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Russian President Vladimir Putin is in a box — and it’s shrinking by the day!
The combination of falling oil prices, economic sanctions, and a collapsing currency are squeezing him more and more each day. With little relief on the way, the only question now is “How will he respond?”
Just look at this chart:
|Click chart for larger version.|
You can see that the Russian ruble now buys just 1.9 U.S. cents. That’s a 39 percent plunge year-to-date. Some 16 percent of that move came in just the last week, the worst collapse since the country’s 1998 debt default.
Russia’s central bank has been raising interest rates to stem the outflow. That has helped drive its 10-year benchmark government bond yield up to around 11 percent, the most since 2009.
But none of that is working. A key reason? Russia is incredibly sensitive to energy prices. Roughly half of the country’s budget is funded by oil and gas revenue. The recent plunge in energy prices is costing Putin an estimated $140 billion a year … at least!
Russia’s own officials now expect the domestic economy to shrink 0.8 percent in 2015. That’s a huge swing from the previous estimate of 1.2 percent growth, and it would mark the first Russian recession in a half-decade.
|The recent plunge in energy prices is costing Putin at least an estimated $140 billion a year.|
The country does still have a huge pile of foreign currency reserves — roughly $420 billion. It can use that dough to mitigate the ruble’s decline and the domestic economic fallout. But even that reserve horde is down $90 billion so far in 2014, which means this can’t go on forever.
The question for investors and politicians on both sides of the Atlantic is how Putin will respond.
Does he back down in Eastern Europe and try to re-engage the West?
Stop supporting Ukrainian rebels, pull out of Crimea, and curtail his military aggressiveness?
Or does he lash out like a cornered animal, and launch a full-scale invasion of Ukraine? Threaten his Baltic neighbors? Take some other kinds of retaliatory steps that Europe and the U.S. haven’t strongly considered?
Many Russians think Putin will continue to thumb his nose at the West, citing the country’s historical resistance to change forced upon it. Citizens of Leningrad and Stalingrad endured horrendous conditions during World War II, yet managed to fight off German invaders. And the entire country put up with years and years of economic challenges and political battles with the West during the Cold War.
As a Bloomberg story noted today:
“The West is wrong in its understanding of the motivation Putin and his inner circle have,” said Evgeniy Minchenko, head of the International Institute of Political Expertise in Moscow. “They think Putin is a businessman, that money is the most important thing for him and that by pressing him and his allies financially they will break them.”
So far, everything that has happened in Eastern Europe has ironically had a positive impact on U.S. markets. “Fear money” has been fleeing European markets and the European currency, and finding its way here instead. But if a full-scale shooting war breaks out, that trend could be severely challenged.
|“So far, everything that has happened in Eastern Europe has ironically had a positive impact on U.S. markets.”|
So where do you stand? Do you think Putin will be forced to change his behavior due to economic suffering? Do you think he’ll respond with more aggressiveness, and if so, how? What does a Russian recession and a plunging ruble mean for your investment strategy? Have you altered your “buys” and “sells” in reaction to what Putin is doing?
These are some very important questions, and I hope you can take a few moments to share your opinions at the Money and Markets website. I’ll sort through your responses, and share the best here in future columns.
|Our Readers Speak|
Oil, oil, toil and trouble. The gyrations in the energy markets have you chatting over at the website, with the following talking points being some of the highlights.
Reader Wayne S. said Reader Gwen P. was on track when she said we should top off our strategic reserves while oil is cheap. His comments:
“Now is the time to fill our oil reserves at low prices. Buying oil strictly from U.S. sellers will help our marginal producers ride out the temporary price dip. They deserve our long term support more than our continuing to live with the uncertainties of OPEC.”
On the other hand, he argued that raising taxes would be one of the worst possible responses, saying: “This is absolutely the wrong time to raise taxes. We’re teetering on a weak recovery, and face significant healthcare premium increases in less than a month. That might disrupt our fragile economic recovery.”
As for how we should respond to OPEC and their recent moves, Reader Shar said: “I do not live in Saudi Arabia. I live and pay taxes in the United States. When are we as a country, government, and business leaders of the world (or so we used to be) going to stand up and declare our independence from these huge government cartels?
“Let them handle their oil their own way without dictating to us and let us focus on our own country’s ability to support itself and its people … It’s time to wake up and realize this is a huge power game and that we can’t win without backbone and our own strategy.”
Finally, on interest rates, Reader Hemal had the following to say: “I was hoping to find an article about the 10-year Treasury rates yesterday as there was a huge spike up. I’ve been monitoring the chart for some time now and think that the spike down to 1.9 was a washout, and the pull back since has been a retracement mainly due to Japan going into QE overdrive.
“The worst news seems to have been priced in and the spike up yesterday is the launch pad from which we will see rates climb high real quick as you’ve warned numerous times in your articles.”
Thanks for all the input. I agree that we need to focus more on supporting our domestic energy industry. The huge expansion in American oil and gas production gets us much closer to energy independence than we’ve been in decades — and that’s a good thing!
With regards to interest rates, I’ve thought they should be higher for some time due to a whole host of fundamental reasons. Now it looks like the technicals are starting to align behind a rise. We’ll have to see if the nascent move can gather steam, however.
Any other thoughts? Then don’t hesitate to share them at the website here!
|Other Developments of the Day|
Could things get any more muddled in the Middle East? Now, we’re seeing reports that Iran is using U.S.-made F-4 Phantom aircraft to attack ISIS militants within Iraq’s borders. Got all that?
Investing in foreign bond or stock funds? Particularly those that invest in countries like Japan or Russia, or regions like Europe? Then you’re facing a nasty two-pronged problem: 1) lackluster returns in those foreign markets plus 2) the negative translation effect of the dollar’s rise in value. The Wall Street Journal provides more detail here.
Profits? We don’t need no steenkin’ profits! That seems to be the corporate philosophy at Internet retailer and technology gadget company Amazon.com (AMZN, Weiss Ratings: D+). Even CEO Jeff Bezos is admitting as much now, noting how he spends untold millions of dollars on failed ventures all the time.
Washington politicians — both Democrats and Republicans — agreed to set aside their differences and craft a wide-ranging tax reform bill that simplifies our tax code, expands infrastructure spending to boost domestic growth, encourages investment and hiring, and reduces the deficit. Just kidding!
While I would love to write that sentence, Congress instead did a bit more can-kicking on the tax front. It passed a modest bill that only extends key provisions for a few weeks, meaning legislators and President Obama will be right back at it … again … early in 2015. Pathetic!
Until next time,