(Source: SaxoBank) The above is the chart for the USDRUB currency pair. Basically, this is the story of ruble's devaluation. Does it look like there might be a selling pressure now? Well, here is the daily chart for the last twelve months: (Source: SaxoBank) What is going on now is unprecedented: RUB is testing all-time lows, and this is not the end of the story. It is going to get worse. As I mentioned in yesterday's article, RUB has to be at a level of USDRUB = 140 in order for the Russian state budget to balance at a minimum deficit (Russian president Vladimir Putin is aiming at a deficit of 3% of the country's GDP). In order to balance the budget completely, the exchange rate has to be at 210 RUB per 1 USD. The economy is going to hit the fan once again, and the politicians are doing nothing to avoid it. Those who live in Russia have a feeling that nobody is doing anything to hedge the risks: the government seems to simply be hoping that oil prices will pick up. What you have to realize is that: (1) Russian people are really relying on the government to take care of them (this is a historical thing) and (2) people do not know what to do, nor they have the instruments to hedge their FOREX exposure. On the other hand, people mistrust politicians (the paradox is that most people mistrust politicians but believe the president - Vladimir Putin is now the new tsar). Every time some official says RUB is not going below a certain level, people rush to the banks to buy USD or EUR. This is why the government has recently introduced a new law that limits "free" purchases of foreign currency (essentially, if you want to exchange more than about $200, you have to fill in paperwork and present your passport). This is a new form of currency control. Of course, one can easily convert currencies in online banking but the movements in paper money are now supervised by the government officials. Another thing I want to point out is that everybody is glued to the markets on daily basis. In particular, people monitor energy prices and currencies. If you read Russian news on local media outlets, this is what you normally get on your screen: (Source: Yandex News) Now you can see that fear-mongering is an everyday thing here. This is why I generally do not read the news and I only monitor movements in commodities and FOREX. On the other hand, the fears are not unfounded. There have been instances where the government simply lied to the people causing them to lose savings. Remember 1998? Well, nothing has really changed since then. The government is still corrupt, people have a lot less freedoms, and the country has been turned into a police state, which is actually a double-edged sword. On the one hand, the siloviks (the modern version of KGB), the policemen, and the army are the foundation of Putin's power. In addition, his reign rests on his powerful cronies. As long as things are going okay in the economy, his power is unshakable. Russia is a modern version of the feudal system: if you support the king, you will have money-producing assets, houses in Europe, bank accounts in the US, and expensive cars. The closer you are to the king, the more you will possess. This has been the model for the last 15 years, since Putin's "coronation" in 2000. On the other hand, the siloviks and the cronies are used to being well-off in USD terms. Now that the economy is crumbling, their overseas assets are frozen due to sanctions, and the local currency is falling through the floor, they suddenly feel poor. This is why new duties are being levied on businessmen (entrepreneurs already represent a very thin percentage of the total working population). This is why I suddenly have higher hydro and water bills. Russian people have to feed its government, which has grown to an enormous size over the years in order to ensure stability of the president's power. Now that oil is crumbling, the state budget is getting less money in terms of excise taxes and export duties. This leads to a smaller budget for this year and the near future. This means the siloviks and the cronies are getting fewer opportunities to "meet their ends". Of course, other government workers, such teachers and doctors, are going to feel the major blow because the politicians will make sure they get the first bite of the reduced budget. However, people are slowly losing their patience with the government and are beginning to see the true colors. The problem is that it is taking too long. Here is what I want readers to take away from this story. First, Russia is not a long-term buy-and-hold. The economy is simply not stable, and the officials have no idea what to do (most of them do not even have the necessary education to deal with this matter). Secondly, RUB is going to collapse - at least in the short-term - if the oil prices keep going down. And the central bank is unlikely to intervene as it did a year ago - its foreign currency reserves are depleted. Moreover, its intervention did almost nothing to stop the ruble's turmoil in December 2014. Thirdly, Russian stock market is already testing the 2008-2009 lows: (Source: Investing.com) With no real drivers other than the energy and commodity prices, the index has only one way to go: down. As I mentioned in my previous article, the option writers are extremely pessimistic about the local stock market in the short-term, selling upside for pennies on a dollar: (Source: Yahoo Finance) The ETF traded above $14 per unit just two weeks ago! Here is what irritates me the most: if energy and commodities prices do indeed pick up in the short-term, Russian people will be praising the government, even though it has little influence on the global oil and natural gas prices. If things turn out worse, the state propaganda will make sure to blame the Saudis or the Americans (or anyone else) or some other external factors in the country's demise. Now let us turn to the bright side. Here is how you can profit from this situation. The trade of my choice is shorting oil and buying calls on Market Vectors Russia ETF. In order to short oil, you can either sell ETFs like OIL or USO or go short on individual stocks like Rosneft, Gazprom or Lukoil. By buying May calls on the broader Russian stock market, you automatically get an inexpensive hedge. This way, you can make money both ways. For those that think going against your homeland's economy is a treachery, I have something to say: always put your personal interests first. You did not cause the crisis to happen, not did you choose to be born and become a citizen of a certain country. Therefore, do what saves your well-being and your lifestyle. You can worry about the rest once this goal has been achieved.