The oil and mineral wealth in Russia is immense, but in desperate need of technology and infrastructure. For savvy investors the opportunities are tremendous. The fear, however, has always been government instability and excessive interference. So when hard line President Putin was officially at the helm his dictator-like demeanor discouraged many investors and multinational companies from doing business there.
In addition, oil companies and drillers were very reluctant to invest in Russia after Vladimir Putin jailed key oligarchs, including Mikhail Khodorkovsky who was head of independent oil producer Yukos. Khodorkovsky’s case is known in the investment community as a prime example of the Kremlin’s ability to snuff out free enterprise when it conflicts with the interests of the leadership.
Khodorkovsky was at one time the wealthiest man in Russia. In 2003 he was sentenced to a total of 16 years in prison for fraud, tax evasion and stealing oil from his own company.
Before his arrest, Mikhail Khodorkovsky was not just rich but very influential.
When in fact the real reason Khodorkovsky was shipped away to a remote gulag was because he wanted to take the presidency from Putin. And he may very well have done so.
Under President Medvedev, amnesty for economic crimes was being considered. And global investors liked that idea because it fostered the hope of a more stable and favorable investment climate. Unfortunately, Putin quashed any such hopes.
Fear Factor Deepens
The fear and trepidation that investors, oil companies, and mining companies felt about Russia had only recently begun to subside under President Medvedev, who was seen by the West as more moderate, and less threatening.
However, in reality Medvedev was merely a handpicked puppet of Putin and nothing more. Medvedev has nowhere near the level of respect and authority that Putin has, and everyone in the region knows it.
“The people who cast the votes don’t decide an election, the people who count the votes do.”
— Joseph Stalin
As demand for all things resources seems to be taking a breather for the moment, Vladimir Putin has announced that he will be running for president of Russia next year.
This is not shocking at all as he is the person who has really been in charge all along!
Immediately after he moved into the honorary prime minister role, he exerted his policies from behind the scenes on all sectors of the Russian economy, from mining to oil to telecom and rare earth elements.
Fast forward to 2011 — President Medvedev has agreed to step aside (as if he had a real choice), which paves the way for Putin to win the March elections hands down. I also expect him to easily win again in 2016, giving him the two consecutive presidential terms the Russian constitution allows. Never mind the fact that Putin already served two terms from 2000-2008; this is Russia, and the rules can change as it suits the Kremlin.
The risk of government intervention, which made investors leery of sinking money into projects and investment in Russia, has now returned. Even before Putin made his announcement, capital was already fleeing the country, exacerbated by political wrangling between the Kremlin and key oligarchs. Now with Putin coming back to power, the fear and uncertainty is growing rapidly.
Key ETFs are signaling that fear. And that’s offering an excellent opportunity to invest in “Putin Puts” on key Russian ETFs, such as the Market Vectors Russia ETF (NYSE:RSX), as shown in the chart below.
Down, Down, Down! Czar Putin’s return is frightening investors, and they’re leaving the country like rats fleeing a sinking ship.
By using put options on this index you can have limited risk and still ride the volatility and fear in the market right now as Putin takes over once again.
Another great way to play the decline in confidence and investment in Russia is by getting short the SPDR S&P Russia ETF (NYSE:RBL). This ETF tracks the performance of the S&P Russia Capped BMI Index, which consists of publicly-traded companies based in Russia.
There is no doubt Russia has vast resources, the question is: Who will invest there to help secure those resources, and when will they be ready to jump back in again? In the meantime, the fear trade is on, and using put options and short positions on key Russia ETFs like the RSX or RBL is a great way to play the uncertainty right now.
Yours for resource profits,
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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