Tim Strauts: In today's chart, we're going to look at the Russian stock, bond, and currency markets in 2014 and examine the events that caused the Russian economy collapse. This chart (shown below) looks at the performance of Russian stocks, Russian bonds denominated in U.S. dollars and euros, the Russian ruble, and oil prices. The data is as of Dec. 17, 2014.
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Russian economy collapse began when the Ukraine canceled the planned trade deal with the European Union because of pressure from Russia. This sparked protests in the Ukraine, which caused the current prime minister to flee. In January 2014, the Russian market sold off about 10% because of uncertainty about how Russia would react to the Ukraine political transition. When Russia invaded the Crimea region, the stock market sold off even more but bottomed once Crimea joined the Russian Federation.
The Russian market bounced back as investors hoped the worst was over. By June, the stock market almost fully recovered from losses earlier in the year. But the stock market turned negative again once Malaysia Airlines Flight 17 was shot down. Then, the combined effect of U.S. and European sanctions and falling oil prices pushed the Russian ruble and stock market into a tailspin.
The Russian bond index used in this chart includes only bonds issued in the U.S. or euro currency, so its returns are not affected by weakness in the ruble. Russian bonds started to sell off in November as it looked increasingly likely that the Russian economy would post negative GDP in the fourth quarter because of low oil prices and a collapse in currency.
The Russian stock market is incredibly cheap by any measure. But there are serious concerns about rule of law. And with oil prices in the [$50 range], the Russian economy will likely contract in 2015. Investors should strongly consider avoiding the Russian stock market unless they have a very high risk tolerance and are willing to potentially lose all of their money in case Russian economy collapse.
