How to Profit from Russia’s Financial Chaos

Russia Financial ChaosRussian President Vladimir Putin is holding the world in what I describe as an economic hostage situation.

From the annexation of Crimea from Ukraine and his continued support of rebel separatists in that region to his defiance of political rights and a thumbs-down approach to the United States and Europe, Putin is creating a political and financial crisis that is deepening.

There is no evidence Putin is softening his aggressive and chaotic stance despite what will likely be the near collapse of the Russian economy going forward.

And with the collapse of oil prices, Russia has dug its trench deep. Given that Russia generates about 70% of its export revenue from the sale of oil and gas, the country is scrambling to avoid a deeper financial crisis. Putin signed a $400-billion oil deal with China, but that will not be enough to avoid a potential collapse.

With less demand for oil and the Russian ruble, the currency has been caught in a free-fall, losing about 60% of its value against the greenback. In a temporary, bandage attempt to prevent the ruble from collapsing even further, the Russian central bank pushed the benchmark interest rate to a staggering 17% on Tuesday, up from 10.5%. The move helped a bit, but it’s not enough to avert the coming financial crisis.

Russia is buying rubles in the market for support, but I’m not sure how long Russia can do this for. There’s speculation that the country may start selling some of its gold reserves to raise cash to avert an economic catastrophe.

The problem is that the high interest rates are driving up yields in Russian bonds, but the risk in holding Russian instruments is too high for many institutional investors.

Consumer inflation is running at around 10%, which is crazy. And while it has been this way for a few years, I don’t see how it is sustainable.

Russia will likely fall into a recession by mid-2015. And things will only worsen if oil prices continue to stay low or move lower.

The big risk is that the financial turmoil in Russia will translate to its trading partners and hurt Europe and the eurozone, perhaps even enough to drive another recession in these regions.

It’s clear Putin has driven Russia into a financial mess, and we could see anarchy if the economic situation worsens. Russians are trying to convert rubles into euros for safety, but having already lost so much of its value, this certainly cannot be good for the currency.

The Investment Opportunity…

As far as the Russian stock market and stocks go, valuations have fallen to extremely low levels. But I’m not sure if I would consider jumping in now; I’d rather wait for the financial crisis to settle.

If you own Russian stocks, you could hold them for an eventual rally, but you can hedge the downside risk via put options on a Russian-based exchange-traded fund (ETF), such as the SPDR S&P Russia ETF (NYSEArca/RBL).

SPDR S&P Russia Chart

Chart courtesy of

Now, if you also believe China could be on the brink of a major gross domestic product (GDP) downgrade in 2015, you could look at adding some gold as a safe-haven play with an ETF like the SPDR Gold Shares (NYSEArca/GLD).