For those not following world events, this hasn't been a good year for Russia's economy. The dual perils of falling oil prices and a U.S.-led boycott over perceived hostile actions in the Crimean Peninsula have decimated a kleptocratic government that is overly reliant on oil exports to fund the country. Russia itself estimated that its GPD could contract 0.8% next year, basing its forecast on $80-per-barrel oil.
For perspective, an earlier Russian budget assumed oil would stay in the $100-per-barrel range in 2015; as of this writing Brent crude is in the low-$60-per-barrel range. Either one of these issues -- the boycott or oil prices -- would cause trouble for Moscow, but both in tandem could potentially be fatal to its economy. The ruble, is in freefall, jumping from nearly 33 rubles per U.S. dollar to 56 (as of this writing) in the past year -- lower is better in this example -- after a recent spike to 68. In the end, these fluctuations have the potential to spur hyperinflation and destabilize the economy.
Here at The Motley Fool, we generally leave the political pontificating to other media organizations, realizing it can be rather divisive. More recently, playing politics with your portfolio would have led to poor investing decisions. That said, there are times in which it is wise to pay attention to geopolitical events. And for Apple (NASDAQ:AAPL) investors, the company's recent decision to stop selling items in Russia is a great lesson in currencies' role in international trade.
Apple says nyet to Russia, for a week
For background, on Dec. 16, Bloomberg reported that Apple has halted online sales of its products in Russia because of "extreme" ruble fluctuations. And that makes sense, considering the ruble lost 19% of its value that day. Apple spokesman Alan Hely addressed the closing by apologizing to customers for the inconvenience while the company reviews its Russian pricing policies.
Apple recently returned to Russia with increased prices. According to 9to5Mac, the iPhone 6 now costs 53,990 rubles for the base model -- a 35% increase over its pre-crisis price worth $980 at today's exchange rate. For a comparison, the same iPhone costs $649 in the United States. The iPhone is 50% more expensive in Russia than it is in the United States. And while Apple is back in Russia, one has to ask how long the company will stay in a country that can't control its currency.
For Apple, rubles need to be converted to United States dollars, eventually
Currencies tend to be the type of thing that mom-and-pop investors misunderstand. And to be fair, the intricacies can be tough. But looking at this currency conversions in broad terms, you can see how this could be an issue for Apple. Eventually Apple has to convert its foreign holdings back to dollars for income-reporting purposes.
Last year Apple sold 1.6 million iPhones in Russia, and although many were lower-priced units, we'll use ASPs strictly for hypothetical for comparison purposes. If Apple produced $971.2 million (1.6 million at $607/unit) when the ruble was trading at 33 per U.S. dollar and had to bring that money back when the ruble trades at 56, that figure drops to $572 million. Apple would have lost 40% of its Russia iPhone revenue on currency movement alone!
And sure, Apple has the ability to hedge by buying derivatives -- mainly futures and forwards -- but perfectly matching cash flows can be difficult. This is a wrinkle of the "shoe-leather" phenomenon, where economic actors are spending more time trying to preserve the purchasing power of their currency rather than utilizing it.
As far as Russians go, there are already reports of mini-runs on groceries stores and banks to avoid future price increases. In addition, Apple has already experienced another phenomenon, "menu costs," by taking down their site to rapidly change prices. And it's not only Apple's sales that are affected; any working capital that Apple had to convert to rubles to effect transactions is at risk of these rapid changes.
So now Apple finds itself in the midst of a tough situation. In the event the company pulls out of the country -- again -- it could anger consumers and a prideful government, hurting future sales opportunities. In the event Apple continues to do business, it could find itself holding currency that depreciates 10%-20% or more before it's able to convert it to a more stable currency. But if things get worse, leaving may be the wisest decision for Apple.
Jamal Carnette owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.