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Oil and gas

One of the main reasons for the failure of the sanctions laid on Russia was Europe's dependence on Russia for oil and gas. Russia supplies gas through pipelines to a large chunk of Europe and it has not hesitated to use this as a weapon against other countries. Ukraine was starved of Russian gas several times in the last decade, which was a card that Europe knew Russia held. Many analysts have remarked how the Russian economy is comparable to a large oil and gas industry that supports other industries. Russia's undoing began here and pretty much the only thing that was keeping Russia afloat, the oil prices saw a sudden and massive drop.

Oil price drop

Oil, in recent months starting in the second half of 2014, experienced a slow but steady decline in prices. It is reported that close to half of the country's federal budget income comes from oil and every $10 drop in price per barrel will hit Russia by $32.4 billion. $32 billion makes nearly 1.6 percent of the GDP, meaning a direct $19 billion loss in government revenues. When the government falls, so will the economy as investors will loose faith in it.

The Ruble

The Ruble is also incidentally in trouble, forcing the ministry of finance to go for shock and awe tactics. The first knee jerk reaction by the ministry was to get rid of a good amount in terms of foreign exchange reserves. Dollars and Euros were sold off to Rubles and the reserves were cut by 1.7 percent, amounting to $6.4 billion.

The Bank of Russia, the country's central bank hiked interest rates from 10.5 percent to 17 percent by the end of Q4 2014. The shock, however did not work out too well as the Ruble kept falling and by the end of the year lost 57percent of its value against the US dollar. Spending came next and the government began to spend it's $400 billion strong reserves, that too wasn't enough. The Ruble was losing value and it was not helping the industries in any way.

The industries

Many other industries are now stuck in a failing economy, with the government and its policy not helping out much and the central bank looking seemingly unable to do anything about the Russian economy. There are many holes and not enough patches. The industries and major Russian stocks are left in a dismal heap. Rating agencies have given a good percentage of the banks and industries in Russia such low ratings that their prices are in a free fall, some as low as 70 percent.

Inflation

Interest hikes and excessive spending have left the inflation on an upward surge. Now the rate of inflation has effectively breached 15 percent. Citizens will end up spending a lot more for even basic necessities. Interest rates will remain high and may even go up, the ministry has said. The Russian economy's recovery, at this point of time is not expected to recover fully till end of 2016 or mid 2017. The Ruble is expected to reach 55 against the US dollar by the end of 2015.  

Opportunities for investment

Russia's junk stocks may be a way to make some quick money as the prices are aggressively low. The stocks can be picked up now for some neat profits later. If that isn't appealing enough, consider trading on oil or Ruble slides on calls options and spreads. Both cases have some big rewards if the risks can be managed. 

Comments  

0 #1 Investor 2015-04-12 17:52
Hi,

thank you for great article. It makes you think a lot.

I am more worried about CHF/EUR problem.

It is really big problem in Europe, specially for people who took loans in CHF.
They were scammed by banks. They were selling them loans in CHF and telling people that they cannot get loan in EUR.
But the truth is, that loans are in EUR, but connected to CHF, so now are banks making huge money. Croatia already won on court, Slovenia is next, etc.
Many Swiss companies are closing, as they are not any more competitive on market.
Russian have problem in Thailand, Ruble/Thai Baht is now so changed that Russian investments in real estate are disaster. They are not capable any more to pay investments, so they are selling it with lowest price. specially condos..
Keep the good work..
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