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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The "Financial Mass Destruction" Investing Play Is All Upside

Companies / Investing 2014 Nov 14, 2014 - 12:23 PM GMT

By: Money_Morning

Companies

Peter Krauth writes: While Russia fights for Eastern Ukraine, for now, it's losing the currency war.

Thanks to a perfect storm of low oil prices, economic sanctions put in place in response to the crises in Ukraine, and capital flight, Russia's been forced to capitulate by abandoning its currency peg.

It's all reminiscent of the financial attacks on Iran and its currency.


But fortune favors the bold, and blood's about to start running in the streets of Moscow, providing us an opportunity to capture our share of profits…

Of Course China Is a Player Here, Too

At the recent Asia Pacific Economic Cooperation (APEC) Summit, Russian President Vladimir Putin's speech voiced his hope that speculation against the ruble would soon end. It seems to have worked – for the time being.

He even promised Russia would keep its sovereign debt below 15% of GDP – a downright miserly level compared to the United States' 102%.

Russia's had little choice but to stop defending its longtime currency peg, more recently with the dollar and euro. The Central Bank of the Russian Federation (CBRF) has spent nearly 20% of its international reserves in the past year supporting the ruble, with $10.5 billion flowing out in just the last week of October.

While the CBRF said it would defend the ruble on an "as-needed" basis, it essentially capitulated to market forces, unwilling to commit any more reserves to support its currency.

Still, a floating ruble is not without its benefits. The weaker currency makes imports more expensive, acting to lessen their inflow, while alleviating the level of foreign reserves required to pay for them.

It also helps to make exports, mainly oil and gas, cheaper to foreign buyers, especially if they can pay in rubles, a trend in motion with Russia's neighbors.

Enter China – again.

A Draconian "Do as We Say, Not as We Do" Law Threatens Russian Depositors

The same day Russia dropped its currency peg, a second natural gas megadeal was announced by Putin and Chinese President Xi Jinping. Only slightly smaller than the first $400 billion agreement, this one, too, will help Russia reduce its dependency on European markets.

The ruble had just hit an all-time ruble-to-dollar low of 48:1, after losing 50% of its purchasing power in the past year. CBRF efforts like raising interest rates from 5% to 9.5% did little to stem the currency's freefall, but a move like this risks stifling borrowing by businesses and consumers alike.

Capital flight has been a major problem. The CBRF upped its forecasts, saying $128 billion would flee Russia this year, rather than the original $90 billion estimate.

Meanwhile, the heavy hand of the state has been busy, with capital controls a very real possibility.

According to Azerbaijan's semi-official Azerbaijan Press Agency (APA), a bill was submitted to the Russia's Duma, the parliament, looking to ban circulation of the U.S. dollar.

As reported by APA, if the bill passes, "Russian citizens will have to close their dollar accounts in Russian banks within a year and exchange their dollars in cash to Russian ruble or other countries' currencies. Otherwise their accounts will be frozen and cash dollars levied by police, customs, tax, border, and migration services confiscated."

It continued, "After the law enters into force, it will be impossible to obtain cash dollars in Russia. The ban or termination of the U.S. dollar will not apply to the exchange operations carried out by CBRF, the Russian government, ministries of foreign affairs and defense, the Foreign Intelligence Service, and the Federal Security Service."

In other words, do as we say, not as we do. If this scenario is starting to look familiar, there's a reason…

It's Déjà Vu All Over Again for Russia

On top of sanctions relating to the Ukraine crisis, the rapid drop in oil prices has been especially hard on Russia. Without $100-per-barrel oil, Russia will run into deficit spending. And that means more foreign borrowing, something Putin promised he wouldn't do.

One can't help but wonder if the West, that is to say, the United States, made a deal with the Saudis to chop oil prices and turn the heat up on Russia, a country increasingly – and aggressively – obvious about ending dollar hegemony.

After all, it was low oil prices engineered by Saudi Arabia that were credited with bankrupting the former Soviet Union. That makes the 25th anniversary of the fall of the Berlin Wall all the more poignant.

Michael Reagan, son of former president Ronald Reagan, recently reflected, "Since selling oil was the source of the Kremlin's wealth, my father got the Saudis to flood the market with cheap oil."

The younger Reagan continued, "Lower oil prices devalued the ruble, causing the USSR to go bankrupt, which led to perestroika, and Mikhail Gorbachev, and the collapse of the Soviet Empire."

The Soviets had nothing other than oil that they could sell for foreign currency.

This is not unlike long-running sanctions against Iranian oil, banking, and trade which caused inflation to hit 40% last year, forcing people to buy less meat and substitute with more rice and vegetables.

Blocked out of the global financial clearing system, Iran's currency, the rial, has lost 63% against the U.S. dollar since 2010, compelling Iranians to seek shelter from inflation. Some even found it in their traditional Persian rugs, famous for maintaining value even through several generations.

This unbearable pressure eventually brought regime change in Iran, including a new "openness" towards the West, but at a cost of extreme hardship and not before wiping out a huge chunk of the average Iranian's life savings.

It's clear that the United States is employing its financial weapons of mass destruction, much as Jim Rickards described in his recent book The Death of Money.

When you wield the world's de facto reserve currency, the one against which all commodities are priced and which is required in nearly all international resource transactions, your foe will eventually come around.

But as I've mentioned before, those heady days are on their way out, providing an opening for us to profit…

Two Ways to Profit Right Now

China, Russia, and scores of other mostly Asian nations are establishing multibillion dollar currency swaps, allowing them to bypass the dollar for large portions of their international trade.

Russia's free-floating ruble will make its main exports, oil and gas, much more affordable to foreign buyers.

Here are a couple of ideas to make that move if you're feeling bold.

For broad exposure to Russia, consider the Market Vectors Russia ETF (NYSE: RSX). Yes, it's trading near a multi-year low, but that means downside could be severely limited. With a P/E ratio of 6 and yielding 3.35%, you'd be hard pressed to find a cheaper market.

If you're prepared to take on more risk consider shares of Gazprom OAO (OTCMKTS ADR: OGZPY), the world's largest extractor of natural gas, and one of the world's largest companies.

Though also trading near multi-year lows, Gazprom is cheap. With a market cap of $72 billion, Gazprom sports a "below sea-level" P/E ratio of 2.2, a profit margin of 18.5%, and $31 billion in cash.

Right now, investment clouds over Russia appear dark, but they may be parting.

Source : http://moneymorning.com/2014/11/14/this-financial-mass-destruction-play-is-all-upside/

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