. In my view, the lack of coordination within the government supports my previous thesis that the situation in the Russian economy will get worse before it gets better. I believe that the fate of the Russian economy remains in the hands of oil prices. I remain skeptical on the current anti-crisis measures. What’s more, I think that ETFs that focus on Russia won’t be able to outperform oil ETFs in the near term. I think that further depreciation of the ruble and problems with the implementation of the anti-crisis plan will hit the non-energy part of RSX, ERUS and RBL portfolios. In my opinion, if an investor is bullish on oil, they should buy oil ETFs rather than ETFs that focus on Russia. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.