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The Rise of the Ruble


Having gained 20% against the dollar over the last few years, the ruble is the average Russian's currency of choice. And those with rubles are spending them with a fervor never seen before.

In August of 1992, Russian President Boris Yeltsin signed a decree introducing a system of privatization vouchers.

At the time, Anatoly Chubais, an adviser to Yeltsin, told political commentator Maxim Krans of Russian news agency Novosti, "I don't have any doubts on this score: the entire civilized world lives under capitalism."

Krans recently wrote that 80% of people hoped that economic reforms would change their lives for the better, although a poll by VTsIOM (the National Public Opinion Research Center) showed that 38% of Russians surveyed believe that their life is worse now than before privatization.

On Wednesday, The New York Times ran an article titled "The Almighty Ruble".

The piece pointed out that, during the Cold War, plumbers in Moscow preferred to be paid in vodka rather than rubles because liquor didn't lose its value the way rubles did. (With what's happening to the US dollar right now, I'm considering asking for my paychecks in Smirnoff (DEO).)

Looks like a stable currency to me…

But now, having gained 20% against the dollar over the last few years, the ruble is the average Russian's currency of choice. And those with rubles are spending them with a fervor never seen before-on designer clothing, imported cars, and just about every other luxury consumer good you can name.

However, Russian consumer behavior doesn't seem to jibe with those results.

Dr. James Picht, Assistant Professor of Economics at the Louisiana Scholars' College and former Fiscal Advisor, Ministry of Finance and State Duma, Russian Republic, writes of a Moscow restaurant called Serebrianyi Vek, or, the "Silver Century," where a bowl of borscht costs $50, and they have Saturday-night "rose auctions," where the bidding often gets so heated that a single flower can go for over a thousand dollars.


Picht says it's "because everyone knows how much you're paying, and that's the whole point."

Russia, before capitalism

Russia, after capitalism

In a July 2006 review of the economy (the most recent one available to the public), the Central Bank of the Russian Federation reported that real disposable income rose 10.5% in the period between January 2006 and May 2006. The Economist Intelligence Unit says that in 2006 Russia became the eighth-largest retail market in the world, having surpassed Brazil, Mexico, Spain and Italy in recent years. Retail sales volume growth has been strong since 2000 at more than 10% per year between 2001 and 2006, which was one of the fastest rates of growth in the world.

Annual PC sales have more than tripled since 1998.

Euromonitor data shows that cosmetic and toiletries sales in Russian grew by 14% in 2006, making it the fourth fastest growing market in the world.

And, people seem to be buying so much, there isn't enough space to sell it all.

"VDNKh" stands for "Exhibit of the People's Economic Achievement," which is an enormous set of exhibit halls built by Stalin in 1938.

The VDNKh grounds

The Scholars' College's Picht speaks of the dozens of buildings, including the Pavilion of Atomic Energy, the Pavilion of Radio Technology, the Aerospace Pavilion, and yes, the Pavilion of Mechanized Pig Fattening. Today, it's a shopping center, where one can buy sofas, La-Z-Boy (LZB) recliners, and home-entertainment centers in what was once the Pavilion of Space Exploration. Even the Kremlin has been "mall-ified," with a large underground shopping center built at its base.

Are there opportunities there for foreign business?

Unlike in China, India and Brazil, foreign companies encounter tough competition in Russia.

Those skyrocketing PC sales? Well, 30 local computer companies control half the market. Three of the top four vendors are Russian (Formoza, Aquarius, and R Style Computers). Hewlett-Packard (HPQ) is the lone outsider in the group.

Apple? What's an Apple?

More than 50% of that booming cosmetics market belongs to small, local producers like Kalina, Faberlic and Nevskaya Kosmetika, making things difficult for multinationals such as Procter & Gamble (PG), L'Oreal (LRLCY.PK), and Avon (AVP).

It's pronounced "Kalina." Really, it is.

And, while Russia's largest companies are actively expanding into different countries and regions, non-Russian money is in no great hurry to enter Russia. In September, 2006, Thomson Financial estimated the total foreign private-equity capital in Russia at a maximum of $3 bln, as investments elsewhere perceived as much less risky. The Carlyle Group opened a Moscow office in 2004 and shut down a year later, citing Russia's unappealing "risk profile."

For all that's occurred in the "new Russia," some believe that a zebra can't change its stripes. As MV Professor Vitaliy Katsenelson, a native of Russia now living in Colorado, told me, "When I speak to my friends over there, I feel like they haven't changed at all. I'm the one who's changed."
No positions in stocks mentioned.
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