There is a simple proverb known as the First Law of Holes: ''If you find yourself in a hole, stop digging.'' Somehow, the Russians and Putin can't seem to stop digging the country into a toxic relationship with the rest of the world.
It is possible that the Kremlin's sanction rhetoric against the west will cease. It is more likely that Putin's recent actions have severely limited Russia's remaining options.
I don't know if that is the case yet. Last week, I wrote about the threats of foreign asset seizures in Russia. The Russian central bank has just announced that it is considering implementing capital controls if capital exits continue to increase.
The fastest way to drive money out of the country is to announce that you are considering implementing capital controls. The private sector in Russia is trying ever harder to contain the political situation, and to prevent it from further destroying the Russian economy and markets.
The desperation was palpable in the language contained in the announcement of the discovery of a ''vast pool'' of oil in the Arctic by a joint venture between Russia's state-run Rosneft (RNFTF) and Exxon Mobil Corporation (XOM), the largest oil company in the U.S.
The problem with this ''vast pool'' of oil is that it is not vast in any way. One billion barrels of oil is the equivalent of about 53 days of U.S. consumption, 10 to 11 months for Russia, and 11 days for the world. It is inconsequential by any measure, and that's before considering whether or not it is even economically and financially viable to extract the oil profitably.
With over-the-top rhetoric, Exxon and Rosneft are trying to create good news in a perilous political and economic environment.
This type of propaganda is an ongoing theme, and it is causing confusion among speculators and investors in U.S.-traded Russian ETFs, CEFs and ADRs. This is most evident in the bizarre behavior of the three-times leveraged Direxion bull and bear funds this year, namely the Direxion Daily Russia Bull 3X ETF (RUSL) and the Direxion Daily Russia Bear 3X ETF (RUSS).
Since the invasion of Crimea had begun, the bull fund RUSL is down about 14%. The bear fund, which should logically produce a near opposite result, is down by an even larger percentage of 33%. The rest of the U.S.-traded Russian ETFs, CEFs and ADRs have exhibited similar behavior by speculators and investors this year.
The best advice I can offer to anyone wishing to speculate Russia is to avoid participating directly in funds associated with the country. Instead, calculate the potential impact on areas outside of Russia.
If the Russian government intensifies its rhetoric on asset seizures and capital controls, investors will increasingly move their money from Russia to somewhere else. One way to do so, especially if you still want exposure to Russia, is to invest in ETFs with exposure to Brazil, China, India and Russia.
The iShares MSCI BRIC ETF (BKF), the Guggenheim BRIC ETF (EEB), and the SPDR S&P BRIC 40 ETF (BIK) are all up 10% to 12% since Russia had invaded Crimea. They have also each lost 8% to 10% so far this month, as China's economic situation has deteriorated, and tensions between Russia and the west have escalated again.
This is only advisable if you really want to have exposure to these countries. The only one of these countries I expect to experience the best long-term performance is India, which I wrote about earlier this month. However, even India will experience an outflow of investment capital if global economic activity does not begin to increase faster than global debt levels.
Later this week, I'll be writing about that issue in a review of the Geneva Report on global debt.