- - Monday, April 20, 2015

If there is one thing I learned during my time on Wall Street, it is to buy something when no one else wants it. Right now, Russia is that something.

During the height of the ruble crisis a few months ago, RUB/USD hit 80. Recently, the Russian government announced the economy slowed dramatically in the first quarter of 2015, as the lack of capital due to economic sanctions and the dramatically lower price of crude oil kicked in to batter all metrics of economic growth. Unemployment is up significantly, personal income is down, inflation is rampant, et cetera, et cetera. The situation looks bleak for the foreseeable future. 

Or, is that really the case? 

First of all, let’s look at the currency, which only a few days ago broke under 50 to the dollar once again. Many criticized the central bank’s actions back during the disturbing sell-off of the ruble. However, the dramatic rise in interest rates to almost 20 percent, coupled with liberal spending of precious currency reserves, seems to have broken the back of the crisis. In fact, the central bank is now saying that Russian interest rates could possibly be reduced. Although the numbers are somewhat in dispute due to lack of transparency, Russia still holds over $300 billion in foreign currency reserves and it seems the total has slowly started rising again.

Russia also has no external debt to speak of. Although the population is suffering due to high inflation and general lack of economic opportunity, the currency crisis seems to have stabilized.

Lack of access to Western capital is still a major problem for Russian banks and corporations, due to sanctions imposed by the West. This is why Russian President Vladimir Putin has gone east to China looking for help. And he has started to find some, although I am sure it is not yet at the level he would like.

Mr. Putin has signed a very long-term deal to provide gas to China; however, the price is said to be barely above cost. The Chinese are shrewd negotiators and sensed Russian desperation to find new customers as Europe attempts to wean itself from Russian energy supplies.

The point is, there is no shortage of capital in Beijing and Russia will slowly find it.

De-dollarization of the global economy is increasing and the BRICs are keen to
remove the economic hammer America has held since the Bretton-Woods agreement after World War II. The new Chinese-led Asian Infrastructure Investment Bank is a prime example of this process. Even America’s allies are joining the AIIB in spite of Washington’s admonitions not to. Capital has a way of finding good investments. Russian entities will slowly find ways to connect with these new sources of funds. It is only a matter of time.

Now let’s look west. Europe is floundering. Greece will most likely be forced from the Eurozone, or be made some type of economic territory with special rules that are obviously concocted to retain the currency union in name only. The European debt crisis is raging as Europe refused to reform its individual economies in ways that will stimulate growth. Draghi can print all he wants but eventually he will be pushing on a string. 

Europe needs Russia. It needs Russian markets. It needs Russian gas. These truths will not change and eventually the demand from European corporations will be too great and the sanctions will be loosened. Again, it is only a matter of time. As we speak, Russia is riding to the Greek rescue with a $5 billion gas “prepayment” as Mr. Putin finds a way to resurrect a version of the South Stream pipeline. Mr. Putin is winning the political game of chess if you haven’t noticed.

John McCain was right. Russia is a gas station acting like a country. In other words, Russia is an economy under stress but is backed by huge pockets of natural wealth in the form of hydrocarbons. The world will need this energy source over the next several decades.

But Russia is also a great empire that is being resurrected, even if the process is not pretty. Those astute investors who have experience in Russia and can see the possibilities will come out ahead as Russia recovers. 

Corruption, the lack of rule-of-law, and xenophobic tendencies aside, I see the
situation in Russia as a good-old buying opportunity. That is why I’m saying back the truck up for Russian assets. The chance to buy empires on sale doesn’t come around very often.

Here’s an interesting article on a future flashpoint in the Balkans …

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