A Safer Way To Play The Ruble Crisis

by: The Panoramic View


The ruble has fallen almost 40% versus the dollar, increasing Russian inflation and sapping Russian growth.

Putin can make a natural gas deal with China to get the dollars necessary to defend the ruble.

Going long PetroChina for a potential natural gas deal, and going long Sinopec for a potential crude deal is the safer way to play the ruble crisis.

In recent months, the fall in the Russian ruble has been so alarming that President Vladimir Putin recently threatened to punish bearish currency speculators with unspecified actions.

Russia's economy suffers when the ruble falls. Depreciation in the ruble exacerbates inflation, forcing the Russian central bank to raise interest rates. Rising interest rates further damages the Russian economy by making many previously viable projects unattractive.

The main reason for the ruble's fall is that Russian companies have approximately $130 billion in external debt due by the end of 2015. The mostly dollar denominated debt exposes Russian companies to a vicious feedback cycle: the more the ruble falls, the more debt the companies have in rubles, and the more the companies have to cut spending and the less they earn. The less the companies earn, the more capital that flows out of Russia, and the more the ruble falls.

The current negative feedback cycle in the ruble is similar to what occurred to the Thai baht in 1997. (In Thailand case, the catalyst for baht devaluation was the popping of a speculative property bubble. The end result of the baht's depreciation was not pretty.)

Unlike Thailand in 1997, however, Russia has a trump card. Russia has immense natural resources that China covets.

Experts estimate that pollution costs China 3.5% of GDP every year in health and lower productivity costs. China has significant pollution problems because it depends on coal for over 70% of its electricity generation. China's government has always wanted to transition to using natural gas but has made little progress so far because the country has limited natural gas resources. (Most experts believe China's shale gas reserves will remain uneconomic for another 5 to 10 years because of tough geology.)

Russia and China can solve their two problems by agreeing to do a natural gas deal. Given that China has $3.8 trillion in foreign exchange reserves, China can afford to give Russia a $100 billion advance to ward off currency speculators and maintain stability in the ruble. Russia would be helping China solve its pollution problem by providing cleaner burning natural gas.

If Russia and China reach a natural gas/crude oil agreement, the stock of the Chinese energy companies that do the deal, such as Petrochina (NYSE:PTR) or Sinopec (NYSE:SNP) will likely rally significantly. So going long PetroChina or Sinopec is a less risky play than shorting the ruble.

Given that the ruble is currently under speculative attack, the ruble could easily go lower in the short term, and with it, Russian indices and ETFs. Whether the bearish ruble speculators will win in the end, however, is uncertain. Putin still has a trump card that he hasn't played yet.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.