Although the Russian central bank raised interest rates from 10.5% to 17% on Monday, the ruble is still in free fall. On Tuesday, the ruble fell to 78.5 rubles per dollar before briefly rallying to 72 rubles to a dollar. Overall, the ruble is down 60% year to date in dollar terms.
The ruble is falling because a combination of falling crude prices, Western sanctions, and a likely 2015 recession has prompted intense capital flight.
The ruble's precipitous fall creates a unique set of winners and losers:
At the end of the day, Russia will likely turn to China to get a dollar loan to get out of the crisis.
For China, doing a commodity deal with Russia makes all the sense in the world. Because of its pollution problems, China needs as much clean natural gas as it can get. Because it has over $3.8 trillion in foreign exchange reserves, China can afford to loan Russia a couple hundred billion in dollars. For China, doing a Russian deal allows it to diversify from the dollar, and helps it improve national security and the environment.
Gold miners and ETFs
The ruble's dive in 2014 is similar to the ruble's dive in 1998. The Russian government ultimately defaulted on its debt in 1998, and the default created unpredictable systemic consequences such as the downfall of Long Term Capital Management. If the Federal Reserve/Wall Street hadn't bailed out LTCM, the entire financial system might have collapsed.
If investors fear that the Russian government will default on its debt again, investors will fear black swan events and flee to safety. Because of the flight to safety, gold will likely rally. If gold rallies, everything gold-related from gold miners to gold ETFs will rally.
Currently, as it stands, the Russian government is unlikely to default even if the government assumes the private sector dollar denominated debt, as Russia currently has enough foreign exchange reserves to cover the debt (although paying for imports will be a problem down the road).
The United States and Ukraine gain geopolitically from Russia's financial troubles.
Ordinary Russians will likely have to deal with stagflation for a few years as Russia's economy is almost guaranteed to enter recession next year and inflation is likely to spike.
Other losers are shareholders of any ETF or American listed Russian security that derives most of the profits in rubles. Because of the ruble's fall, Russian companies listed in the NYSE or NASDAQ will likely report less profit per share and their debt loads (if they have any) will be bigger in ruble terms.
There is also a question of whether Russian companies can pay dividends in dollars if Russia imposes capital controls on currency flows. (So far Russia has not imposed capital controls yet.)
Because of the ruble's precipitous fall, basically anything can happen in the short term.
In the long term, one still has to believe that the Russian economy will recover just as it recovered from the 1998 default. All Russia needs is for crude prices to rise and its ruble problems will be over.
The downside of waiting for the long term, however, is that it could be a very long time.
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.