Shorting Russia Now Is Not As Rewarding As In 2014
Summary Oil prices have dropped sharply again, similar to late 2014, yet this has been less rewarding for investors shorting Russia. FDI in Russia is projected to increase from its current level of $1.3 billion to $16.2 billion during the 2nd quarter of 2016. The IMF made the following statement: “The recovery in 2016 will be supported by the ruble’s more competitive exchange rate, increasing external demand and normalization of domestic financial conditions.”. Non-alignment in sanctions against Russia is another factor that could decrease the value associated with shorting Russia, even in a low oil price environment. Shorting Russia will not be as rewarding as late 2014. Since late 2014 I have been bullish and bearish on Russia, enjoying the thrill of the volatility of the Direxion Daily Russia Bear 3x ETF(NYSEARCA: RUSS ) and the Direxion Daily Russia Bull 3x ETF(NYSEARCA: RUSL ). With necessary and intensive due diligence and an appetite for risk, the past year has provided opportunity for substantial returns by strategically investing in these leveraged ETFs. The declining price of oil has presented an obvious opportunity to short Russia, although the recent return for investors has been significantly lower. Although sentiment towards Russia has become more bearish amidst low oil prices, I have decided to take a step back and sell the majority of my position in RUSS, only keep the profit invested. This was tough to do, as Citi has projected that oil may drop close to $30/barrel this year , producing an inevitable shock to Russia’s economy. My basis for this decision was a historical analysis of the impact of oil prices on the Direxion Daily Russia Bear 3X ETF. The plunging price of oil in late 2014 sent the Direxion Daily Russia Bear ETF near 200.00 in December of 2014. Now that oil has dropped to its 6.5 year low , the positive impact on the Direxion Daily Russia Bear 3X ETF has been drastically reduced. The fund currently trades at 44.59, a far cry from the high levels experienced earlier this year. RUSS data by YCharts Lower oil prices have been less rewarding for bears Oil prices have dropped sharply again, similar to late 2014, yet this has been less rewarding for investors shorting Russia. (click to enlarge) Source: Trading Economics It will certainly take $30/barrel oil for investors shorting Russia to receive a substantial return, similar to what investors who shorted Russia in late 2014 experienced. I do not deny the opportunity associated with continuing to short Russia in anticipation of lower oil prices, but still decided to step back and take a wait and see attitude, which will most likely result in me not shorting Russia again. Sanctions: Non-Alignment Non-alignment in sanctions against Russia is another factor that could decrease the value associated with shorting Russia, even in a low oil price environment. However, the effects of sanctions have thus far been substantial, as the IMF has projected that sanctions have resulted in Russia’s economy contracting at an additional 1 to 1.5%. In December of 2014, China’s foreign minister Wang Yi made the following statements edifying its non alignment with sanctions against Russia: “Russia has the capability and the wisdom to overcome the existing hardship in the economic situation. If the Russian side needs, we will provide necessary assistance within our capacity.” These supporting views of Russia are also shared by its counterparts Brazil, India, and South Africa. Economic Outlook (click to enlarge) Source: Trading Economics The recent contraction in annual GDP growth will be met with reconciliation, according to the following outlook of the IMF: Growth in Russia’s GDP is projected to contract by 3.6% in 2015, but is expected to recover in 2016. Weak GDP growth of 1.5% is expected. This statement sums up the IMF’s reasoning for the recovery of Russia’s economy. “The recovery in 2016 will be supported by the ruble’s more competitive exchange rate, increasing external demand and normalization of domestic financial conditions.” Increased FDI Inflow Projections My observation of the increased FDI projections for Russia was probably the strongest indicator for me to determine that shorting Russia was no longer as beneficial. (click to enlarge) Source: Trading Economics The projected increased flow of FDI into Russia verifies that the country now has increased investors confidence, unlike late 2014. Trading Economics projects a substantial increase in FDI during the next 12 months. FDI is projected to increase from its current level of $1.3 billion to $16.2 billion during the 2nd quarter of 2016. 3rd quarter of 2015: 167% QoQ growth in FDI projected. 4th quarter of 2015: 14.3% QoQ growth in FDI projected. 1st quarter of 2016: 231.9% QoQ growth in FDI projected. 2nd quarter of 2016: 22.3% QoQ growth in FDI projected. Valuation Case A glance at some Russian ADRS displays how many companies in Russia have been unfairly hurt by sanctions and low oil prices, making them extremely undervalued. I will be watching these companies, based on an initial glance at valuation, although I will need to wait until oil prices settle and the economy of Russia begins to experience moderate economic growth, before feeling confident value investing in Russia. Company P/E P/B Mobile Telesystems Public JSC(NYSE: MBT ) 4.63 1.39 Qiwi plc(NASDAQ: QIWI ) 7.2 4.06 JSC Irkutskenergo(OTCPK: IKSGY ) 6.78 0.51 Federal Hydro-Generating Company(OTCQX: RSHYY ) 3.77 0.14 Rostelecom(OTCQX: ROSYY ) 2.59 0.32 Conclusion Shorting Russia could be rewarding, but I have decided to sell my principal investment, only keeping the profits invested in the Direxion Russia Daily Bear 3X ETF; this is based on the consensus that oil should drop to $30/barrel, and that this provides further opportunity for profit. This decision is not based on my long term bearish view of Russia, but rather the inevitable and sensationalized effect that lower oil prices will have on Russia’s economy. However, I think that the days of shorting Russia and winning will soon be over. Besides, I prefer the simplicity of value investing in high growth countries in Southeast Asia, and do not wish to relegate the art of investing to gambling. Russia is a complicated case for investment, but based on my observation, I am not confident that shorting Russia is a wise endeavor, even though oil prices are sure to be lower in the future. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.