41

As everyone knows, the ruble is falling compared to the euro and it has been falling for a long time already.

The way I see it, the ruble will eventually get back up once the political situation around it is resolved. Is it naive to think I can just exchange - say, 500€ - for its equivalent in rubles, wait until the currency is back on its feet and then exchange it back now that it will return me more euros for the same amount of rubles?

For example, if I use €500 today and exchange it for rubles at today's rate (0.01349) I receive 37064.5 rubles (74.1290 * 500).

Taking the rate of about 2 years ago on March 12 2013, we see an exchange rate of 0.02500. That would mean I get €1 for every 40 rubles, resulting in a total of €926.6125 (37064.5 / 40).

Aside from the fact that you don't have access to your €500 in that period, is there any reason why someone shouldn't buy a cheap currency of an economy that's bound to bounce back?

Edit to address a common remark:

Isn't there a significant difference if you look at it from a short term vs a long term perspective? I would think that many companies with rubles step away from it so they don't endanger their operations with a shortage of money or being forced to lend more money (and as such incur interest rates).

Myself, on the other hand, can wait for years since it is "extra" money and I am not bound to the weak currency.

Does this lower currency rate really indicate that experts don't see much value in the ruble in the long term?

  • 2
    FX forward rate are a good method for figuring out what the market thinks the value of currencies will be in the long term. For instance, asof 1/7, the one year forward exchange rate for EURRUB is ~90, significantly weaker than the current value. – rhaskett Jan 8 '15 at 1:11
  • 22
    "once the political situation around it is resolved" +1 for your optimism, at least. The main problem here is that foreign currency exchange rates aren't bound by the relationship "what goes up must come down" - and what goes down doesn't necessarily ever need to come up again. It doesn't necessarily need to ever (or at least in one human life time) go significantly back up, and could keep going lower for an unbounded period of time. Indeed, if the governments involved want a cheap ruble (it does make exporting easier) it could just keep on going down for a really long time. – BrianH Jan 8 '15 at 3:40
  • 24
    Did you just call Russia "an otherwise solid economy"???? Have you ever been to Russia? – littleadv Jan 8 '15 at 4:17
  • 7
    Even if you're confident that the economy will eventually recover, there is the risk that the government prints lots of money during the crisis, causing severe inflation. – CodesInChaos Jan 8 '15 at 15:19
  • 2
    One thing to consider is the opportunity cost of investing your €500 in a "safer" investment vehicle. You are currently comparing the FX trade with sticking €500 under your mattress. If you have a long term time horizon you could presumably invest your money some other way and also make a return. You'd then need to compare the potential risk and reward profiles. – Daniel Kelley Jan 9 '15 at 9:13

12 Answers 12

32

What you are describing is a speculation. Particularly, a long-term speculation. You propose to place a bet that:

  1. Your particular view of the fundamentals is correct (which it might be)
  2. Whatever shorter-term dislocations that cause major market players to price the ruble differently from how they otherwise would are bound to change within your investment horizon (which might happen).

But as with all bets, it's better to know, which, for a person like you or me, is kind of problematic.

For example, my wife works in a bank, doing finance, and I myself sort of look at the market, then this happened:

Enter image description here

... Did we see the spike coming? No, we did not. We saw only the general trend, and even that not to real numbers. Can we explain that spike? Well, "some sort of fishy stuff is going on" is my best answer. Last time some big and fishy stuff was going on, the oil was up to US$140 a barrel and then down to almost US$30. The big boys were fighting and some of them blew up.

I'd say that betting on the ruble before whatever thing is going to happen in the West is resolved might be a risky business. And I live in Russia. And I watch things. And I don't really know. What I do know, last time both the ruble and Russian stock market went up after the game in the West was resolved, with exactly zero change of economy or political leadership, so the change of either of that is not strictly required.

Another point is not to hold paper money long-term. I am not sure if you assumed holding paper or having a bank account paying up to 20% yearly (in rubles they do).

With the way this question was asked, my guess is that you are new to this; your best bet would be education. Not necessarily a formal education, self-education will do. Do some research. Make some decisions. Write them down or execute them on some small scale (maybe 500€ is a small enough scale for you; I recall losing real money helps memory and motivation somewhat), then wait and observe. Meanwhile, get good at your primary job.

47

Many people make money doing this kind of thing. Many more people lose money doing this kind of thing. You're basically making a bet that the market is wrong. What makes you believe that this particular currency will increase in value compared to your home currency?

The other problem with this kind of bet is that it's expensive. You will need at least around a 6% windfall just to break even due to the small scale nature of the currency conversion (buying and selling in a foreign currency will usually incur a 2-3% transaction cost each way).

It's usually a much better idea to invest in the currency of the area you live in as you will be spending your money in this currency.

EDIT: Oh and the ruble won't go up until the oil price does or there is a change in leadership. Neither look likely in the medium term future at this stage.

  • 2
    Wouldn't the high interest rate from the russian central bank more than offset the transaction cost? Even if you choose to speculate in the ruble I would not think that keeping the ruble in your matress would be a good idea. – Taemyr Jan 8 '15 at 15:18
  • 1
    The key phrase you used was "as I see it". This is why this is speculation, not an investment. Buy an asset that produces an income stream instead. – JAGAnalyst Jan 8 '15 at 18:14
  • There are much more efficient ways to achieve this. Given the liquidity and low volatility associated with currency trading. Trading platforms exist to relatively inexpensively leverage (borrow) huge positions. Google "Fx Trading Platform", typically they will cost a few pips as opposed to a few percent in spread. However, as Stephen said, its much easier to lose money than make money. – Aron Jan 9 '15 at 1:55
  • @Taemyr How does one go about depositing their rubles with the Russian Central Bank so as to receive those interest rates? And if you do deposit it somewhere, now you have two risks instead of one, no? – Michael Jan 9 '15 at 19:14
  • 1
    should also mention the barrier to entry, my broker requires a minimum deposit of $10K to open a currency exchange account. – SnakeDoc Jan 9 '15 at 23:09
15

Currency trading is basically a zero-sum game. You're betting against the experts that play the game. Why do you think you're better than they are? Especially with the overhead costs you must deal with, being average still means you lose.

  • 1
    1) I would not call currency trading a game. Currencies are much more more massive than stocks and central banks have lots of money. It's not that easy for "experts" to play the currencies. 2) Like with stock exchanges, the overhead costs are minimal. – Ark-kun Jan 9 '15 at 19:15
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    "You're betting against the experts" and you're not in the stock market (depending on your strategy of course)? – SnakeDoc Jan 9 '15 at 23:10
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    "Zero-sum game". Sorry but that is so utterly wrong. If it were the case money would be worth the paper its printed on. – Aron Jan 12 '15 at 5:53
  • @SnakeDoc The stock market as a whole goes up. Thus so long as you don't buy trash it will go up in time. Currency trading is another matter, there's no underlying source of gain. – Loren Pechtel Jan 12 '15 at 6:56
  • @Aron Why do you say that? – user253751 Mar 30 '17 at 23:32
8

Risk, reward, return, etc.

If the economy is "bound to recover", then sure, invest in it, and reap the reward. But there are market forces at play here too. Additionally, when you say "bound to recover", can you say that with real certainty?

You are not the smartest kid on the block, though you may be willing to take the most risk.

When people invest, or divest, from any risky proposition, they weigh up the potential rewards against what may be a better opportunity. What the market is saying now, is that based on the average risk profile, it is better to have your money somewhere other than in the Russian economy. You can earn better money, or have more certainty, or both, if you invest elsewhere.

So, smart people have looked at things, and using their risk profiles, have determined what they are willing to risk in terms of their investment in the Ruble, compared to other places. If you disagree with them, then invest now in the Ruble, and bet against those people who generally know the systems better than you.

In all, it's always a risk, no matter where you invest, and your risk propensity means a lot too, but, the smart folk think it is better to put their money elsewhere, because they will get more for doing that.

  • This is not strictly true. The prices of many things are often determined by big guys, and then, at the margin. And big guys playing at the margin do cause dislocations and occasionally blow up. And they occasionally have to pull the money from someplace to plug a hole someplace else. – Eugene Ryabtsev Jan 8 '15 at 13:33
  • 1
    "it is better to have your money somewhere other than in the Russian economy" -- it's not saying exactly that since there hasn't been 100% capital flight from Russia. It's saying something like, "the number of people for whom Russia is the best place for (some of) their money has greatly fallen". – Steve Jessop Jan 8 '15 at 18:07
5

What's naive is believing that the current political situation is

  1. the only thing that has caused the currency go down
  2. guaranteed to be resolved in a way that is positive for the currency

Oh, and that you're the only person who's thought about long-term developments in regard to exchange rates. Companies which use rubles only because it's necessary to conduct their real business in production, logistics, etc. may indeed not do that, but investment banks and hedge funds most definitely have considered this very well and their decisions are already factored into the exchange rate.

4

Alternatively, just buy oil-based stocks/funds (commodities).

The reasoning goes something like this.

Russia is a predominantly oil-based economy (very large producer and supplies Europe).

If you buy the underlying commodity at your local exchange, some benefits/risks accrue to you: - You avoid the currency risk (the ruble may still fall, you don't care). - You avoid the politics of Russia playing with the currency (printing more, meh). - You acquire commodity risk (will oil go down?, finger nail biting time, you have time). - Depending on where you are and what exchange you buy/sell on, you may induce currency risk: -> e.g. if you are Canadian buying NYSEARCA:USO (United States Oil Fund in USD), then you have taken on the CDN:USD currency conversion risk. Potentially better than Russia, your choice. If you are a US citizen, then you are buying&selling in USD (you don't care).

  • You have many more choices in playing the commodity game, exchange-traded funds (ETFs, see USO above), the commodity itself (NYSEARCA:BNO - Brent Sweet Crude), or an index (from multiple sources).

  • The oil commodity market is quite liquid (meaning you can buy/sell quickly+easily, not the viscosity of the oil :)) with many players world-wide. It is easier for you to get in or out without holding a bag of rubles that nobody in North America wants or cares about.

  • There is more opportunity in commodity trading relative to your example: the commodity price has been 2.5 times current. Your ruble example is only ~2.0 times.

  • Oil will not go to zero; the underlying commodity has value. You can't eat rubles.

In the end, it is still speculation but with different characteristics. It's better than lottery tickets, probably better than Vegas and gives you a reason to check Google Finance 12 times a day :)

Don't forget about taxes (depending on where you are), try to play with money that you have been given a tax break on (e.g. deposit to your Registered Retirement Savings Plan (AKA 401(k), AKA <insert your government retirement savings plan here>) and buy the commodity inside that. Any gains may be tax free until you retire and start taking it out. Oil will either be VERY expensive or have been replaced with an alternate form of energy (warp drive anyone?)

3

I can give you some practical experience-based information regarding the Russian ruble and buying low (hoping to sell high). I think that to some extent this would be applicable on a broader scale. In 1998-1999 this currency took a massive hit and dropped to about 50 rubles per dollar. By about 2004 it has "recovered" to about 30 rubles per dollar. While it would seem that you should have been able to make some money over this 5 year period by trading back and forth, the reality was that the return was nowhere near the ratio of 50 to 30 (even taking the trading transaction costs out). Prices for things have gone up across the board, good stocks generally went up, etc. Basically a case of "a dollar doesn't buy as much as it used to..." (neither does a ruble). So, overall, I think if you had invested some money in the ruble shortly after the crash and then cashed out five years later, you would have made some money nominally, but much less when it comes to the actual worth of your earnings. You probably would have most likely been better off investing that exact money in a predictably good stock.

All in all, it's a gamble, as others have said. It's entirely possible that the ruble won't even recover much for decades.

(And I wouldn't keep your money in a Russian bank to accrue interest. Bad things have been known to happen to people's money over the past 20 or so years.)

3

Is there a reason why someone shouldn't buy into a temporarily cheap currency of an otherwise solid economy?

If you observe the last year's worth of data on the exchange rate between the ruble and most other currencies, you'll find that all the big currencies show the same fall in value of the Ruble.

Assuming it's a stable economy, or that the economy will recover, then, again - under that assumption - there is no reason not to speculate and assume it will rebound. This is called a market correction - if the economy is actually stable, and the fluctuation is merely in the market itself (a perception traders have) then eventually it will right itself and go back up/down to its previous value.

However, there are many sources who would disagree on your primary assumption.

Even if your assumption is correct, there's the possibility that the currency will undergo inflation, or any number of other gross economic effects. This is another way things are corrected, but unfortunately for investors like you, you lose when this type of correction happens, rather than the market correction you predict.

3

From a guy (myself) who made/saved some money recently using a USD-RUB currency exchange: What you propose is most likely a bad idea.

The way I see it, the ruble will eventually get back up once the political situation around it is resolved.

I don't see that. I don't believe it will return to the past level. The currency was devalued.

Just look at these historical RUB/USD charts (1992-1998 and 1998-2015):

Enter image description here

Enter image description here

Look at the 1992-1995, 1998, and 2008 periods. There are big raises. But do you really see the falls? I don't see them.

I don't believe that RUB/USD will ever return to the 30-40 range. It's more probable that RUB falls even more.

You can play that risky instrument like any risky stock, but, most probably, the base level is the current level, not the past level.

P.S.: What's more interesting is Russian bank deposits. Right now banks offer +22%/year for RUB deposits and +10%/year for USD ones. These deals look much better and much safer. Unfortunately, it's not easy for foreigners to register the Russian bank accounts that are needed for the deposits.

2

You will lose !


@Loren Pechtel says: "You're betting against the experts". It is a great underestimation of the situation. As for rubles, you are betting against false players, as Putin and his gang. They are playing on the stock market and they are news makers and they actively use they political and economical steps for stock play.

For example, the spike @Eugene Ryabtsev told about, appeared after Putin gave about 700bil. rubles to one of his friend firms. As help against sanctions. Just after he forbade mass ruble selling. And of course, all this mass was sold and the ruble fell.

When you have lost to the false player, you have done only one error - it is that you sit at the one table with him.


If you believe, that they are honest, try another thought. The friends of the current Russian President, being the leaders of the Russian economics, are playing against ruble. Do you think that you know the situation better than they?


A new Russian anecdote:

  • Can I buy $200 in your bank?
  • Sell them to us and we'll gladly sell them to you back, if you wish.

Don't forget, that current course of ruble is partly artificial already. It is NOT a product of free market.

  • 1
    This is somewhat misleading. Those inside Russia are joining this trade for a ride or are operated as tools (whatever forms it might take). It's useful not to forget that there is real stuff going on. And the closer we are to 2020 the more reasons we have to study the macro and, really, The Game. It's what will cause great movements in (read: destruction of) quite a lot of world markets. – Eugene Ryabtsev Jan 9 '15 at 11:09
  • 1
    @EugeneRyabtsev Sorry, I know nothing special about the y.2020. Except the number itself. – Gangnus Jan 9 '15 at 11:13
  • As for someone selling quite a load of money at the option expiration date - yeah, they did, and they were helped. The problem is analyzing this implementation detail to understand what's really going on. In any case future events like this are almost impossible to predict (so +1 to your answer for any play at the margin like some other answers suggest). – Eugene Ryabtsev Jan 9 '15 at 11:23
  • As for 2020 - it's just a date, give or take a few years. There is a hypothesis big things must happen (read: no way they won't happen) before that time, one way or another. – Eugene Ryabtsev Jan 9 '15 at 11:31
1

Yes, there is a reason to not do what you propose. It is the same reason that lies behind any rational decision to avoid any investment opportunity: if the expected return on the investment (ROI) is less than the expected ROI of any other opportunity. And there are thousands of other opportunities available at any time.

You mention, for example, that you can "wait for years" for the RUB to improve, but did you take into account what better things you could be doing with your money during that time? Many of the other answers to your question point out flaws in your thinking or suggest other investment opportunities; what's common to all of them is that the expected ROI you're computing may or may not be accurate -- and you may not be considering all the other ROIs out there.

If you have a crystal ball that tells you with 100% certainty that the RUB will double in value by this time next year -- and that there's no other investment that will do that well over the next year -- then there's absolutely no reason not to do exactly what you propose.

1

After reading your question title, I'd tend to asnwer, it's worth trying.

But the body doesn't match.

Russia is not 'otherwise solid economy'. It's the economy based on the raw resources, and in the context of unstable political situation.

The main reason the investors are running away from countries in such political situation is they fear to loose everything.

There are many ways you can loose everything if you invest in rubles:

  • hyperinflation
  • government confiscating foreign/domestic savings
  • blocking the exchangeability of rubel vs. foreign currencies

Microeconomic approach can be misleading because it doesn't take that factors into account.

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