Top U.S. Stocks at Risk of a Russian Collapse

It’s not looking good for Russia right now. Saudi Arabia’s oil minister Ali al-Naimi said that OPEC will defend its market share even if it means crude oil at $20 per barrel.  Al-Naimi confirmed what many oil watchers have suspected: That the Saudis are intentionally flooding the market in order to put their competition out of business.

RUSSIAThat’s horrendously bad news for Russia, as Moscow needs a crude oil price of about $105 to balance its budget. With Russia on watch for a downgrade to junk status, and with the ruble in free fall, plugging a budget gap by borrowing promises to be punitively expensive.

China has offered to help Russia get through a rough patch, but it remains to be seen whether this assistance amounts to much. Meanwhile, Russia has stooped to measures that reek of desperation to keep the ruble afloat, ordering five of its largest state-controlled exporters to sell excess currency reserves and buy rubles.

Over the past week, the ruble has recoupled most of its December losses, but it’s still down by a good 40% for the year.

As I wrote recently, a bet on the ruble is a bet on rising oil prices. And oil prices will probably recoup their losses as higher-priced supply gradually comes offline. But that could easily be a few years from now at the earliest. It took crude oil prices about two years to see $100 per barrel after collapsing during the 2008 meltdown.

I’m not necessarily a Russia bear. In fact, I’ve been trading Russian stocks via the Market Vectors Russia ETF Trust (RSX) and the iShares MSCI Russia Capped Index Fund (ERUS). But I do consider myself a realist, and I consider a full-blown Russian meltdown to be a real possibility.

At this stage, we’re all well aware of the risks facing Western oil companies in Russia. The one-two punch of Western sanctions and a collapsing oil price have made it all but impossible for them to operate in Russia going forward. But there are plenty of other U.S. stocks less obviously at risk. Let’s take a look at non-energy companies most at risk from a Russia meltdown.

I’ll start with U.S. automakers Ford Motor Company (F) and General Motors Company (GM). Russia is the second-largest European market for new autos. Last year, Ford and GM sold 105,000 vehicles and 258,000 vehicles, respectively, and hold market shares of 3.8% and 9.1%, respectively.

We have to keep these numbers in perspective, of course. Ford sold 2.5 million vehicles and GM sold 9.7 million. Russian sales account for a modest 4% and 3% of their respective totals. But keeping in mind that Japan and much of Europe is in recession and that emerging market growth is sagging, a collapse in Russian sales would be felt.

At this point, Ford and GM are left precariously dependent on the U.S. consumer. The drop in crude oil prices might send Americans back to the high-margin large trucks and SUVs that padded industry profits in the 1990s and early 2000s. But that remains to be seen.

Aircraft manufacturer Boeing Co (BA) is not so much at risk from a falling ruble or a collapse in Russian consumer spending. Its bigger risk is that it could lose access to Russian supplies of titanium due to potential counter-sanctions or a further souring of relations between the U.S. and Russia.

How important is titanium? It makes up about 15% of the weight of Boeing’s 787 Dreamliner. A disruption in titanium supplies could mean a major slowdown in Boeing’s manufacturing.

I don’t necessarily see this happening, mind you. A Russia desperate for hard currency is not likely to turn away buyers. But it’s one of those “long-shot” risks worth noting.

And finally, we get to food and drinks giant PepsiCo, Inc. (PEP). Pepsi’s empire spans the globe, rivaled only by that of The Coca-Cola Co (KO).

Pepsi did $4.9 million in revenues in Russia last year, making up about 7.4% of its total. But the risk here goes beyond the obvious. Pepsi gets 50% of its revenues from outside of the U.S., with a good chunk of that coming from emerging markets.

Should a collapse in the ruble lead to a broader collapse of emerging market currencies in general, Pepsi could be left licking its wounds for several quarters.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he is long ERUS.

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