This picture is from an article called "Drunk Boris Yeltsin was found outside White House in underpants trying to hail cab 'because he wanted some pizza'

This picture is from an article called “Drunk Boris Yeltsin was found outside White House in underpants trying to hail cab ‘because he wanted some pizza’

Russia day continues, and Mr. Yeltsin at least seems pretty happy about it. I would temporarily suspend my no gifs policy if a gif of Boris Yeltsin dancing was available. But alas, it was not to be. Could somebody get drunk Yeltsin some pizza? He’s hungry, dammit.

Thanks to Putin stealing Crimea from the land of perogies and strangely colored easter eggs, the Russian stock market has taken a hit. Shares sold off 12% on the news, and although they’ve recovered a bit since the news, shares in Russian ETFs are down approximately 30% since the beginning of the year. This is partially due to emerging market weakness across the board, but certainly shirtless Putin flexing his strength didn’t help. He was riding a bear.

Naturally, this contrarian guy got a little excited at the possibility of buying a market at a 30% discount. Even though there are analysts saying Russian growth will be cut down to almost nothing because of this, I think things aren’t so bad. Europe gets a third of its gas from Russia. There’s no alternate source, no matter how much American politicians think they can produce it. The U.S. is on pace to be able to cover their own energy needs – by about 2017. I’m not sure how that helps Europe now.

This is why Europe has handled this situation with kid gloves, and why the likelihood of another large war is pretty close to zero. The bottom line is far more important than any large imperialistic goals. Sure, the U.S. might show up and kick some small country in the teeth, but it’ll never grow beyond a regional conflict. Business is just too important for big countries to fight each other.

With that in mind, investing in Russia is primarily the same as it was a year ago. There’s general emerging market risk, but that’s about it. So let’s take a look at the Russian 10 year bond yield.

Screen Shot 2014-03-24 at 8.57.30 PMThe current yield is about 9.25%, rising significantly over the past year, where it bottomed at 6.5%. That’s a huge move, and a yield over 9% is a big deal in today’s low interest rate environment. Of course, one of the reasons why yields have moved up so much is because investors are finally figuring out that emerging markets are risky.

There’s also the currency issue to contend with. If the Russian Ruble goes up compared to whatever your home currency is, that’ll depress returns. (Unless your home currency is Bitcoin, and you live inside the Matrix) There’s certainly risk of that happening if Putin pulls out (giggity) of the Ukraine and apologizes profusely. Or if the market just gets used to him being there.

I’m not overly concerned with tepid Russian economic growth, since debt to GDP numbers aren’t terrible. The ratio is under 10%, according to the best numbers I could pull out of my ass that I found on the internet. Like most governments, the Russians collect royalty payments on oil and gas that’s pulled out of the ground. Government deficits are projected to be 0.5-1% of GDP over the next few years, nothing too crazy. Sochi cost them a bundle, but in the scheme of things it isn’t so important.

I don’t think Russia is going to default on their debt at any point soon. And if that’s the case, this represents the opportunity to get 9% on your money with pretty minimal default risk. There’s currency risk, and maybe the risk of actually being able to buy Russian bonds in Canada, but it’s an interesting idea.

 

Tell everyone, yo!