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Hey doc, what can you give me for a bad case of Perestroika?

I don't want to be the voice of another "world-coming-to-an-end" scenario; there is no fun in that and it is impractical from an investment standpoint. But the situation in Russia is a concern nevertheless.

After the Yukos scandal unfolded I made a prediction that foreign investment, something Russia is in dire need of, will not be coming to Russia. Unfortunately, my prediction has become reality. According to the Financial Times, foreign direct investment fell by 10% in the last twelve months, and that happened at a time when oil is hotter than Britney Spears. On the surface the Russian economy is doing well, in fact it even threatened to pay down its foreign debt, however the latest economic numbers show activity is on a decline (growth forecast was lowered from 6.5% to 5.8%) and inflation is on the rise (forecasted to be around 10%).

It appears that high oil and gas prices are masking economic problems in Russia. I have found that predicting oil prices in the short run is not a very productive exercise. However, looking at history as a guide, oil and gas prices will not be at their highs forever. Mean reversion kicks in sooner or later, as it always does.

Jeff Mathews whom I admire endlessly, recently pointed out a comment made by Wal-Mart's CFO: "But Russia is wide open, and Wal-Mart looked closely there, and was about ready to go...but pulled back following Putin's hostile takeover of Yukos, the country's largest oil producer." Russia did not just lose a billion dollars of investments into its inefficient retail system, no it lost a lot more. It lost the efficiency and Western know-how from WMT and likely hundreds of other companies that rolled back their plans to invest in Russia.

As Jeff Mathews correctly pointed out: "The Russian Crisis of 200X approaches."

Here are some other reasons why they would not invest in Russia.

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