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THE RUBLE The collapse of most currencies in the Orient has drawn attention to the ruble as perhaps the next to fall, and I think that's an excellent bet. Briefly, there are several indicators that can point to an overvalued currency that's likely to devalue: 1) Purchasing Power Parity—If a basket of goods is much more expensive in country A than country B, it might be because of local taxes or inefficiencies. But it might also be because the currency is overvalued. The McDonald's Big Mac, which can be easily found almost anywhere on the planet, is a good rule of thumb indicator. I didn't personally visit one of these emporiums of fine dining in Moscow, but I'm told Big Mac's in Russia cost about 50% more than they do in the US. That's certainly true of restaurant meals and hotel rooms, which is especially egregious in a country where the average income is about 10% that of the US. Based on that, the ruble is a great candidate for devaluation.

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2) Foreign Trade Deficits— One reason a country imports more than it exports might be that it's living above its means, consuming more than it's producing. That's absolutely the case with Russia. Devaluing the currency is one way to reduce demand for imports. And most of the money in question isn't spent on capital investment, but on consumption. So there's no prospect of these deficits turning around. The ruble is headed down, bigtime. 

3) Government Spending Deficits— The Russian government spends a lot more than it takes in; it finances part of the deficit by printing new rubles, but most of  it with debt. Instead of trying to collect taxes to cut its deficit, it should cut its spending 50% or so. That, of course, would inconvenience a lot of people who live off the government. Regardless of whether or not they cut spending, it will almost certainly devalue, amounting to a de facto default on its ruble-denominated debt. Which is one reason, along with the rational fear it will print up lots of extra rubles to buy what it wants, it has to pay up to 150% interest on what it borrows. 

4) Government Backing for its Currency— After having sold most of its gold during the final days of the Soviet regime, the Russians are now said to be net gold buyers. (Note: Russian gold production has fallen from a peak of 188.5 tonnes in 1987 to 120.3 tonnes in 1997). But all their gold and dollars together are trivial relative to the rubles outstanding; if the ruble was to be made redeemable with a fixed amount of gold, and hence stable, maybe it needs to be devalued 80-90%. Right now its backed mainly by confidence in the Russian government, something that only an idiot would rely on.

What would be the consequences of a ruble devaluation? In Russia (and it's similar in most Third World and state-directed economies, for that matter) only relatively inconsequential volume (10% ?) of  transactions take place in rubles. About 20% take place in dollars. And about 70% are barter. Rubles are used mainly by the average Russian, who doesn't have much in the way of assets. He gets his salary, and pays his rent and groceries in rubles, but even with 100 million people, this amounts to chicken feed. Any large or important transactions, or those between people with some sophistication, are done in dollars. Really big transactions tend to be bartered, for several reasons. First, banks don't act like banks in the West; they don't make loans. Basically they take deposits from the public and then speculate with them. So there simply isn't available cash for financing deals. Second, if there is any cash, then the State is going to want it for taxes; bartering obviates that problem.

I expect the ruble, currently 6.26 to the dollar, will be devalued significantly, probably to at least 10-1 within the year. The average Russian will again be financially devastated, which has pretty much been the story throughout history, including the last seven years, when he's seen his savings and pension evaporate through runaway inflation. You might think the average Russian, after all these centuries, has been genetically altered to allow the acceptance of unlimited abuse. On the other hand, since the State is no longer powerful enough to keep a tight lid on the pressure cooker, especially in the face of the massive changes since the collapse of the Soviet Empire, maybe the place is ripe for a real revolution. It's a tough call. My guess is that a further disintegration of Russia, into a bunch of new nations, is the most likely scenario. 

Russia, in its present form, makes only somewhat more sense than the Soviet Union did. Places like Chechnya and Tartarstan aren't the only candidates for autonomy or independence. It's hard to see why much of eastern Siberia will continue to send money to Moscow in return for a lot of aggravation.

THE OLD GULAG

The Russians have always been fond of bragging how big their country is. And it is  big, evidenced by the fact it took 8 hours to fly from Moscow to Magadan which, although it's not nearly as far east as Vladivostok, is in the same time zone as New Zealand. It's disconcerting being that far north in mid-summer, since the sun had no apparent movement the whole flight, either coming or going. In fact it never set in Magadan, and barely set in Moscow. 

Anyway, the place is big. But size isn't everything. The reason is that there's nothing there. Picture far northern Canada, but with no infrastructure, no amenities or conveniences, and no prospects. Actually it's much worse than that, because it's not populated by good-natured Canadians, who are at least there for some reason, but by chronically depressed and bad tempered Russians who are there because of a cruel trick of fate. Just millions of square miles of waterlogged muskeg, underlain by hundreds of feet of permafrost, and absolutely covered with mosquitoes. The mosquito rules; there are few or no large mammals because the insects will drive them crazy within hours, covering their eyes so they can't see, and their nostrils so they can't breathe. The tundra may serve some useful purpose in the ecological scheme of things, but I'm unaware of it. I'd suggest using it as a giant camp for Green Warriors, Earth Firsters, Deep Environmentalists, and other assorted enviro-nazis to get a taste of the wilderness. Few have the foggiest idea that nature, outside of artificially groomed national parks, not only isn't our friend, but is pretty much dedicated to recycling you as part of the food chain.
But perhaps it's somewhat indelicate to talk of putting people in camps up here, because there were, in fact, millions of them in camps in exactly this part of Russia up until the mid-eighties. The camps were located here for two main reasons: One, it's so isolated that you don't have to build prisons, as such; there's nowhere to escape to. And two, there's plenty of use for cheap labor. Almost all the gold mined here—an estimated 80 million ounces since the 1920's-- was placer, a type of mining which is labor intensive, but takes little capital. Placer isn't favored for public companies because it's hard to establish reserves; you're basically looking for free gold buried in gravel. And free gold is easy to pilfer.

The Russian government has historically felt the need to develop eastern Siberia, not because it was particularly worth developing, but because if they didn't, the hordes from China would. The only thing the Russians have ever been able to do here that makes even a semblance of economic sense is mine gold. So that's what most of the Gulag workers did. That, and build the infrastructure that catered to, and was paid for by, the mining industry.

I regret to say that I've only read the briefest selections from Soltzenitzen, who logged a number of years up here. Having seen the reality during the summer, the most pleasant time of year, I'm really anxious to hear his description of the winter. Of course you do hear stories. The city of Magadan, such as it is, was mostly built by Japanese prisoners of war, almost all of whom died. When they put in the docks, for instance, they worked naked in the icy water; when they died, new prisoners took their places. When a newly arrived boatload of prisoners tried to hijack their ship, the guards simply turned fire hoses on them, and waited until the next day, when the prisoners could be conveniently chopped out of ice by other prisoners. There are plenty of stories like that floating around, so I won't retail more to you.

Magadan itself is a pretty sorry looking place, even at the height of summer. The winters must be something else entirely—endless darkness, constant sub-zero temperatures, little or no fresh food, no entertainment other than vodka, and the exclusive company of people who are such depressing losers that they couldn't figure out how to escape. But it's obviously much improved from only a few years ago. There are now probably a dozen stores of various descriptions in what passes for the downtown, and maybe a dozen restaurants. Not bad for a city of 150,000, at least by comparison to other parts of Russia.
The place could have at least as much of a future as an Alaskan coastal city, if only because of fishing. But only it became a true free port. Complete freedom could literally make the dark side of the moon a paradise. In the meantime, why should people or capital come here? Indeed, how to keep the people and capital that are already stuck here from leaving?

Barring radical change, most of the artificial cities the Soviets created in Siberia should, and will, turn into ghost towns. There's nothing left of the gulag camps, which were basically shantytowns. They've just blown away. I flew around Magadan region for about six or seven hours in an MI-8, and can promise you that one square mile looks just like thousands of others around it. About a week after I left, three people were killed and another thirteen injured when another MI-8 went down in Irkutsk after catching fire; about half the passengers were foreigners there to look at mining prospects. For years I've felt, whenever getting off a Soviet-era aircraft, as if I've dodged a bullet.

INVESTING IN RUSSIA

I regret to tell you that one of the decades great speculative opportunities slipped right by me a few years ago, when the Russians privatized their industry by passing out vouchers that allowed people to buy into any of about 127,000 companies that the State spun off. It wasn't the way I would have done it, or the method I pitch to governments today, but at least it got industry out of direct State ownership. If, for instance, 100 vouchers were offered for a company, then each voucher would get 1% of it. Most Russians didn't have a clue what the vouchers were worth, nor what the companies were worth, so people who went there with briefcases full of money made unbelievable killings. But that was pretty hard work. The good thing about Russia being as screwed up and volatile as it is, is that there will be ample similar opportunities to do the same thing with publicly traded shares, again and again, as time goes by. The market here should be as volatile as that for junior mining stocks.

There are a lot of good stories concerning Russian stocks. Incidentally, US-traded stocks probably the only way to go, at least if you want stock quotes and communication from the company. 

One example is the TyumenAviam Trans ADR (TYAVY, US$5), which flies about 100 fixed wing and 225 rotary wing aircraft in the province of Tyumen, in far western Siberia. The liquidation value of the aircraft alone are conservatively several times the value of the 6 million ADR's outstanding, not counting its ownership of a number of airports. Revenues have grown from US $70 million in FY1994 to US $165 million in FY1997, and the company is selling for a P/E of perhaps 3 or 4 to 1. It's hard to be sure about things like earnings, though, because of uncollectable receipts, barter deals, and the like. 
Another example is Gazprom, a natural gas conglomerate, which is the largest company in Russia in terms of employees (most of whom should be fired) but, more importantly, in terms of revenues. It's estimated to own about a third of the world's natural gas reserves, and if it was valued like a western company it would sell for 100 times its current price. Even though it accounts for about a fourth of the Russian governments revenues right now, the comments I quoted above from Tax Collector Fyodorov were directed at this company in particular. Which partly accounts for its low price.

The story is similar for oil companies, where reserves go for a few cents a barrel. There are lots of stories, but this isn't the time to get into them all. When the time is right to buy Russia, a closed-end mutual fund should be the foundation of your position. Two are available: Morgan Stanley Russia (RNE, US$X, 13% discount), and Templeton Russia (TRF, US$X, 22% premium). TRF has a better performance record to date, and that accounts for its premium. I'd probably still go with RNE, however, since I want a ply on the market, not any particular manager.

When should you get into Russia? Why not wait until the ruble goes into freefall, which will probably be accompanied by a political crisis. I'll let you know what I think in the months to come.