Pass/Fail Test?

by: Douglas Tengdin, CFA


Russia is facing a currency crisis caused by low oil prices and international sanctions.

The crisis is not a solvency crisis; they have plenty of excess reserves.

Their current pain will encourage them to keep pumping oil and piping gas.

Could Russia become a failed state?

Almost a century ago the Russian people rose against their leaders. The feckless Romanov dynasty had presided over a brutal conflict with Germany, mass poverty at home, and brutal repression of dissent. An economic and political crisis forced the Czar to abdicate and a power struggle ensued, ending with the Bolshevist takeover in October 1917. Are there parallels to today? With a massive stockpile of nuclear weapons and the world's sixth largest economy, a lot of investors want to know if Russia could descend into the same anarchic chaos today. The short answer is, not yet. Doomsayers are getting a bit ahead of themselves. While the Ruble is facing collapse on the foreign exchange markets, Russia hasn't run out of money yet. They still have massive reserves.

Source: Scoopnest

Their central bank has over $400 billion - over 15% of their economy. About half is easily accessible. There's enough accumulated surplus for Russia to cover its debts through 2016. But with oil below $60 per barrel, these won't last forever. Russia is the latest victim of the "resource curse," the paradoxical instability that comes from having sizable holdings of a valuable commodity. Too much of a country's intellectual, financial, and physical capital becomes devoted to one particular product. With nations, as well as with portfolios, diversification provides stability. But don't press the panic button yet. There's still time for Russia to restructure. And since they need all their export earnings, don't expect cutoffs of natural gas exports to Europe.

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. The author has no business relationship with any company whose stock is mentioned in this article.