The Russian ruble continues to go downhill as it dropped a further 1.5 percent to 53.2850 against the US dollar in Moscow today-its steepest one-day drop since the default crisis in 1998. Yet, the 38 percent ruble plunge this year does not seem to affect Russian metal and mining companies, since the weakening ruble enables them to lower local costs and boost their profits from exports.
According to the RTS Index in 2014, eight of the ten best performers are producers of raw materials from steel and nickel to diamonds and even soil nutrients. The slumping ruble has lifted metal and mining companies that have local costs and sales abroad. Alexander Losev, CEO of Moscow's Sputnik Asset Management, told Bloomberg Businessweek, "Serious ruble devaluation is benefiting metal producers since their costs are in rubles and revenue from exports is in dollars."
The recovery in major metal prices also boosted the mining stocks, particularly nickel and aluminum. Aluminum prices have risen about 10 percent this year when European premiums that buyers pay for faster delivery almost doubled and the non-Chinese market turned to aluminum deficit for the first time since 2008. United Co. Rusal PLC (OTCKMTS: RUALF), the world's largest aluminum company, had an almost fourfold advance since its record low in November 2013.
As for nickel, the metal advanced more than 20 percent in 2014 after the output cut of China. The share price of MMC Norilsk Nickel (MCX: GMKN), Russia's largest exporter of nickel, got a boost this year from the large interim dividend payout of $2.78 billion. The prices of the shares of Amur Minerals Corporation (AIM: AMC), which manages one of the top 20 largest nickel sulfide copper projects in the world, also went up as much as 11.89 from last year's 2.29.The boost also benefited from positive news regarding the Russian Ministry of Natural Resources' recent approval of the company's mining license application, which is the final agency approval required in the license conversion process. It has now been forwarded to the administration of Prime Minister Dmitry Medvedev for final authorization.
On the other hand, the decline of the ruble led to tumbling stocks in other sectors of the Russian economy, including lenders, utilities, airlines, and particularly crude oil. Crude oil, in fact, has entered into bear market, driving a 38 percent decline in the ruble and magnifying the impact of international sanctions imposed on Russia because of the Ukraine conflict. Russian oil company OAO Bashneft's (MCX: BANE) shares tumbled 41 percent this year-the most among oil companies on the RTS Index. OAO Rosneft(MCX: ROSN)was also down by 12 percent. "The ruble will not stabilize until oil does," Sberbank CIB analysts said.
Another loser in the ruble depreciation are pipe producers like OAO TMKS, which dropped by as much as 39 percent this year. Sberbank said, "Ruble denominated pipe prices lag steel and scrap costs due to strong oil and gas' companies bargaining power."
Though the Russian economy is heading towards its first recession since 2009, the weak ruble and strong commodity prices helped companies attract investors like Jim Rogers, who set up the Quantum Fund in the '70s. Still, Russia had lost its ranking as the world's eighth largest economy shrinking form a $2.1 trillion petro-giant to a mid-size player comparable with Spain and Korea.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.