Russia’s economic future lies in small and medium sized businesses, especially if their technology initiatives are to succeed. When looking at the other countries in the BRIC acronym, one sees giants, but also developing domestic companies, the medium and small companies that form the foundation of all prospering companies. Look at these other countries and you’ll find the dynamism and diversity in China, technology in India, and everything from agriculture to homebuilding in Brazil. The Russian index is weighted heavily from energy with large financials and metals contributing as well. These have helped the index soar in recent years as commodity prices have exploded. Now though, the Russian market is growing but starting to lag behind the other countries in the BRIC. Its one thing to talk about the importance of small and medium sized businesses, it’s another to promote their growth through good government and legal reform.

I’d like to greet our readers with this scary thought on Hallow’s Eve. With American consumers showing signs of cracking under 900 billion dollars worth of credit card debt (an amount equal to the sub prime mess ironically) and recent figures indicating 6% of British homeowners paying off their mortgages with credit cards, what could be the damage to Russian banks if the economy here starts to slow. Unfortunately, it is hard to quantify with hard facts, but the answer is not good. With tons of money flowing through the economy and financial system, a lot of no questions asked credit has been given the past several years, hard to imagine but even easier than in the West. Ask us which companies in particular you should be wary of and if this could pose a danger to your bond portfolio.

We are keeping an eye on the Russian timber industry as government regulation could have the opposite effect it is intended. The Kremlin previously announced an initiative to develop downstream industries of Russia’s natural resources. For example it is much better to develop modern metal fabrication plants and even finished product manufacturing rather than just exporting raw iron ore. The problem is how they are doing it, for example with timber they are not guaranteeing foreign companies investments’ from local interference or even providing tax incentives. They are simply adding a massive export tax that will likely make many companies uncompetitive in the industry. We hope the next administration will meet and deal the structural changes that are necessary for real growth.

A new President was recently elected in Poland, what does have to do with Russia and its trade with the EU? Well, the meat of the situation is actually a situation about meat. It seems for a while now Russia has banned Polish meat that for some reason is good enough for the EU but not for the Russian consumer. Poland has retaliated by using its veto power to poison negotiations opening European markets to many Russian products such as finished steel. This is coupled with the fact that on Russia’s end they could use all the imported meat they can get their hands on to help lower food prices, well some progress might be approaching. If so, it could be reasonably good news for Russian industry.

GR Invest is advising our investors to sell and stay away from the food sector, including both producers and retailers. This change to a solid and growing sector happens after the government “suggested” retailers and producers freeze prices to help contain prices after the election. Firstly, we feel some of the price increase has resulted from increased global demand, which can not be helped, but the real cause of inflation is the lack of supply that is being created and government interference rather than a developing economy. Russian agriculture produces less today than it did under Soviet times with old technology, this is an indication to you how bad things have gotten, but also how much potential there is. What is needed is the facilitation of investment, massive corporate investment from abroad and perhaps tax breaks and subsidies to help domestic producers. On the retailing end, all that is needed is for local and federal authorities is to get out of the way. These might sound simplistic solutions, and they are for I don’t have the space to delve deeper into this complicated issue. I would like to leave you with the thought this is not only a solvable problem, but an opportunity for Russia to become an efficient world leader in agriculture and food production, not only able to feed itself, but much of the growing world.

The elections are over in Ukraine and it looks like the liberal Orange forces will be ruling the country, although a major shift in policies of the country, no matter who won would have been unlikely. On a per-capita basis, Ukraine may even offer more opportunities than Russia for individuals wishing direct investment in the country as they have advanced property rights and a better court system. Recently, international banking giant HSBC has announced expansion plans for Ukraine in a move likely to spur advancement in the country’s financial sector.

We’re fast approaching the time when UES will be splitting itself up into 12 regional electric companies. Where as before, you just had a choice of a national monopoly, you now will have choices- different geographic areas, different managements, different styles and plans for competing. That is just the equity possibilities, there are going to be many bond offerings from all these companies as they try and keep up with the growing demand for new infrastructure as the current system is not really “state of the art”. We’ll begin offering previews for you, or if you have any specific needs, please let us know.

It’s been some frustrating times for the Russian consumer lately, although incomes have risen somewhat typical food staples have risen in some cases close to 20 percent. Ironically a country that spans double digit time zones, has a cold climate but in many cases fertile soil, and a relatively small population, imports most of its food. This has left it vulnerable to the fluctuations in prices of commodities, which have been rising lately at an inopportune time for upcoming elections. This would be a worse situation if not for a rising Ruble, the only thing the government can do in the short-term like decrease taxes on imported food, like they plan to do with dairy. With all the potential in agriculture has, I have no doubt American and European agricultural giants will flock to build the billions of dollars in infrastructure Russia needs to be self-sustaining, what is needed simply are laws that will be enforced to protect their investments, like so much of the rest of the economy.

The chances of an interruption to the natural gas supplies to Western Europe from Gazprom pipelines were seriously lessened recently when Ukraine agreed to pay the 1.3 billion dollar gas debt by November. In the U.S. a new gasoline refinery hasn’t been built in decades, but in Russia, in keeping with the Kremlin’s suggestion of more value added production instead of just shipping natural resources abroad, a second multi-billion dollar refinery will be built. This was the second announcement in just a matter of weeks with the first being built in the city of Kazan, the second will be built in the St. Petersburg region.