The Russian government will be raising its export duties on oil by about $25 to $250 per ton. If you wanted to buy equities in the Russian energy industry we recommend oil services stocks, the nuclear mining industry, or even coal rather than the major oil companies. This does not influence our opinion of energy company debt, we feel they clearly have the cash flows to meet all current and future debt for the foreseeable future.

Many people have heard about a project that is being developed for emerging countries sponsored by a non-profit foundation that includes such corporate luminaries as Intel. The goal is to put computers in the hands of children at a cost of 100-150 U.S. Dollars. There is going to be a law of unintended consequences here though that should have ripple effects in a country like Russia for years to come. Although wealthy and upper-middle class Russians have no problem affording computers, this will revolutionize Russian education, lifestyles, and not least in importance, business for the masses. We’re looking forward to bringing you the companies and opportunities that stand to benefit.

In the words of the great American folk singer Bob Dylan and his great song “Shelter From the Storm”

I was burned out from exhaustion, buried in the hail,Poisoned in the bushes an' blown out on the trail,Hunted like a crocodile, ravaged in the corn. "Come in," she said,"I'll give you shelter from the storm."Suddenly I turned around and she was standin' thereWith silver bracelets on her wrists and flowers in her hair.She walked up to me so gracefully and took my crown of thorns."Come in," she said,"I'll give you shelter from the storm."

Appropriate lyrics that fit these uncertain times, and where you ask is our financial shelter from the storm? Firstly, last week the U.S. Federal Reserve flat out stated they will bail out the American credit market at whatever the cost is, by lowering rates. This is going to cause a declining dollar to fall even faster and further against all currencies, the Ruble included. Your solution is to find quality Ruble denominated instruments with a short to medium-term maturity horizon. Also, learn to block out what the “experts say” sometimes. Supposedly every single time the American Fed has lowered rates, oil has done poorly. The “experts” though, are basing their predictions off of obsolete models. We don’t have the time or space in this article as to exactly what makes today different from 20 or even 10 years ago, but I’m sure you can easily guess some of the major reasons.

This week’s bond is from the Yaroslavl Oblast and in this suddenly unstable fixed income environment it was chosen for clear reasons. Firstly, it has an effective YTM of 7.42%, maturing in 598 days, giving you the security of a solid yield but not so far out that you have to worry about your money returning to you. Yaroslavl is about 175 miles from Moscow and 500 miles from St. Petersburg, located in the Upper Volga region. Its natural resources include forestry, agriculture, and a limited amount of oil and natural gas. Most of its citizens live in urban areas and are educated and it enjoys good geographic location inside Russia. With the Kremlin enjoying a 420 Bln. USD currency reserve, and growing, we feel a major oblast such as this is a welcome refuge to sit out the current credit and debt storm sweeping the globe.

The Ruble should not strengthen too much more for the rest of the year, but not really because of anything the government will try and do, although they officially state they want a weaker Ruble. If they slash interest rates, that would only make a difficult inflation scenario that much worse, the economy would be in danger of overheating. What will likely happen for the last four months is what has started to happen over the last month and a half in world markets. Investors will seek to trade in some of their overseas investments and repatriate their money back into U.S. Treasuries and the like and will show less aggressiveness towards emerging markets fixed income, including Russia. This, combined with an increase in the value of imports vs. exports will help reign in the Ruble as the year draws to an end.

This week’s bond is from the city of Volgograd and has an effective YTM of 8.18% and is payable in Russian Rubles. It matures in 778 days. Volgograd is a city of over a million people, being the most important metro area of the lower Volga region in Russia. The yield is especially attractive when considering the fact of the stability and liquidity of the economy in general plus assuming the dollar will conservatively fall 1-2% over the coming year over the Ruble, returns should only be enhanced.

I suspect interest rates in Russia will be heading higher not because something is fundamentally different in Russia from three months ago but because of the culmination of several things happening around the world. Lets assume the growth of Russia’s economy has been built upon a foundation of the following things-low interest rates in the U.S. and Europe (we’ve seen the subprime mess raise corporate rates in America almost overnight and the U.K. and E.U. have been raising and leaning towards raising their rates even more) people are becoming psychologically nervous, avoiding risk, and if they can get similar returns in developed markets they are going to. Additionally, there has been too much liquidity floating through the Russian system due to foreign investment and the rising of government revenues due to increasing prices for energy. If there is no hurricane soon in the U.S. many experts predict oil has reached its nadir while a retreat of 10-15 dollars a barrel would not be a disaster, it would be yet another piece of mildly negative news on the scale. Gazprom and Rosneft recently removed bond offerings that were ready to debut in London, possibly due to the fact of increasing rates in the U.S. and Europe and they could have had difficulty with the rate they wanted to sell them at, if Gazprom is having trouble, what about average companies? Remember, in Russia like any developed market only one percent of the securities are from quality companies that meet your investment goals. So if I seem a little happy about what is going on, it is because as I mentioned earlier in the article, nothing has changed in Russia from several months ago, I am still positive on the fundamentals. What I feel is happening is the wringing out of the excesses of the system and inevitably the weak and inefficiently run will fall by the wayside, as always we’ll show you where the opportunities are and what is to be avoided.