The Ruble is gaining on the dollar.
Economic developments suggest Russia is cheap.
Russia has a strong foundation.
Сергей Шармаков/iStock via Getty Images Preamble
At this point, there would appear to be little doubt that the purchasing power of the dollar is slipping. And how long this period of inflation will last is anyone’s guess. Some time ago, I wrote an article about protecting purchasing power in an inflationary environment . One of the ideas proposed in the piece was the suggestion of investing in emerging market securities. In this composition, I propose to explore the logic behind investing a proportion of a portfolio into the VanEck Russia ETF (BATS: RSX ) so that the value of invested money is maintained, or even grows. Background
Some followers of the Dollar Index may be mystified as to the reason why prices are rising. Afterall, it would appear that against the basket of currencies that make up the DXY, the dollar is holding up pretty well; as the graph below shows. Chart courtesy TradingView
Clearly, there have been a few ups and downs, but as of today, the index is pretty much where it was a year ago. The reason for this is that the currencies which make up the DXY (Euro, Yen, Swedish Krone, British Pound, Canadian Dollar and the Swiss Franc) are being mass produced at a similar rate to the USD. So, with the DXY, you are comparing apples to apples, so to speak.
However, when you compare apples to oranges, that is to say when the USD is compared to currencies which are not being duplicated with the aid of a magic-money-making machine, it is a different story. There are many examples, two of which include the Ugandan Shilling and the Taiwanese New Dollar. Graphs provided courtesy Xe
Since the Ugandan currency is largely supported by commodities and that of Taiwan by manufacturing, they serve to illustrate contributory factors for the price rises evident in supermarkets all around the US.
A currency that is somewhere between the two is the Russian Ruble. That is to say that the currency is backed by both a booming commodities sector and growing industrial production. For the US, it was recently reported that there was a slowdown in economic growth in the third quarter to 2%, as the table below shows. Chart courtesy Bureau of Economic Analysis
In contrast, the Russian economy is expected to grow by in excess of 4% for the current year. Given these factors, the Ruble has strengthened by around 10% against the USD, as the graph below illustrates. Graph provided courtesy Xe
For many years, the Ruble was in intensive care on life support, but in February 2019 Russian Government bonds became investable again. According to Moody’s ; “The upgrade of Russia’s ratings reflects the positive impact of policies enacted in recent years to strengthen Russia’s already robust public finance and external metrics and reduce the country’s vulnerability to external shocks including fresh sanctions”.
Considering the debt to GDP ratio for Russia, one would have to agree that the country is on a sound financial footing. As you can see from the table, the ratio for Russia is around 18%, whilst for the US it is a staggering 128%. Debt to GDP charts provided courtesy Trading Economics
By now, most readers will know that the US is in an unfortunate predicament as regards inflation. Unable to significantly increase interest rates to resolve the problem of rising levels of inflation due to high levels of debt. The Russian Central Bank, on the other hand, does not have such restrictions. As recently as 2017, inflation was around 17%, but this was choked off with interest rates of 15% . Once again in Russia inflation is on the march, and the Russian Central Bank is raising interest rates in lockstep to stifle inflation once again.
Raising interest rates is not the only tool that the Russian government has employed in reducing prices for its citizens. The country has also levied export taxes on grains in an attempt to lower the cost of food.
In a further boost to the Ruble, Russia has been buying gold with some enthusiasm. According to a Bloomberg report , Russia holds $583 billion in reserves, and 23% of which is now in gold. As per the report, Russia’s slump in dollar reserves is no accident since it is Putin’s declared policy to de-dollarize. Gold is now the second-largest constituent of Russia’s central bank reserves only behind euros, but […]