When Russia’s Worried, We All Should Be Worried (RSX, EPI, EWZ, EZA, FXI)
Sara Nunnally: The BRICs are starting to show their power. As tensions with Iran rise, their economic fate is at risk. When Russia’s worried, we all should be worried…
And when that worry concerns Iran and its nuclear program, it’s even scarier. Let me throw out a few words and phrases that Russian Deputy Foreign Minister Sergei Ryabkov said in an interview on Friday:
- A new global economic crisis
- Strikes against Iran by… Israel
- An explosion of energy prices
- Worse than last year
In all senses, the nuclear situation with Iran is not good. And Ryabkov made that plain in an interview in New Delhi. Normally, this kind of rhetoric comes from the U.S. and the West, not a pseudo ally, and certainly not to this extent.
Sure, we’ve heard Russia say that Iran should not use nuclear technology to make weapons and that it should stop its enrichment processes.
But this goes a step farther, and here’s the interesting part.
Russia was one of five countries meeting in India to discuss the issue and call for resolve to not let the crisis reach a conflict.
Guess where the other four leaders were from. India (NYSEARCA:EPI), Brazil (NYSEARCA:EWZ), South Africa (NYSEARCA:EZA) and China (NYSEARCA:FXI). The BRICS are meeting to throw their weight behind a resolution.
This is finally making some sense. These countries are highly sensitive to energy and commodity price fluctuations. A conflict in the Middle East that involves one of the world’s biggest oil producers is not something anyone wants, but especially the BRICS.
China’s probably the most at risk for an energy crisis from Iran, with India coming in a close second. These two countries are Iran’s biggest oil markets.
And the sanctions are already biting into oil exports. A full-blown conflict would really hurt India and China.
The sanctions are meant to punish countries for doing business through Iranian banks for oil… They in essence are trying to handicap the Iranian economy. In order to get around some of the sanctions, China and India are bartering with Iran for its oil… trading things like wheat and local currencies like the rupee.
Russia has been opposed to more sanctions, and has considered joining China and India and some other countries in bartering with Iran.
Things are getting more and more tangled… India and China are actually benefiting from these trades. For example, China buys oil in yuan paid into Chinese accounts for Iran to use, and Iran is buying Chinese-made goods, like clothes, electronics, appliances and other consumer goods, with this money.
The same thing could be happening with India’s rupee.
These currencies aren’t fully convertible, so they don’t help Iran in the global financial sense, but they certainly help India and China when Iran decides to cash in that currency for goods.
So you see, the BRICS have an interest in keeping the nuclear crisis from ballooning into a conflict. And the trade connections are growing.
According to the Federation of Indian Export Organizations, 70 Indian business representatives met with Iranian companies in Tehran this month to talk about furthering trade.
Trade between the BRICS themselves is on the rise, too, and the meeting in New Delhi is the fourth such summit for these emerging markets. On the docket besides Iran is the idea of a new development bank to complement the World Bank.
These countries are certainly learning to throw their weight around! Indeed, they now make up 28% of the world’s GDP, and will account for more than half of the world’s growth this year.
And they’re looking to “diversify” away from dependence on the U.S. and Europe. They are certainly doing that through increased trade with each other.
Remember a few years back when Brazil and China agreed to trade with each other in their own currencies?
This idea has become more than just a theme or rude gesture toward the U.S. dollar. This is becoming a rallying call for growing economies. The BRICS might be radically different in scale and process, but agreements on increased trade and bartering — cutting out the dollar — are going to make them extremely important over the next five years.
But let’s get back to what this means for Iran.
Some U.S. officials are happy to let Iran barter its oil for goods. One said that wheat is better than dollars or euros that Iran could then use to purchase equipment and technology to further its nuclear program.
As of now, there isn’t any evidence of this kind of trading to boost oil exports or get illicit goods, both of which are in violation of the sanctions.
I’m still concerned, however. This is some of the strongest language we’ve heard from Russia on Iran’s nuclear program and strong language needs to be backed up by firm stances, or Russia — and the other BRICS for that matter — will lose some clout.
Here’s what you need to watch… Watch Brent crude prices, which are more sensitive to geopolitical tensions in the Middle East. This price has a big effect on economies, including Russia. That’s why you should also watch the Market Vectors Russia ETF (NYSEARCA:RSX) for weakness. I’m expecting some over the next couple months.
As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities. Sara Nunnally’s diverse background includes studies in history, computer science, literature and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, Bloomberg and CNBC’s Squawk Box, as well as numerous radio shows around the country.
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