Weak Ruble May Lead to Weak Russian Stocks

 
 
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by S. Wade Hansen

Domino Effect from the Russian Ruble to Russian Stocks

The Russian ruble is under attack, and the war may spill over into other parts of the Russian economy—including Russian stocks. Weak Ruble Could Lead to Weak Russian Stocks

The Russian government has said it does not want the exchage rate between a basket of U.S. dollars (USD) and euros (EUR) and the Russian ruble trading below 41 rubles. However, with oil prices remaining low, the Russian petrostate may not be able to remain above this low-water mark.

 
   
 
Russia Has to Make Some Tough Choices

Up until now, the Russian leadership has been selling off their foreign reserves to try and buoy the value of the ruble, but at some point, they are going to run out of usable reserves. And when that happens, the Russian economy is in for a shock.

According to the Wall Street Journal: "Pressure on the ruble is likely to mount in coming weeks, say investors and analysts. Many predict a gloves-off battle between investors intent on driving the currency lower to reap profits, and Moscow, which may be forced to make unpleasant choices to keep the ruble from falling....

So far, the central bank's efforts -- raising interest rates and tightening liquidity -- haven't been aggressive enough, analysts say, serving mainly to whet investors' appetites for more ruble declines. As a result, most of the money the Kremlin is spending to boost the banking system and the economy is flowing into the currency market instead.

"All the rubles that are out there have been turned into dollars," says Natalya Orlova, chief economist at Alfa Bank in Moscow. 'To get out of this spiral where everyone expects a devaluation will be very difficult.'

She says a decisive defense would require a massive increase in interest rates that would shake the fragile banking system and the slumping economy. Some analysts said the government also could impose capital controls, limiting money from leaving Russia."

If the government does start raising interest rates and the economy falls further into its recession, the value of Russian stocks will almost certainly follow the trend downward.

Exchange-Traded Fund for Russian Stocks

One way to take advantage of a potential decline in the value of Russian stocks would be to short the Market Vectors Russia ETF (NYSE: RSX).

When you short an ETF, you make money when the value of the ETF goes down, and you lose money when the value of the ETF goes up. Since the value of the Russian stock ETF is tied to the values of the stocks within the fund, if you short the ETF and the stocks lose value, you will make money.

Of course, you could also buy Put Options or sell Call Options to take advantage of a decline in value on the RSX if you do not want to sell the ETF short.

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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."
 

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