Even though I spend a great deal of time in Moscow, I have to admit, I am still one of those people who has been shocked at the speed of the decline of the Russian economy and the standing of Russia in the world economic community. By most estimates, the economy of the Russian Federation is in recession. It is rumored that the Kremlin has based their annual budget on an oil price of $114. The market is no where near that, and falling further, due to dwindling demand, and the changing dynamics of the global hydrocarbon balance of power, as the United States becomes the world’s largest producer of crude oil. Therefore, there will be a significant budget deficit this fiscal year in Moscow. The new sanctions imposed by the United States and the European Union on Russia will hurt production capability, which is the lifeblood of Russian tax receipts. In addition, capital outflow, which has already approached $100 billion this year, will likely accelerate due to reputation risk as Putin escalates actions in East Ukraine and elsewhere. It is difficult to see what catalyst will spark growth in Russia barring a bounce back in the price of oil.
The impact of all of these factors on the Russian currency, the Ruble (RUB), has been predictable. Today the RUB has reached a new historical, post-Soviet low against the dollar and other major world currencies. We now have a new handle on the RUB of 38 against USD. Many pundits and talking heads, including the famous commodity expert Jim Rogers, are now saying back the truck up on the Russian economy and buy equities and the RUB. I totally disagree with this analysis. Yes, it’s true that it’s always good to buy when there is blood in the streets; however, in Russia, the RUB is sinking for a very good reason. Again, I spend a lot of time in Moscow. I can say with authority that there has been a fundamental shift in the policies the leadership are pursuing and the outlook and desires of the Russian people themselves. Russia is becoming a fascist state bursting with nationalistic, imperialistic desires. The power structure of Russia were in their twenties when the Soviet Union fell. They are bitter and want to make right the wrongs they feel they have suffered over the last several decades. The rule of law is nonexistent. The law is whatever President Putin and his oligarchs say it is in the moment. The political opposition has been silenced. The free-press is almost non-existent. In short, this is not a normal situation for investors. There are risks here that one cannot comprehend unless you are in Putin’s inner circle.
When Russia invaded and occupied Crimea, a well known businessman in Moscow stated, “If the Kremlin doesn’t watch out, the RUB will be at 40.” Well, we are basically there already. Although there was a period of relief when Putin fooled the West into thinking Crimea was all he wanted, the bounce back didn’t last long. I believe the RUB will get much weaker. The Kremlin is all in regarding their current strategy of intervention and destabilization of the former Soviet Republics. Now with events in Estonia, it seems NATO may be in the Moscow cross-hairs as well. President Putin is determined to stand-up the Asian economic union with former Soviet states. This will allow Moscow to control the situation on its borders and attempt to better manage its economy. This is more important to Moscow than good relations with the EU or the price of the RUB. As events are destabilized more and more, the RUB will continue to fall. At some point in the future, possibly when new leadership takes the helm, or when oil rebounds, it may be time to take another look at investing in Russia. However, until that happens, stay away.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com