Apart from the political stance that Russia has taken, there are a many other things that the country will have to worry about. Starting Q4 2014, the country was seen trying hard through various tactics to get its slowly sinking economy back on track. In spite of the sanctions against it not having the expected effect on the country, Russia seems to be in trouble nevertheless. There are many reasons for the slow droop of the Russian economy and two important variables are to blame - the fall of the forex market and oil.
How to Play Weakness in Oil and Russian Currency into 2017
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 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.
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.
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.