Candidate Medvedev in an address to a national association of Russian lawyers, decried “legal nihilism” (his own words) and issued a call to arms for the countries lawyers to help further develop Russia’s legal system, especially in the areas of land and intellectual property laws. Remember, Medvedev is a lawyer and legal professor by training. It would be easy to comment on the profound significance of these words, or the other way to be skeptical. At this point, I simply am encouraged by his words, have an open mind, and will be reporting to you on issues as they develop. Ukrainian Prime Minister Tymoshenko has publicly stated she wishes to eliminate a “middle man” company that purchases gas from Gazprom and sells it to Ukraine. This is significant news by itself, but she also wants to diversify Ukraine’s energy needs away from Russia, building gas pipelines from the Black and Caspian seas, to Ukraine, and then to Europe. This could be significant in drawing Ukraine and the EU together even more, perhaps in preamble to Ukraine actually joining the EU. Finally, in sweet news to Russia’s manufacturing and consumer base, a prominent Italian chocolate manufacturer is building a 300 million dollar plant in the Vladimir region of Russia.

I’m going to talk about a bond from Chuvashia, a state located in the European heartland of Russia. The industries it has are electrical engineering, machining, and some forestry and agriculture. Another great municipal bond that can be held until maturity offering competitive rates backed by a still vibrant economy and government flush with cash. This bond is payable in Rubles, rated Ba2 by Moody’s, and matures in a little over a year at 397 days. The all important effective YTM is 8.04%.

We’ve discussed presidential candidate Medvedev’s legal credentials before, how it could benefit Russia and based upon a recent speech he gave, he seems to be sincere. He stressed the need to have the rule of law over the land. A skeptic might chalk this up to campaign talk but it is talk that no Russian candidate has mentioned before, like an 800 pound gorilla in the room everyone tries to pretend doesn’t exist. Of course you will find these concerns in every emerging market, but if serious attempts are made in Russia, even on a limited basis, it is something that would truly be unleashed. You would have a natural resource rich country, industrial infrastructure, a good university system, with hi-tech promise. Remind you of any country America?

Russian supermarket chain and discounter X5 is proposing an acquisition of a large retailer having locations in northwestern areas of the country. Of course, we have talked about Vimpelcoms acquisition of Golden Telecom to complement the services they already offer their customers. We are going to see more of these mergers as 2008 progresses as the Russian consumer sector becomes more mature and large companies seek to expand their geographic reach, acquire new members or services, or perhaps offer complementary services. It’s interesting to note in closing that all this activity has occurred without too much foreign participation, when that happens perhaps prices paid will increase even more.

A few words to invest by in 2008. A strong Ruble is going to benefit consumer staple stocks like X5 and Vimpelcom, these are the types of stocks to look at. We are thrilled to be in the financial sector overall, as they stand to reap large benefits from a consumer and business sector that is hitting on all cylinders. Please avoid most energy stocks, but of course there are exceptions, (Gazprom). Utilities look to have a bright future along with infrastructure type stocks. We are intrigued by the fact that Russia has had large inflows of investment since the beginning of the year, even before elections and with economic concerns being played out in the west, this is contrasted with major economic outflows from China and Brazil-all this in only the first two weeks as it promises to be an interesting and profitable new year

In case anyone didn’t notice the oil stabilization fund climbed to nearly 157 billion USD. We don’t claim to have any inside information yet as to where the money will be spent, but I can promise you it will. Likely spurring even greater inflation, possibly higher interest, which is good for the investor in many cases. (as long as you don’t live in the economy with higher inflation of course) The fund is a story we’ll be following closely in 2008 as Putin has stated Russia has no immediate plans for a sovereign type investment fund, the only other option is to invest (spend) it on domestic concerns, be they infrastructure improvements or pension increases.

This week’s bond originates from Russian telecommunications giant VimpelCom. This bond is denominated in the U.S. Dollar, YTM of 6.90%, and matures in 506 days. They are rated BB+/Negative by S&P and their stock trades both in the U.S. and London, a stock that has done very well in recent times. Even though they have taken on some debt recently to develop their network and for acquisitions, we feel telecommunications in Russia is the place to be in 2008. They get most of their revenue from the domestic Russian economy, they are not a commodity based company depending on the declining dollar eating away at profits. As the wealth of Russia continues to grow, communications becomes a necessity, this is a company that has positioned itself to capitalize on that by offering new services.

On December 24, 2007, the Wall Street Journal featured a highly complementary article regarding the Russian markets. The article featured this quote among others-“Russia should fare better relative to other emerging markets due to its stronger exposure to very high oil prices, huge foreign reserves, double surplus [in both trade and current account balances], political stability and strong domestic demand”. These are many of the same themes we talked about in depth throughout 2007 and with 100 dollar a barrel oil, very little downside can be imagined in the foreseeable future. Two scenarios that could have an impact upon the Russian economy are a sever downturn in the Chinese markets, they have doubled in just this past year and are showing signs of a bubble, at least in the short-term, could global investors sell off more than just China if this happens. With recessions looming in both the U.S. and U.K., how bad of a recession is key in determining how deep and far the worldwide ramifications spread. On the positive side, lets not forget about projected increases in foreign investment after a peaceful election, money sloshing around in the national economy just looking for a home, and numerous bond and equity IPOs on tap, delayed from the jittery markets as 2007 was drawing to a close. There will be hazards and opportunities to sort through, and look forward to helping you see both throughout an interesting 2008. Welcome back from your holidays, lets all get back to making this a prosperous new year.