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RSX: My Prediction For 2016

The next year is around the corner, and it’s high time to look at RSX prior to the Russian holidays. Oil stays low and poses a major threat to the economy. At current oil price levels, RSX is overvalued. Those who follow the Market Vectors Russia ETF (NYSE: RSX ) closely probably know that I’ve been bearish on Russia the whole year. Lately, I’ve been commenting on the tensions between Russia and Turkey , the impact of the continuing oil price decline on the Russian economy and the exchange rate of the Russian ruble. As the year ends, it’s logical to make a prediction for 2016 and leave the topic to develop until the end of January. Why the end of January? First and foremost, the Russian Central Bank will announce its key interest rate on January 29, 2016. In its next meeting, the Central Bank won’t have the luxury of waiting and will have to either support the economy by cutting the 11% rate or choose the course of supporting the ruble and leave the rate or even increase it. I think that this will be the pivotal moment. Also, keep in mind that Russia has long New Year holidays that last from January 1 up to January 10. In practice, low volume trading and muted business life typically last from the last week of December up to the “Old New Year” on January 14. To those interested, the “Old New Year” date is the New Year date in Julian calendar, which was observed in Russia until 1918, when Gregorian calendar was implemented. Expect increased volatility and false moves during this period. It is clear that the main determinant for both the Russian market and the Russian economy is the oil price. If you believe that oil will go to $70 – $80 per barrel in 2016, then you should clearly buy RSX or other Russian ETF. I am in the bearish camp for oil, at least for 2016. My base-case scenario for Brent oil is $40 at best, and I think that oil will first go lower and could rebound only at the end of 2016. My main point is that if oil stays at current levels, the Russian market is significantly overvalued and will drift lower. Here’s why. We’ve yet to see more action from the Central Bank, but I think that at current oil levels we will not get to the ruble-denominated oil price of 3150 which is needed for the budget. This will lead to extreme devaluation of the national currency. For example, if this was to happen right now, the ruble would have dropped from 71 rubles per dollar to 85 rubles per dollar. This is too much, as Russia still depends heavily on imports (this statement was previously challenged by some readers, but I stand by my views and tried to explain them in more detail in the comments sections of previous articles). I think that the resulting exchange rate will likely be a compromise between the needs of the budget (and all the export companies, which are the majority of the Russian stock market) and the needs of curbing inflation. My prediction is that the ruble will settle in the area which allows 2900 – 3000 rubles per barrel of oil, implying 10.5% – 14% downside for the currency and for the dollar-denominated RSX. Also, I believe that constraints that low oil puts on the Russian economy are not fully reflected in the price of RSX. The Central Bank is predicting that GDP contraction will slow to 0.5% – 1.0%, but I think that these are optimistic figures. In the current oil price environment, there is no way to balance the interest of export-oriented companies, which are the majority of RSX holdings , and the economy. This problem will result in damage to every Russian company. All in all, I think that RSX is overvalued by 15% – 20% at current oil price levels. The downside increases if oil drops further, and such a drop will likely lead to a catastrophic liquidations of positions and a huge drop of RSX. On the other hand, if oil manages to deliver a major rally, the whole thesis will go bust. The next year is already behind the corner, so we will soon know how the thesis plays out.

RSX: Ready For December Wipeout

Oil falls under $40, which is extremely negative for Russia. Yet, the ruble and the dollar-denominated RSX show relative strength compared to oil. I explain why this happened and where I think RSX is heading. It looks like December is a poor month for the Market Vectors Russia ETF (NYSEARCA: RSX ). Last year, RSX suffered a steep decline as ruble collapsed amid weak oil and sanctions on Russia. This year, oil falls further, with Brent oil trading at just $38.24 at the moment of writing this article. Yet, RSX has yet to touch lows seen in last December. In fact, RSX did not go lower than the August lows. However, in my view, this magic won’t last forever. On Friday 11, the Russian Central Bank left its key rate unchanged at 11%. The rate is high, but the Central Bank had little to do in current circumstances. Sanctions on Turkey will be contributing to food inflation, which is especially pronounced in winter as Russia does not produce much fruits and vegetables in this season. Oil keeps falling and threatens the ruble (more on this later). A weaker ruble will contribute to inflation. No matter how Russia tries to jump-start production of everything internally, this is plain impossible, and the country still depends a lot on imports. In this light, the Central Bank’s hands were tied and it was forced to leave the rate unchanged despite the fact that the high rate hurts the economy. Meanwhile, the ruble is showing some extra strength. At the moment of writing this article, ruble was 70.43 to the dollar, making the ruble-denominated price of oil stand at just 2,693. As a reminder, the Russian budget for the next year is based on the ruble-denominated price of oil at 3,150. The relatively strong ruble hurts exporters which make up the majority of RSX’s holdings . At the same time, the relatively strong ruble prevents the dollar-denominated RSX from falling further down. This situation will not last forever. I strongly believe that the ruble will return to more acceptable levels. If it does not do so on its own, then the Central Bank will be forced to help in order to maintain the budget and help exporters to gain from the ruble weakness. I expect that the ruble will have a downside correction of at least 10% from the current levels, which will inevitably add to RSX’s weakness. I believe that current oil prices are an immense drag on the Russian economy. This drag has been so far underestimated by the market. The Russian Central bank has cut the ruble’s liquidity with the wise use of repo, but these tricks can’t go on forever. To highlight what I’m talking about, I’ve made a screenshot from the official site of the Russian Central Bank. As you can see, the amount of bids received is twice more than the money allotted. To further enhance the thesis that the Central Bank is artificially cutting liquidity to support the ruble, here’s the screenshot of several repo auctions in January 2015: (click to enlarge) And these are numbers from this summer: (click to enlarge) All in all, I believe that the current balance is not sustainable. Ruble will fall and RSX will follow. If oil stays at current levels for longer, RSX will have even more downside.

RSX: OPEC, Sanctions On Turkey And The Stubborn Ruble

Summary OPEC fails to provide support to oil prices, posing a significant risk for RSX. The story with Turkey is evolving as I predicted, and does not add much to the bear thesis. The ruble remains relatively overvalued. Market Vectors Russia ETF (NYSE: RSX ) had an interesting November. The ETF moved up and down, fueled by implications of Paris attacks, the shooting of the Russian jet by Turkey and the fluctuations of oil prices. In this article, I’ll focus on two major developments – the Russian sanctions on Turkey and OPEC’s decision to leave things as they are. Turkey In my article on RSX that was published right after the jet incident I stated that Russia’s response won’t be harmful for RSX components. This what exactly happened. In essence, Russia banned tourism and food from Turkey. The food ban comes into power on January 1, 2016, but multiple reports from Russian media show that it is already next to impossible to bring food from Turkey in reasonable time due to customs’ intense checks. Short-term, this will increase inflation, as Russia imports most fruits and vegetables that it consumes in winter because of obvious geographical reasons. As for RSX holdings , this might hurt the retailer Magnit, but I don’t think that it will have a big impact on Magnit’s bottom line. Russian president promised more sanctions on Turkey, but so far there was more harsh talk than real actions. Given the nature of the incident, tourism and food bans are a very light response. I anticipate more words (like the recent mutual accusations of involvement in the ISIS oil trade) from both sides as politicians want to score some points, but I expect little action. Among RSX holdings, the biggest risk is on Sberbank (OTCPK: OTCPK:SBRCY ), which is the fund’s biggest holding. Sberbank owns DenizBank, which is a notable player in the Turkish market. In the latest interview to the Russian media, Sberbank’s head German Gref stated that he saw no significant risks for Sberbank in Turkey, and I agree with his assessment. OPEC OPEC’s decision to live things as they were was predictable, but, nevertheless, was bad for Russia. I think that OPEC’s inability to function as an organization will put more pressure on the oil market. I recently argued that a perfect storm could push oil to $25 per barrel. Such a drop will push RSX way past the lows of December 2014. However, even current prices present an enormous threat to the Russian economy as the country eats through its emergency funds. The ruble The ruble (which is an important factor for the dollar-denominated RSX) stays relatively strong given the current oil price. The ruble-denominated oil price stubbornly stays around 2900 per barrel, while the Russian budget for 2016 needs at least 3150 per barrel. Sanctions on Turkey limit the Central Bank’s ability to decrease the rate, which is currently at 11% . However, if oil stays weak in the beginning of 2016, I expect that the Central Bank will have to cut the rate to provide some help to the Russian budget. Bottom line I remain bearish. RSX was clearly not the easiest short trade in the last few months. There was some optimism about Russia and buying activity was real. However, I question the Russian economy’s ability to successfully operate at current oil price levels. Also, as I think that the next leg down in oil is around the corner, I expect further weakness in RSX.