Russian Stocks A Bargain With Ruble On De Facto Gold Standard

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Includes: ERUS, LUKOY, OGZPY, RSX, RSXJ, RUSL, RUSS
by: Atlas Grinned
Summary

Russia’s official gold reserves have quadrupled since the financial crisis.

Russia’s ruble supply has increased also, but proportionally less than the gold increase to back it.

Russian stocks are knocking at resistance, and could really rocket higher if the oil price rises on a US-Iran conflict.

In the event the conflict eases and oil falls, Russian stock dividend yields will rise, and you can buy more.

Russian companies held by RSX have very low leverage, so there is little danger of dividends being cut.

It’s not being widely reported, but the gold standard is back, at least in Russia. Since the last financial crisis, Russia has more than quadrupled its gold reserves, at least according to official data. See the chart below from the World Gold Council:

Russia Gold Reserves There has long been a buzz, especially within the gold investing community, that the Russians are slowly but surely backing the ruble with gold in a quest to dedollarize. Putin has come out against the dollar as the international currency reserve for quite some time, most recently earlier this month:

“Deep changes require adaptation of international financial organizations, reconsidering the role of the dollar, which after it became international reserve currency, turned into the tool of pressure of the country of issue on the rest of the world today.”

But just because a country increases its gold reserves, that doesn’t mean that it’s on a gold standard. However, in the case of Russia, it effectively is. If we crunch the numbers counting back to just prior to the last financial crisis, we find that the ruble’s gold backing is actually stronger now than it was back then, meaning, numerically, that its gold reserves have risen faster than its total ruble supply. In today’s age of record central bank money printing, this is simply astounding.

Here are the numbers. Since April 2007, Russia’s central bank’s gold reserves have risen from 386.52 tons to 2,119.2 tons. That’s an increase of 448%. Over the same time period, the ruble supply has risen from RUB9,964.3 billion to RUB46436.5 billion. That’s an increase of only 366%, much less than the increase in gold reserves to back it. Below is the Russian ruble supply from the St. Louis Fed.

Russia’s gold reserves are not the only thing that proves Russia is serious about maintaining the value of the ruble. Overnight interest rates are actually at historical norms at 7.5%. That means its bonds actually have a decent yield to them currently at 7.4%. Further, Russia has one of the most responsible and conservative fiscal policies in the world. Debt to GDP is a miniscule 13.5%, rising from a low of only 6.5% during the depths of the financial crisis.

From a technical perspective, Russian stocks also look very attractive. The VanEck Vectors Russia ETF (RSX) is knocking on the door of 5-year resistance, and even at these relatively high prices, at least compared to the last 5 years, the dividend yield on this ETF is a very respectable 4.5%.

Chart Data by YCharts

If you’re looking for a class of equities that stands to benefit from rising inflation in Europe and the US, Russia is one of the best options. As sovereign bond yields in the West head more and more into negative territory, now at $12 trillion priced below zero and counting, once this reverses, demand for Russian debt securities is likely to rise, bringing down Russian interest rates while at the same time its currency should be stable given its de facto gold backing.

What about Oil?

Russian stocks are heavily weighted towards oil and so is RSX, so a lower oil price could hurt RSX in the short term. That said, the dividend yield would rise in such a case, so scaling in as oil declines would be the best move here. As we’ll see, the main companies held by the ETF are in good financial shape, so dividend cuts are unlikely.

One could perhaps argue that the United States produces more crude oil than Russia, so a higher oil price would just as well benefit US stocks, so why turn to Russia? The answer is that since only dollars are accepted for oil, a higher oil price means a lower dollar, which pushes up the costs of oil production in the US relative to the costs of oil production in Russia, which would remain relatively stable in ruble terms. Costs of production would go up, but much less than in the US. A higher oil price would give Russia a windfall and boost both Russian equities and the ruble itself, lowering the cost of living overall in Russia and improving the Russian economy. True, modern economists don’t believe in this notion, but this is the hard money perspective, namely that a falling cost of living is better for people and the economy overall.

Going into the individual energy companies held by RSX, we can see that they are financially stable with very low leverage. Gazprom (OTCPK:OGZPY) has only 4.3% leverage. Lukoil (OTCPK:LUKOY) has almost none. This compares to domestic US oil producers like Chesapeake (CHK), leveraged nearly 300%. These kinds of setups are a natural consequence of US interest rates being so low for so long, encouraging enormous amounts of debt, while Russian rates have been historically normal for so many years.

Conclusion

In the near term, the oil price depends on tensions between the US and Iran. That situation may, hopefully, calm down and the oil price could fall as a result. But it may not. If it does calm down, then the yield on RSX will go even higher, and you can buy more RSX. Eventually, oil will recover as it always does, and in the meantime you can reinvest dividends. A de facto gold-backed ruble over the last 12 years, very low sovereign debt, normal interest rates and a market knocking on significant resistance all point to Russia as being a stable growth investment over the next 10 years as monetary uncertainty plagues the West and threatens systemic debt crises.

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.