A few days ago, I wrote how the Brazilian real seemed to have been punished enough, and how I expected a level of stabilization and improvement over time. There's also another currency which I believe has been punished too much, and it, too, will stabilize and gain some in value. That would be the Russian ruble.
Like the Brazilian real, the ruble was punished mostly on three counts:
- The significant drop in commodities' pricing. Russia, even more than Brazil, had a weak spot in its commodities exposure. And in one commodity in particular: crude and associated products, which accounted for a full 2/3rds of Russia's exports during 2013. With the severe punishment these commodities have been taking, it's no surprise that investors are wildly scared of the ruble. Recently (October 2015), Russian exports were dropping at a massive 34% year on year, and this is set to continue for a while given the recently resumed crude plunge.
- The dependence on energy in particular and commodities in general also had a very significant economic impact. Russia's economy is contracting at nearly 5% year on year.
- Russia's renewed militaristic stance, which led to economic sanctions with the potential to worsen the already bad impact from commodities.
These effects have led to a massive loss of trust on Russia and its currency. The result was a significant drop in the ruble exchange rate.
The ruble went from ~28 to the dollar in early 2011 to ~76 now, a drop in value of more than 62%.
The Thesis In Favor Of The Ruble
Since Russia's situation is arguably still deteriorating (as crude continues to move lower), why would I be saying, at this point, that the ruble ought to stabilize and even gain some in value?
Again, as with the real, the answer is that devaluation is needed for a country to regain competitiveness, and competitiveness can be gauged from something like the trade balance.
Like with Brazil real, the commodities implosion and the ruble devaluation were so hard that:
- The Russian economy took a large tumble, leading to contraction in demand.
- And furthermore, demand directed towards external goods and services was affected even more extensively, because the ruble devaluation made those goods and services a lot more expensive.
The end result of this is that exports imploded because of the commodities crash, but imports also did the same (down 36% year on year in October 2015) on account of depressed demand and price increases for foreign goods. In the end, it all coalesced into a trade balance which, amazingly, remains very positive.
Now, this trade balance remained healthy in spite of crude now trading below what can arguably said to be a sustainable level over the long term. If and when crude recovers some of the lost ground, there will actually be pressure towards a larger positive Russian trade balance.
The one concern, as with Brazil, is that Russia might lose control of its government deficit.
Fiscal deterioration has indeed happened. Russia now sees its 2015 budget deficit at 3% of GDP. Here, however, Russia has the advantage of coming from a very low public debt/GDP ratio, so it has the leeway to resist a few years under the negative conditions prevailing today.
On top of this, and more as a curiosity, purchasing power measures such as the Big Mac Index already flash "highly undervalued". For instance, a Big Mac in Russia went for ~$1.88 back in July, compared to ~$3.99 in the U.S. And at that time the USD/RUB rate still stood at ~57, versus 76 right now.
For a U.S. stock investor, investing directly in the Russian ruble presents no good alternatives.
However, there is a good proxy for the Russian stock market, the Market Vectors Russia ETF (NYSEARCA:RSX). This ETF is also affected directly by the ruble and would gain from an improvement in the unsustainably low energy prices to boot (due to index components).
Hence, if an U.S. investor wants some exposure to the ruble, he can direct his attention to Russian assets which also quote in the U.S. and are originally denominated in rubles. The RSX is one example, but there are others, including for individual companies.
It is my view that given the risks Russia faces, the drop the ruble has taken and the level crude trades at, the Russian ruble stands to have a decent performance going forward.
This is so because in spite of the impact on Russia's economy from the low crude prices, the country has kept a positive balance of trade. Right now, crude already trades below what I believe is its long-term sustainable level on account of new production from shale and offshore costing more than the present market price. This means the fundamentals for the ruble are set to improve going forward and there's no need for further devaluation.
This also means that Russian assets originally denominated in rubles but available for foreign investors to buy into should do well.
This article is something akin to the (negative) articles I wrote on the Australian dollar and Brazilian real back in 2012. Only this time the predictable path is favorable, both for the Brazilian real and Russian ruble.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.