Looking into next year, we recommend Gazprom bonds, and not just for reasons of attractive yields, one of the largest energy companies in the world, and the great potential for long-term appreciation. The bottoming of natural gas prices is another good reason as well. You must also consider what the energy policy of the United States will be for at least the next four years and what effect that will have upon the world. The new administration will almost definitely join world global treaties limiting the type of pollution found in inefficient automobiles and standard coal fired plants. This means a greater emphasis on alternative energy to keep CO2 levels down, but from a practical standpoint alternative energy is many years away from being produced on a mass level. So what we are left with is not just more nuclear power, but much more natural gas produced power plants, and this is not taking into consideration natural gas powered automobiles. Natural gas is considered a practically benign fossil fuel because of its low pollution and because it is ready to help meet the energy needs of today, it will only increase its utilization.

There has been much talk and speculation concerning Russia joining OPEC. While current market conditions make it a possibility with some logic, our prediction is it is not likely to happen. Before asking if its is politically feasible or probable, one must be familiar with the drilling realities of Western Siberia and the Arctic regions. Because of the extreme environment, drilling can not just be stopped, put on hold, and started again later at the flick of a switch. If drilling is stopped in that environment, equipment will break and the fields will have to be drilled all over again, with new equipment. Storing the oil instead of exporting would create its own set of problems. Russia joining a natural gas group of exporters is a much more likely scenario. How likely though, remains to be seen.

The Russian equity markets are up over 20% off their lows, but for this momentum to sustain itself and continue into the future, there must be several things fall into place. Firstly, global commodities (including energy) must stabilize and demand must return. There was some overproduction when energy prices were at their height and an equilibrium must be reached, in other words, current inventories must be brought down. Secondly, sooner or later people will look around and recognize the permanent reality of a weaker dollar, and when this happens it will only compound the effect of rising commodities as they are still priced in dollars. Thirdly, people must emotionally learn to deal with a changed world and realize it is different than it used to be, but the world will not end anytime soon, they must break out of their paralysis of thought and action they are in. I don’t think all these things will happen in the next week, but, it is realistic to assume all will happen in the near to intermediate future, and when they do, a gradual price increase in commodities might give way to a sudden meteoric rise.

With the price of commodities and commodities linked stocks having undergone devastating price decreases over the past half year, now might be a strange time to talk about their resurgence, yet the fundamentals today look better than they did even a month ago. The U.S. Dollar appears to have been knocked off its perch at the top of world currencies in a lasting way, as it has retreated significantly just in the past week. Not even mentioning the long-term growth in the world’s consumption of most natural resources, the weaker the dollar gets, the more expensive almost all commodities become, that is an unavoidable fact, something that bodes well for Russia. Oil is approaching 50 dollars a barrel, at least temporarily the talk has stopped about 25 dollar barrel oil. To assist large Russian companies get through short-term difficulties until the world economy stabilizes, the government has announced a formal plan to lend assistance to the 1,500 largest companies in Russia.

Paradoxically, some of the expected weakening in the retail and real estate sectors has been offset by Russian’s reaction to the sliding Ruble, and the expectation the government will let it slide further. Granted, what we are finding is anecdotal stories, not scientific surveys but they can be indicative of millions of people’s behavior. For instance, if people expect their Rubles to lose value, they are currently purchasing everything from apartments to jewelry as a hedge to a falling currency. These are the sort of things we’ve been noticing, that in the short-term at least, have an impact upon the macro economy.

We’ve reported for quite some time now on the challenges facing Russia’s energy industry as new fields of natural gas and oil must be found and developed to replace more mature fields with declining productivity. This need is made even more acute and urgent by the government’s stated intent not only to maintain current production rates but to increase them. We’ve recently discussed about financial incentives the government is enacting or plans to enact to encourage new exploration and development. Recently, in an enormous oil field in the Barents Sea, Gazprom has indicated foreign energy companies will be encouraged to play a role in its development. This is another part in the strategy to develop Russia’s vast energy resources.