Jim Rogers and the Russian Wonderland
by Joshua Enomoto, Founder of ContangoDown.com and FutureMoneyTrends.com contributor
Out of all the economic experts in the media today, perhaps none have done more to advance the cause of the commodities sector than Jim Rogers. With his trademark bow-tie and affable nature, Mr. Rogers unique gift of communication evokes powerfully with the audience, and those that have listened to his sage advice early in the game profited handsomely. It goes without saying that regardless of one’s personal opinions, when Mr. Rogers speaks, you should listen!
In an interview conducted by Lauren Lyster (formerly of RT’s Capital Account), Mr. Rogers articulated the point that while there were no more sound currencies available today, if one were forced to choose, the Russian ruble would be the top pick of a dubious list. His focus on Russia, of course, has the potential to be labeled as contrarian genius: in pop-culture, Russians are depicted as backward brutes, ensuring that the masses will not be looking to this eastern giant until it is too late.
However, does investing in Russia make sense under the current fundamental environment? Despite its enormous size (the largest country in the world by landmass), that factor alone could easily become a liability without a robust economic engine. Naturally, the Russians began investing heavily into extracting its vast resource base, and it was not unusual to see 9% annual growth rates prior to the global financial crisis of 2008. This leveraging towards energy and commodities, unfortunately, is a double-edge sword for Russia. According to EconomyWatch.com, economic growth declined to 1.1% in the fourth quarter of 2008, a jaw-dropping 88% free-fall from the same period the year prior. Of course, with the rebound in crude oil, the Russian economy surged back into recovery, but by then, the 800-lb gorilla was finally visible: Russia will live and die by commodities, unless they can be successful in leveraging to other sectors, such as technology.
Whether we can truly see a “new Russia” emerge or instead, watch it revert back to Soviet-style spartanism, will have strong implications for American investors taking on this contrarian bet. Let’s first look at the Market Vectors Russia ETF, or ticker symbol RSX:
As is common amongst ETF’s that track the performance of emerging markets, such as Brazil, India, China and South Africa, we find that post-2008 crisis, the Russian market peaked in 2011, in conjunction with precious metals and dollar inflation. Since then, Russia, as well as its emerging bretheren, have been on an aggressive decline. Even with the surge in crude (where light crude especially spiked up 14% in a month), the RSX, despite being up 10% since late June, is still 34% below its 2011 peak. It’s also 9% down, year-to-date, and this is a discouraging sign that despite WTI and Brent crude reaching an uncommon 1:1 ratio, the Russian market has a long road ahead of itself.
This is more accentuated when we consider Gazprom, perhaps Russia’s most famous company:
Gazprom is almost a direct copy of its underlying mother-economy, but worse: sure, it popped up 23% as black-gold had its powerful rally, but this came after making a 4-year low. At a price of $6.48 per share, that’s approximately only 18% above valuations seen at the epicenter of the financial crisis. Moving forward, the technical challenges of Gazprom is identical to that of the greater Russian market: declining resistance levels and lethargic momentum.
In many ways, the Russian market is the opposite of the American market: while indices such as the S&P 500 suffered a severe decline in 2011, the Russians surged to post-crisis heights. Since that time, however, the American economy regained strength and stability, and contrarian assets across the board, from gold to grains, have been stuck in a downturn. As we are undergoing a major transition in the global economy, the next few years will likely separate the wheat from the chaff: countries that are nimble and can innovate will fare far better than those who rely on antiquated fiscal mechanisms. Whether Russia is amongst those nations that are strategically aligned remains to be seen.