Russia Phobia: Big dangers and big opportunities!
A new ABC series, “Designated Survivor,” elevates the concept of Washington paranoia to new heights:
During a State of the Union address, an unknown enemy destroys the Capitol building with a giant bomb. The president, vice president, plus nearly every member of the Cabinet and Congress are killed instantly. Only three government officials survive; and one of them, an instrument of the same enemy power, becomes Acting President of the United States in a conspiracy to destroy America.
This is crazy. But taking a page from the TV plot, Washington paranoia about Russia is also off the charts:
We hear not only accusations of election meddling, but also innuendo about penetrating the president’s inner circle; not just allegations of collusion, but also talk of treason; not only rumors about the president’s aides, but also whispers about the president, himself. In the worst case, say some, the president is conspiring with a foreign power to weaken America’s defenses.
All of this is very unhealthy, and it’s happening at a very delicate time.
As I demonstrated in a three-part video series last December …
- Russia and the United States have embarked on a long march to war (Part I).
- A conflict could be much more dangerous than most people realize (Part II).
- The two countries still have a one-time opportunity to turn the tide (Part III).
But now, the combination of scandal and paranoia is threatening to torpedo that opportunity.
Major Economic Headwinds
All this is also very unhealthy for another reason: Both the U.S. and Russia face strong economic headwinds that can only be made worse by deteriorating relations.
As we explained here last week, the Trump budget is in serious trouble, the U.S. economy is overdue for a cyclical crisis, and America’s soaring debt load threatens future growth. We can ill afford an expensive escalation in Syria or Eastern Europe. We certainly cannot afford a major new arms race.
And as I explain today, Russia’s economy is in even worse shape. Here’s why:
Falling confidence. Recent polls by the Russian Federal State Statistics Service (Rosstat) and the Moscow School of Economics reveal shocking new evidence that Russian citizens have turned extremely pessimistic about their economic outlook: 35% report a deterioration in their material conditions over the last 12 months, versus only 15% who report an improvement. And among them, the most pessimistic are precisely those who are the most active in the country’s work force — the 30-49 age group.
Widespread poverty. According to the IMF, Russia’s income per capita in 2016 was a meager $8,929. That’s much lower than the income per capita of economically devastated PIIGS countries like Spain ($26,609) and Greece ($17,901). It’s lower than chronically poor countries like Slovakia ($16,499), Equatorial Guinea ($14,174) and Croatia ($12,095). It’s even worse than Venezuela’s, where the income per capita in 2016 was still $9,258.
Chronic structural problems. If you travel around Russia, you see governmental institutions riddled with inefficiency and corruption, rural communities in chronic decline, agriculture in a state of paralysis, manufacturing in decay, and the entire economy still terribly dependent on energy.
Oil boom encourages Putin’s global gambits. Between 2009 and mid-2014, when a barrel of crude oil was holding in the $80-$120 range, and when cold cash from energy exports flooded into the economy, Russia’s underlying structural weaknesses were well camouflaged. The Russian ruble was strong. Foreign direct investments poured in. And Putin was assured he had more than enough resources to finance bold actions on the world stage.
So, in 2014, when the Ukrainian government fell to a pro-Western regime, Putin was willing to take an enormous risk: He made a historic move on Crimea, completely upsetting the world order that had prevailed since the end of World War II.
Sanctions. The U.S. and the E.U. responded with three rounds of retaliatory sanctions, crippling key aspects of the Russian economy. Russia then responded with a series of import bans designed to punish the European countries, but, in the end crippling Russia itself.
Crude oil bust. The biggest blow came in the second half of 2014: Crude oil prices plunged by nearly 50%. The Russian ruble collapsed. Foreign direct investment vanished. And the Russian economy plunged into a deep recession. With a moderate bounce in crude late last year, there was talk of some sort of recovery in the economy. But it’s already fading again.
Here’s the key: In the midst of deepening recession, Russia simply does not have the financial firepower to maintain its current posturing as a great world power. Already, as I showed you in “Urgent War Quiz for Investors,” Russia is cutting defense spending by approximately 7%. And if the current trends continue, they will have to cut even more.
Now can you see why Putin wantsbetter relations with the United States?
His desires are very clear:
- He wants to cut Russia’s huge expenditures in Eastern Ukraine. The costs are draining their already-bare coffers. It must stop.
- He wants to cut back on Russia’s intervention in Syria, where the costs are also massive.
- He wants more foreign investment in a wide variety of industry sectors to help reduce Russia’s reliance on energy exports.
- He also wants more foreign investment to help create more jobs and raise consumer confidence.
- He wants more money to institute costly reforms and finally get Russia’s economy on a growth path.
But it’s going to be almost impossible for him to achieve any of this without reaching some sort of deal with the United States.
My main point: It’s not a trick. And the sooner Washington recognizes this reality, the sooner the United States can take advantage of the opportunity.
My recommendation: If the Russia scandals and paranoia fade, and if a real path is opened for restoration of relations, there will be major profit opportunities for investors in Russian ETFs like the VanEck Vectors Russia ETF (RSX) and iShares MSCI Russia Capped ETF (ERUS). You will be able to buy them at depressed price levels and watch their share prices recover dramatically.
However, if the scandals snowball and the chances for better relations are dashed, you can expect further massive declines in Russian assets.
Good luck and God bless!