While Russia fights for Eastern Ukraine, for now, it's losing the currency war.
Thanks to a perfect storm of low oil prices, economic sanctions put in place in response to the crises in Ukraine, and capital flight, Russia's been forced to capitulate by abandoning its currency peg.
It's all reminiscent of the financial attacks on Iran and its currency.
But fortune favors the bold, and blood's about to start running in the streets of Moscow, providing us an opportunity to capture our share of profits…
Of Course China Is a Player Here, Too
At the recent Asia Pacific Economic Cooperation (APEC) Summit, Russian President Vladimir Putin's speech voiced his hope that speculation against the ruble would soon end. It seems to have worked – for the time being.
He even promised Russia would keep its sovereign debt below 15% of GDP – a downright miserly level compared to the United States' 102%.
Russia's had little choice but to stop defending its longtime currency peg, more recently with the dollar and euro. The Central Bank of the Russian Federation (CBRF) has spent nearly 20% of its international reserves in the past year supporting the ruble, with $10.5 billion flowing out in just the last week of October.
While the CBRF said it would defend the ruble on an "as-needed" basis, it essentially capitulated to market forces, unwilling to commit any more reserves to support its currency.
Still, a floating ruble is not without its benefits. The weaker currency makes imports more expensive, acting to lessen their inflow, while alleviating the level of foreign reserves required to pay for them.
It also helps to make exports, mainly oil and gas, cheaper to foreign buyers, especially if they can pay in rubles, a trend in motion with Russia's neighbors.
Enter China – again.
A Draconian "Do as We Say, Not as We Do" Law Threatens Russian Depositors
The same day Russia dropped its currency peg, a second natural gas megadeal was announced by Putin and Chinese President Xi Jinping. Only slightly smaller than the first $400 billion agreement, this one, too, will help Russia reduce its dependency on European markets.
The ruble had just hit an all-time ruble-to-dollar low of 48:1, after losing 50% of its purchasing power in the past year. CBRF efforts like raising interest rates from 5% to 9.5% did little to stem the currency's freefall, but a move like this risks stifling borrowing by businesses and consumers alike.
Capital flight has been a major problem. The CBRF upped its forecasts, saying $128 billion would flee Russia this year, rather than the original $90 billion estimate.
Meanwhile, the heavy hand of the state has been busy, with capital controls a very real possibility.
According to Azerbaijan's semi-official Azerbaijan Press Agency (APA), a bill was submitted to the Russia's Duma, the parliament, looking to ban circulation of the U.S. dollar.
As reported by APA, if the bill passes, "Russian citizens will have to close their dollar accounts in Russian banks within a year and exchange their dollars in cash to Russian ruble or other countries' currencies. Otherwise their accounts will be frozen and cash dollars levied by police, customs, tax, border, and migration services confiscated."
It continued, "After the law enters into force, it will be impossible to obtain cash dollars in Russia. The ban or termination of the U.S. dollar will not apply to the exchange operations carried out by CBRF, the Russian government, ministries of foreign affairs and defense, the Foreign Intelligence Service, and the Federal Security Service."
In other words, do as we say, not as we do. If this scenario is starting to look familiar, there's a reason…
Join the conversation. Click here to jump to comments…
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
Canada recently became the only country in the Americas officially recognized by China as a currency trading hub.
That means that Canadians and others can now trade with China using the Canadian Dollar directly, no need to convert a currency into US Dollars when buying or selling to China.
And since Obama keeps treating Canada like garbage by blocking the flow of our oil into the USA, we had to make deals with China and others to buy our oil.
Seems that Obama prefers to buy oil at full price from Venezuela and dictators who hate the USA rather than buy oil at a discount from a reliable friend and ally like Canada.
Obama has dithered on approving the Keystone pipeline for many years. Now that both the Senate and House are controlled by the republicans, we might get
approval for it. Prime Minister Harper was right in protecting Canada's interest by
making a deal to use Canadian dollars only in buying our oil. Obama will do anything
he can to delay approval if it suits his purpose. Michael Price