by Dave Evans of binary.com
Coming into the close on Friday, the Russia Ruble had finally stabilised against the US dollar. As the chart below demonstrates, although the dramatic central bank interest rate hike may eventually have hit the mark, the USD/RUB is still painfully high.
As expected, Vladimir Putin came out fighting this week, refusing to acknowledge Russia’s part in the crisis and pinning the blame on external factors. The primary factor is of course, the continued pressure on oil prices, with oil futures pointing to a pre-Christmas close below $60 a barrel. Around Friday’s close, oil was trading around $55.00, almost exactly half the price it was trading at during its peaking in August 2013.
Lower demand from China and increased production from US shale refineries are the primary factors behind this fall, with bearish speculation accounting for the some of the more extreme moves since November.
S&P 500 Daily Chart
Putin tried to paint the picture that Russia is under attack despite diversifying its economy away from a reliance on oil. The trouble is that the lure of oil has been too great, both for Russia and for its customers.
Depending on the data examined, Russia is either the top or joint top oil producer in the world, alongside Saudia Arabia and accounting for around 13-14% of global production. This alone explains why attempts to freeze out Russia over its actions in Ukraine have proved complex, with much of Europe (especially Germany) relying on energy supplies from the region.
Even with Russia’s over reliance on oil, there is a sense that the Ruble’s collapse is out of proportion with the respect to the commodity price collapse. Many oil producing nations have been pressured by the oil price collapse (see Canada), but none have seen their currencies capitulate like Russia’s.
So what’s going on?
One theory put forward by economist Paul Krugman is that the investment habits of wealthy Russians (especially those close to Putin) are to blame. Areas of London or ‘Londongrad’ have been awash with Russian cash, with prime property prices snapped up by the wealthy elite. Inward investments into London by oil money is nothing new, but according to Krugman, holding so much debt outside of the Ruble has caused the size of private deficit to rise exponentially. As the Ruble depreciates, so the size of the external debt increases further, creating a vicious circle in which one fuels the other.
Bad For Russia, Bad For Europe
This week, European nations have apparently stood firm over their trade sanctions with Russia despite the crisis. To some though, these sanctions have not been driven hard enough due to resistance in some areas (notably Germany). Not only is Germany reliant on Russia for energy, they are also valuable trading partners.
So while, the Ruble may have stabilised, oil prices are unlikely to bounce back over night. This points to a more sustained economic mire for Russia, a situation that is hardly going to help a stuttering Eurozone.
Indeed, the Russian crisis has gone some way to mask the uncertainty surrounding Greek political elections and the country’s long term economic malaise.
As such, there could be more downside to come for the euro in 2015, with Russia a significant factor in this.
A good way to play this could be a LOWER trade predicting that the EUR/ USD will close below 1.2100 at the end of January for a potential return of 225%. Or put another way, betting that the EUR/ USD will drop and close below 1.2100 on January 30th could return £32.54 from every £10 put at risk.
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