The Russian Central Bank recently lowered rates in an indication of the seriousness of the slowing of the economy. The federal government has also indicated in recent years and weeks it will be paying close attention to agriculture in order to make Russia a leading exporter to the world. Very attainable as it has 10% of the world’s arable land, and only a fraction of that is currently cultivated. In addition to legal reforms that should be introduced, there will undoubtedly be bonds coming to market to finance construction of ports and other infrastructure necessary in order to maintain and enlarge the current system.

With all the talk about government and energy bonds, what seems to get lost in the mix so to speak is the size, liquidity, and desirability of the Russian railways sector. To those unfamiliar, in a country the size of Russia, with a lack of a national highway system, lots of heavy industry, and for many other reasons, the railway sector is an enormous part of the economy, requires enormous investment, and as such, issues bonds to cover investments costs. In Russia, the company that is the national railway company, Russian Railways enjoys a monopoly in its business. For many other reasons, not listed here, this could be a desirable part of most people’s fixed income portfolio.

Today’s entry is a play concerning the energy industry of Russia, it is speculative, we’ll see how it develops. As we know, Tymoshenko lost the recent elections in Ukraine and Yanukovych won, this could have an impact upon the energy industry in that the candidate that won might be inclined to sell some of the pipeline infrastructure in Ukraine to Russian companies, this could lead to less chance of disruptions in the gas supply to West Europe. Again, this is highly speculative right now, we of course are monitoring the situation.

Things might be getting choppy for the Russian economy. Because the Russian economy has become so dependent on the price of oil, almost like a proxy for the global oil markets, investors should pay close attention to the price of oil, now and on the horizon. At $70 a barrel, it has decreased drastically, just in the past month but two factors should be considered if your gauging the odds of further decline. Firstly, the futures contracts for delivery of oil are much greater than the actual physical capacity to store the actual oil, by a factor of several times. Secondly, global oil refiners are shutting down refining capacity because of their inability to make money with oil in the 70s and 80s. This is taking major oil customers (the refineries themselves) off the market which should further weaken demand for an already weak demand for oil.

Russian municipal bonds are paying over 9%, but the wise cautious side of your bond investing personality is asking how likely mass defaults in the municipal bond market are? With all the trouble U.S. states and cities are having, you could make a reasonable argument they could be riskier than their Russian counterparts. Here are a few things you should consider. Although the government is running deficits of 5.9% for 2009 and a projected 6.5% for 2010, there is still money in the sovereign fund, and they are projected to offer Euro denominated bonds in the approaching year as a way of raising money. Additionally, the Russian administration might view allowing any municipality to go bankrupt as reflecting bad on the entire country and will do whatever it takes to prop-up the local administrations so they meet financial obligations. So when deciding which bond is best, a strategy could be to choose something maturing in the short-term to medium-term, selecting a less financially stable region, taking advantage of a higher yield.

A recent press release by the government stated Russia pulled out of recession back in the 3rd quarter of 2009. There are those that can present a compelling argument on both sides of this debate, but the critical issue for many in the fixed income community is whether this will stoke the flames of inflation at any point in the foreseeable future. The short answer is no, at least no inflation will be the result of wild and unrestrained economic growth. Two important variables help us in this analysis, one is the continued decline in industrial activity and the second is the continued high and possibly increasing unemployment rate.