After being the second-best performing stock market of 2015, the Russian stock market took a hit last night. The Market Vectors Russia ETF is down 2.79% as I write this.
Here is your five-year RSX chart:
The war with Ukraine, the economic sanctions imposed after the annexation of Crimea, and the drop in oil prices have sent the Russian ETF from $43 to $17.43 today. It now has a price-to-earnings ratio of 5 and pays a 4.60% dividend yield.
Last week, the leader of an opposition party was murdered, perhaps prompting President Obama to declare that he would continue sanctions on Russia for another year. These include visa bans and asset freezes on Russians in the U.S. who are connected to the Ukraine war.
As far as sanctions go, these are minimal, but they signal that the diplomatic fight will sputter on.
Path to the Sea
That said, the price of oil (Brent) has stabilized around $60 at the moment, and the truce in Ukraine seems to be holding.
Brit Ryle covered Putin‘s end game in Wealth Daily last week:
If you’ve followed the Russia/Ukraine situation at all, you probably know that a ceasefire between Ukraine and Russia was brokered by Germany and France a couple weeks ago. You may also recall that the Russian military… er, I mean the Russian “separatists”… made a huge push deeper into Ukraine as the ceasefire talks began.
This last-minute escalation was quite deliberate. It got more territory into Russia’s hands before the ceasefire agreement froze the action. Now, both sides can basically keep what they have. And for Putin, that might well be enough for a more lasting ceasefire… for now, anyway.
He’s achieved a land bridge all the way to Crimea. He’s boosted his popularity at home. And he’s established that the European Union is not going to do anything substantive to stop him. Europe is even eager to back down from the sanctions that have been imposed on Russia.
All Putin has to do to be the clear winner in Ukraine is back off.
Rush to Russia
International investors agree with Brit. They think the market has sold off too much, and they bought Russia last month.
According to the Wall Street Journal:
While Russia-exposed equity ETFs saw $70 billion outflows in January, the decline reversed into a $310 billion inflow in February… So far this year, Russia’ ruble-based Micex benchmark share price index is up about 29%.
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Junk Credit
On the credit side, two out of three major credit agencies have reduced Russian bonds to non-investment-grade, a.k.a. junk, based on the threat of future sanctions.
Not only have companies like Moody’s and Standard and Poor’s been consistently wrong in the past, but it is likely they are wrong here as well.
Russia is running a very thin budget deficit of just 0.5% of GDP. In comparison, Mexico runs a 4% deficit.
Furthermore, Russia runs a foreign account surplus, which now stands at 1.56% of GDP with $376 billion in currency reserves. I’d like to point out that all Western economies are running massive deficits and building non-payable debt.
Russia has one of the lowest debt loads in the world. Again, the WSJ:
Another important factor to assess a country’s credit worthiness is the amount of debt it has relative to the size of its economy. Here again Russia comes out on top with its debt amounting to just 13.4% of GDP as of 2013, compared to 56.8% for Brazil, 22.4% for China and 67.7% for India.
Russian Rubles with Upside
The Russian ruble has fallen dramatically over the past year — some 43.8% — which means exports from Russia are now cheap.
Companies that produce steel, for example, are beating their competitors handily, with exports to Europe up 26.1%. Exports of palladium to Switzerland jumped the highest since last May. And new deals to export oil and gas to China will pay off in the coming years.
I’m waiting for the dead cat bounce we’ve seen over the past few months to sell off again and form a knowable bottom pattern. There will be plenty of opportunities in Russia at the right time.
The market currently values Gazprom (OTC: OGZPY), the super-major oil and gas company, at $98 billion. It has a trailing P/E of just 2.14 with $24 billion in cash.
BP Plc. (NYSE: BP) has a market capitalization of 125.9 billion and a P/E of 33.93. Enersis S.A., the Italian oil major that produces a large portion of its oil in war-torn Libya, has a P/E of 15.86.
Even discounting Putin’s Russia, the values are out of whack.
Like I said, it is too soon to buy now, but keep an eye on deep discount opportunities in Russia.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
