Could they default again on billions of dollars in debt like they did in 1998? If you think things are bad here in the U.S. or in Europe or Asia, then you haven’t taken a look at Russia. When you see how things are going there, you will think we all “got off easy”. Now I’m not watering down what we are all experiencing in our economies but just pointing out the fact that some have it so much worse than we do. Russian stocks have been falling like the rest of the world. However, there’s one notable difference. They are leading the way down. While the rest of the world’s major stock market averages, for the most part, are holding their sideways patterns at present, Russia’s stock market (RTS) has gone on to fresh lows. On top of all of this, just to add insult to injury, their currency (the ruble) is crumbling at the same time. Ouch! Take a look at its chart below. You will be looking at the USD/RUB currency pair. So as the ruble falls, it causes the USD/RUB pair to go parabolic. The dollar is simply crushing the ruble as the ruble is devalued more by each passing day! Why is Russia hurting so badly now, when they were doing so well just a year ago?!? So why is all of this happening? Well, Russia is the world’s biggest supplier of energy, especially oil and natural gas. Both of these have had such “demand destruction” that it has crippled their markets as the profit margins are all but gone now! This “crash” in commodity prices has caused traders and investors alike to lose confidence in their stocks (which as dropped 18% this year on the RTS index) and their currency. You see, when money comes from abroad, it exchanges first into rubles then buys into their stocks. If both are coming down, then they are losing on both fronts (currency losses through the diminishing exchange rate as well as stock depreciation). This has caused a “chain reaction” that keeps looping around. The ruble loses some value so investors cash out of their stocks and repatriate their money home. When other investors see the stocks drop, they cash out and repatriate money home also while further devalues the ruble as rubles are sold off and their home currencies are bought once again. So it’s a nasty “catch 22” for them if you ask me. On top of this vicious cycle that’s been going on, Russia’s balance sheet is also eroding. Here’s why. The government (through their central bank) has been attempting to defend the currency and slow down its descent. However, it has literally cost them one third of the central bank’s reserves to do this. That’s huge. In an effort to preserve the remainder of their reserves, the central bank raised interest rates on one day and seven day repurchase auctions to 11% in a bid to deter banks from borrowing funds to speculate against the ruble. The central bank is also limiting currency swaps to 5 billion rubles a day. Currency swaps allow traders to bet on an exchange rate without having to sell the currency up front. However, there’s even more pain getting added on here. Today, Fitch lowered Russia’s debt rating to BBB and maintained that they have a negative outlook on Russia. This will cause their borrowing costs to climb now even further. However, what made me write this story now is that I was reminded of what happened the last time that Fitch downgraded their debt back in 1998. Within a month, Russia defaulted on $40 billion worth of debt and devalued the ruble which wiped out the savings of millions of Russians overnight. So now that Russia has spent $210 billion of reserves and investors have pulled out about $290 billion out of the country, there’s about ˝ a trillion dollars gone from the country right there. Formerly, Russia had the world’s third largest reserves in the world. However, since the defending of the ruble just since August, that $210 billion has gone out the door! Now they have had to widen the trading band with which the ruble trades in against a basket of euros and dollars. They’ve had to widen this band 20 TIMES since November 11th. So as you can see, Russia is in the “hot seat” right now. You may not invest in Russia’s stocks or currency, but be forewarned that if something drastic happens there, it can cause a ripple effect around the world that does end up “directly” affecting your stock portfolio. This is why I am emphasizing this so much. Because it could end up affecting the whole world, if this downward spiral doesn’t get stopped soon.
Russian Stocks & their Ruble Come Crashing Down! It could end up affecting you!
Have a question for Sean?
22nd October 2014 3:35am
Thanks for the explanation, man. I Am surprised that no one is talking about this.
6th November 2014 11:17am
Hi! How are you Sean. I am from russia, i have read your thoughts, in this post you give Russian economy to much weight/ Tell you the truth our constituion have been wrote by american invaders/advisers, russian rouble doesnt depend to government. Emission of rouble goes throw buying dollars and euros. So for us for patriotic people its good to fall rouble, as a foreign currency!
16th December 2014 7:34am
I wonder to what extent this is down to liquidity drying up from the US suspension of QE. From what I have been reading, liquidity drying up will cause the US stock market to decline significantly in the near future too, and I am told that further QE in 2015 will be inevitable.