by Fortress Capital (JoeGelet), 2016
Currencies trade in pairs – if something goes up, something else is going down.
There are many derivative plays offered by forex, which can be realized in the stock market.
Buying and selling foreign companies is one way to play the US dollar.
Many foreign companies are traded on US exchanges via ADRs.
Sberbank provides a great play on USDRUB carry trade.
With the EUR/USD around 1.15, there’s talk about the US dollar being in a downtrend. As we’ve explained in previous articles, there are many ways to trade forex without actually trading forex. That’s because the forex market is largely a derivative itself. Unless you are actually sending money to another country, you aren’t really in the forex market. If you have a forex account and trade, you are betting on the rate of change of the currency pair. It is completely artificial, a complete derivative. But this derivative, the rate of exchange from one currency to another – impacts all markets.
One interesting emerging market from a forex perspective is Russia. The reason is because the benchmark interest rate is 11%. That means average Russians can get up to 11% on their savings (although the reality is that in Russia, they don’t trust the banking system like in Western countries). A great investment would be to buy such bonds and hedge the currency risk (assuming they are priced in rubles, not US dollars or euros). But there’s another way to play this, as described in a Seeking Alpha article:
Sberbank stock price is UP 34% in the past 52 weeks.
Sberbank has recently joined the rush of companies selling ruble bonds. They have been locked out of foreign capital markets for over 2 years now, and because of the cost of corporate borrowing falling to a 16 month low, a surplus of rubles and a recovering oil market, they now have been offering this new debt to customers. Analysts at Sberbank have been seeing a marketed improvement in the interest from investors, which is key since Sberbank still needs to diversify its funding mix. A yield above 10%, which is what the bank is currently offering, is above the 9.44% rate for the governments 2 year paper. Banks in general are eager to invest their excess ruble cash in new bonds, as the price of crude has jumped 11% since February. The market will devour the 10% yield, creating more fees and commissions earned by Sberbank, helping to increase earnings in future quarters. Up until now the bank hasn’t needed to sell local currency bonds because they hold about half of all deposits in the country. The ruble’s 12% increase has encouraged people to keep their savings in local currency, which is Sberbanks main source of funding.
Sberbank (OTCPK:SBRCY) of Russia is a great long to play this.
SBRCY data by YCharts
What’s best about Sberbank is that it is backed by the Russian government and the Central Bank of Russia (CBR). It is the largest bank in Russia, and not a real default risk. All this commotion about the Panama Papers and Putin’s friend was another bank, Rossiya Bank. Of course, being such a large bank, Sberbank has the risk of being involved in something just as much as any big bank. But the fact that it’s backed by the CBR and Russian state tells you that Sberbank means business. The bank has a subsidiary, Sberbank CIB USA, Inc., which is registered with FINRA CRD#47972. According to Wikipedia, the bank has 250,000 employees and 137 million clients. That’s a lot of clients!
As of 2015 the bank had about 16,500 offices with over 250,000 employees. According to own estimates, the bank had over 137 million retail clients and over 1.1 million corporate clients in its 22 countries of presence.
As of August 2015 it accounted for 28.6% of aggregate banking assets, calling itself “the circulatory system of the Russian economy”,”key lender to the Russian economy and the biggest receiver of deposits”.
Can Sberbank collapse? Absolutely. Anything is possible in today’s day and age. Can JPMorgan (NYSE:JPM) collapse? What’s the risk of collapse? How to calculate improbable, high-risk events such as war? In any event, the ADR offers investors the same protections enjoyed by other US issues. In previous cases of problems with Russian companies, such as Yukos and the recent VimpelCom (NASDAQ:VIP), class action securities cases were awarded jurisdiction because of their US registrations. Of course, that isn’t a guarantee and isn’t full protection, but it’s a lot better than flying to Russia with US dollars and opening a savings account (and if you do this, you’ll need a notarized translation of your passport and other documents). This strategy isexplained in great detail in the book Splitting Pennies.
- iShares MSCI Russia Capped ETF (NYSEARCA: ERUS)
- SPDR S&P Emerging Europe ETF (NYSEARCA: GUR)
- SPDR S&P Russia ETF (NYSEARCA: RBL)
- Market Vectors Russia ETF (NYSEARCA: RSX)
But they are broader plays, and some, such as GUR, provide exposure to non-Russian companies.
The point is that a bank such as Sberbank will continue to realize benefits from the interest rate differentials between the USD and the RUB. As the Russian Central Bank has direct ownership in this bank, it’s not likely that the CBR will “surprise” Sberbank with any unplanned announcements or actions, as has been the case with other central banks. Why is Sberbank better than other Russian banks? It is bigger, is owned by the CBR, and it is registered in USA.
Sberbank is not linked to oil, unlike much of the rest of the Russian economy. This is one factor that differentiates it from its peers. Also, in the Russian banking sector, there is no Sberbank equivalent – it’s unique. That’s because the modern Sberbank that we know is really a state-owned and run people’s bank:
After the October Revolution of 1917, the state savings banks system continued its activity and growth under the management of the Finance Ministry of the USSR as the State Labour Savings Banks System. From 1926, the saving bank outlets were used to pay wages to blue- and white-collar workers. The savings banks were used to distribute state lottery tickets and for the placement of state bonds with the population. The savings banks introduced wider services such as money transfers.
By late 1980s, the Soviet savings bank system had almost 80 thousand branches. As part of Perestroika reforms, in 1987 the savings bank outlets are reorganised into the Savings Bank of the USSR. Within the Savings bank of the USSR, separate savings banks were created in the Soviet Republics. Following the dissolution of the USSR, the former republican savings banks became state savings banks of the newly independent post-Soviet states. In 1991, the Savings bank of the RSFSRhas been reorganised into the Joint-Stock Commercial Savings Bank of the Russian Federation (Sberbank of Russia).
There’s no other government-backed/owned bank, like Sberbank in Russia. In the United States, such a bank doesn’t exist, but the closest equivalent is GSEs (Government-Sponsored Entities) such as Fannie Mae (OTCQB:FNMA).
All of these facts don’t mean that the share price of Sberbank will go up for sure, but simply that if one were to play the Russian banking system due to the interest rate differential, this bank would be it.
There is also talk of a rate decrease in Russia – that it may be time to ease:
Look to the ruble for clues about the Russian central bank’s path to restarting the easing cycle it froze nine months ago.The currency’s gain of about 7 percent to 60 against the dollar would be the single biggest factor in favor of an interest-rate cut already this quarter, according to 27 percent of the 30 economists surveyed by Bloomberg. Inflation not accelerating in the next few weeks was ranked second. Six of 41 analysts in a separate poll forecast a 50 basis-point decrease when the central bank meets on Friday, with the rest predicting the key rate will remain at 11 percent.
But that news was from last week, and the CBR decided to keep the 11% rate:
On 29 April 2016, the Bank of Russia Board of Directors decided to keep its key rate at 11.00% p.a. The Board of Directors sees the positive processes of inflation slowdown and inflation expectations decline, as well as shifts in the economy which anticipate the beginning of its recovery growth. At the same time, inflation risks remain elevated. These risks primarily stem from slowly declining inflation expectations against the target, uncertainty in parameters of the national budget, and ambiguity of the observed movements in nominal wages. Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings. The Bank of Russia predicts, consistent with the decision, the annual inflation to stand at about 5% in April 2017, to reach the 4% target in late 2017.
So it looks like the 11% is going to be here, at least for the time being. But Sberbank should do okay with a rate decrease – even if ruble rates are slashed in half, it’s still more than quadruple what investors are getting in Europe, the United States, and in most G8 currencies.
The fact that Sberbank is part-owned by the CBR / the Russian government doesn’t give it any market advantage explicitly (although, like many Russian enterprises, we don’t know what goes on behind the scenes) – it is just less likely to fail or come close, compared to other Russian banks. That is to say that if Sberbank collapsed, it would be a Russia-wide collapse – not a likely scenario. Russia doesn’t want a repeat of 1998. CBR is doing all the right things to move Russia in a favourable direction.
Many people ask – does Putin understand forex? Well, we don’t know – but he certainly has good forex advisors and good management of the CBR. Udachi!
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