Russia's Achilles' Heel

No doubt by now, you've heard of the problems in Russia with its currency. You have to say to yourself, "a 17% return on my money sounds pretty good," but when the ruble sinks more than that in one day, you say, "WHOA, will I get my money back?" And that my friends is Russia’s Achilles' heel right now, as investors ponder whether they going to get their money back before capital controls are put in place.

If you didn't think commodity markets are important, think again. The correlation between the collapse of the Russian ruble (CME:6R.Z14.E) and the collapsing oil market is extraordinary and I will illustrate it for you in today's video.

Who knew that Saudi Arabia alone could, in essence, break the Russian economy almost in half, not with tanks and bombs, but with a commodity called crude Oil (NYMEX:CL.F15.E).

Saudi Arabia has continued to push production from its vast oil fields in order to lower the price of oil and make it difficult for competitors to stay in business. One of the amazing side effects to all this is the fact that Saudi Arabia has basically ripped the guts out of the Russian economy and its cash cow, crude oil.

Should Europe and the west be happy about this? I think not and here's why.

To be truthful, no one knows for sure how the scenario that's unfolding is going to play out, but it is not a healthy one in my estimation. With the Central Bank of Russia being unable to stem the decline of the ruble not only against the dollar, but against the euro and other major currencies, the next logical step for Russia will be capital controls.

Putin and the Russian people will be looking to blame someone for their misfortune and they are going to be pointing the finger at America for all the problems we have caused them. As things get more difficult in Russia and with winter coming on, Putin is going to act like a cornered animal and he will come out fighting. That may not happen right away, but it will happen sooner rather than later, in my opinion.

Many economists never expected or predicted oil would drop below the $70 a barrel level and we are now trading in the low $50s. Can oil prices go lower? Yes, of course they can. The question is, will they?

There is no crystal ball to tell us what the future's going to be in trading, all you have are the three "P's" - probabilities, possibilities and lastly, perception. You've heard me talk about this many times before, that perception is perhaps the most powerful force in the markets. Perception is a major market driver right now in all the markets around the world.

Many investors have been lulled to sleep by the US stock market, which for the most part has been moving higher and higher for the past six years. I believe that this is all coming to a head as many investors are just now getting concerned about their money. Let me give you some first-hand evidence of this, my wife and I were out to dinner on Saturday with some friends and out of the blue they asked me what I thought about the market. Now that's unusual, as we don't ever talk about the market at dinner. That struck me as unusual and I think that millions of other investors are thinking pretty much the same thing. We've had a good run, it's the end of the year let's take our profits while we still have them. All this collective thinking adds up to market pressure and the perception that stocks are going to fall.

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14 thoughts on “Russia's Achilles' Heel

  1. I said this months ago....Russia wants a conflict, the US will give them a conflict. Russia moves tanks and men; the US moves numbers on a ledger. History will show you that armies won't fight for you if you don't feed them.

    We bankrupted them in the 90's; we will do it again. The best part is most of the collateral damage hits our other enemies, Iran and Venezuela. It's really a win-win scenario for us. I think Russia will keep Crimea (win the battle), but they will lose the war.

    Caged animal, Adam? Caged animals always end up dead. They might hurt you in the process, but they die. Not sure Putin would agree with the comparison....

    1. What kind of conflict will the US give them Jason, anything including nuclear? Are you saying we can win that too? That's very reassuring. "We" bankrupted them in the 90's? It wasn't $10 oil?

      By the way, the U.S. has 730 bases around the globe. Russia has 2. Krygistan and Kazahkstan. By the way, the U.S. broke the ABM treaty. For years in the 90s, U.S. strategic bombers flew over Russia. They have until this point showed remarkable restraint. Pushed too far, provoked too much, they will break. It's like a kid shoving a stick into the eye of a small animal, it's not going to put up with it before going berserk. We would do the same.

      1. Sigh, your first paragraph assures me you are not a thinking man, JamieLee. The US in not interested in a "hard" conflict, i.e. tanks and bombs. The US does most of it's fighting with capital (money). It is just as violent, but the public does not see body bags so it is more palatable.

        Why do you think oil reached $10 in the 90's? Market forces? Sure, right. You need to understand that oil (and the entire energy complex) is a weapon of mass destruction. Countries use it all the time. OPEC used it on us in the 70's. Russia used it on Europe (nat gas supply) a few years ago, and they were still trying recently. The US coordinated with the Saudis to drive the price of oil down to $10 in the 90's to break the Russian Empire. Why do you think we protect the Saud Empire? Kind-heartedness? Try to think a little bit, JamieLee.

        Yes, US military might is projected around the globe. Your point? Do you really think the Russians (or Chinese) would not do the same if they were economical able to sustain bases around the world? OF COURSE THEY WOULD. The fact is they cannot. They do not have bases because of some benevolence or kind-heartedness; they do not because they cannot. (The Chinese, however, are embarking on the path in Africa.) Further, the Russians have shown "restraint" because they must. Russia showed no restraint in the 50's (Korea) or in the 60's (Vietnam) or the 80's (Afghanistan). They tried repeatedly to expand their influence and idealogy because they could afford it. I suppose you think it's a total coincidence that Russia (and Iran and Venezuela) started acting up again when oil was $100+/barrel? No sir, they could afford it so they did it. Guess what? The US and our friends are unleashing cheap energy on the world to damage our enemies. Bonus question, JamieLee, why do you think the Saudis for the FIRST time in my LIFETIME decided to "let the market determine the price of oil" instead of cutting production? Try to think a little bit, JamieLee.

        Again, just like Adam, I don't think Putin would agree with a comparison to a small, caged animal. The Iranians and North Koreans are small, caged animals. The Russians? Not so much.

      2. Russia isn't a small caged animal, Putin is. Sanctions and cheap oil are hurting the country and its plutocrats and their easiest fix is for Tsar Vladimir to go into exile with his billions of foreign deposits while the new lord of the Kremlin withdraws from Ukraine and Georgia. Sanctions will then end, the ruble will recover, and the plutocrats will get better prices on the new Benz with better exchange rates.

        Putin's current policy of shirtless macho blustering as attempted extortion just isn't going to work. Time of him to leave.

  2. i am surprised, as in today noon, i found a message like "Your comment is under surveillance" while after posting my comment on this issue, but even after 8 hours, comment is not inserted.

    I am more surprised because this is my very first such experience while my affiliation as a blogger in INO, since quite long period.

      1. Dear Jeremy,

        Thanks for reply, and i think, this is the best example of your dedication towards your Bloggers.
        I always prefer INO to express my views, because of healthy and friendly environment.

        With Regards,
        Rasesh Shukla

  3. Dear Adam,

    You have expressed logical thinking and observations.

    We must understand and accept that entire financial sector is co-related, either up-ward or down-ward effect start from any single point and in later stage, effects or consequences thereof, always expand and spread across the board, across other countries and across other financial markets. No player or participant just cant be exempted in a any manner.

    Actually Oil is second or third, because down trend was begin or initiated with Gold and Silver, followed with base metals and other Commodities, and now it will extend to Currencies and Stocks.

    As far as Oil is concerned, well before crash, i have predicted such fall up to $ -55 or even less, through my post in this INO Traders Blog on 27th October 2014 and i will not surprised if Oil break $-40 or even lower marks.

    Considering all above, I am much sure to find many other countries in a situation, just as of Russia today. This is a warning signal, if any one is ready to accept.

  4. Russia's way out is simple enough, the oligarchs and military simply depose Tsar Vladimir and withdraw from Ukraine and Georgia, then the sanctions end and everyone lives happily ever after. Putin is toast, just a matter of how much more pain the oligarchs are willing to suffer.

  5. russia i believe is in the best position to return to a gold standard. they should. they are getting sick of being bullied by the US. i mean , why cant they invade an unstable country on their doorstep. america can invade iraq on the basis of NO weapons of mass destruction (when it was really about iraq going off the us dollar). America cant invade russia as russia stops using the us dollar...., so they attack russian economically.

    1. the only way they, the russian government will get to a gold standard is if they steel more from their own people

      1. Our government already stole everything we had, have and will have in a future. We just don't know it yet 🙁

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