Russia has been hit with a triple-whammy since the beginning of the global financial crisis: Falling oil prices, a lack of demand for exports, and a pandemic of capital flight.

Even before the crisis reached its zenith, rattled investors were pulling their money out of Russia. Capital outflows totaled $21 billion in the two weeks ended Aug. 22 – the two weeks following Russia’s Aug. 8 invasion of Georgia – according to Goldman Sachs Group Inc. (GS).

Of course, even more money found legs out of the country late last year as the financial crisis intensified. Deputy Prime Minister and Finance Minister Alexei Kudrin told a meeting at the Federal Tax Service that net capital flight stood at around $130 billion in 2008.  Addressing the service earlier Kudrin said that some $200 billion had been taken out of Russia from October 2008 through to late January 2009.

An additional $80 billion in capital could flee the country this year, said Russia’s Economy Minister Elvira Nabiullina. The external debt of Russian companies widened drastically from $175 billion to $500 billion in 2008, and interest would have to be paid this year, according to Nabiullina.

Meanwhile, a drastic decline in oil prices has put a kink in the country’s most vital economic lifeline. After hitting a record high of more than $147 a barrel last year, Russia watched the value of its lifeblood dip below $40 a barrel. At one point, crude had lost an astonishing 80% of its value, forcing the government to rethink last year’s budget outlays.

The new 2009 budget estimates that oil will average $41 a barrel, versus $95 a barrel in the original. Government revenue will tumble 39% to $195 billion (6.7 trillion rubles), while spending will rise 7% to $282 billion (9.7 trillion rubles).

However, Minister Kudrin estimates that Russia’s budget deficit may exceed 8% in 2009.

“This may happen if we do not distribute budget spending differently or change the structure,” he said.

Kudrin indicated that the government would be forced to “make a number of tough decisions regarding budget spending,” as the revenue of the federal budget for 2010-2011 would be 33% lower than in 2009, according to his estimation.

And even if the price of oil holds on to the gains it has made in recent weeks, Russia’s gross domestic product is set for a significant contraction.

“GDP will fall, even if oil prices climb not to $41 per barrel, but $44, $50, or $55,” Kudrin said.

In light of the challenges facing the economy, even the 6.6% GDP growth forecast for 2020 is “too optimistic,” he added.

Russia’s economy shrank 7.3% year-over-year in February, a slight improvement from January’s 8.8% decline.

Russia’s MICEX stock index and the ruble have taken their lumps as a result of the economy’s downward trend. But while both the Russia’s currency and stocks have shown some signs of life, unemployment continues to soar and shows no sign of abating.

Russia’s total number of unemployed jumped 20.6% year-over-year in February to over 6.4 million people, or 8.5% of the economically active population, according to the Federal State Statistics Service. That represents a 4.9% increase from January 2009.

The rising level unemployment and bleak outlook for Russia’s economy have stirred rumors of social unrest that have grown increasingly audible, even in the nation’s repressed mainstream media. And some analysts and officials believe the former president and current prime minister Putin could be the scapegoat for Russian oligarchs eager to maintain their influence, as well as Putin’s handpicked successor Dmitry Medvedev

The Growing Putin-Medvedev Rift

Gleb Pavlovsky, a pro-Kremlin political scientist and adviser, said earlier this month that the economic crisis poses a growing threat to both Putin and Medvedev, whom he suggested could also be swept away in an uprising financed by Russia’s oligarchs. Pavlovsky warned of a “remake” of the 1991 street protests that helped bring down the Soviet Union, and the 2004 Orange Revolution in Ukraine.

“The transition of the [economic] crisis into the political arena has already begun happening,” Pavlovsky wrote in Russia’s Moskovski Komsomolets. “The sources of social protest should be sought in the corridors of power.”

With so much at stake, tensions at the Kremlin are beginning to rise and even the 20-year relationship between Putin and Medvedev, his 43-year-old protégé might crumble.

Over the past few months, Medvedev has struck a far less aggressive, less nationalistic tone than the ex-KGB agent. Medvedev has scaled back a bill to expand the definition of treason and resurrected a dormant human rights council. He’s also taken a more lenient stance towards protests and free speech.

On March 15, Russian protestors held a sanctioned, peaceful march in Vladivostok, the very same city where just months earlier they had been beaten and arrested for similar actions. And in his monthly television addresses, Medvedev has also acknowledged that unemployment in Russia is actually closer to 6 million than the 2 million officially reported.

Medevedev is also building his own political powerbase, which consists of mainly of economic liberals – the archrivals of the siloviki, the military security officials grouped around Putin.

The Kremlin announced in February that it was establishing an advisory group to address the current financial crisis. The group, called the “Golden 100″ will eventually grow to 1,000 and ultimately supplant many holdovers from Putin’s administration.

“Medvedev is building his own power base, up to a certain point,” Alexander Khramchikhin, a senior researcher at the Institute for Political and Military Analysis told TIME.

What’s more is that both Medvedev and his team of liberal economists have both in recent weeks ramped up their rhetoric against Putin and his old guard.

Igor Yurgens, director of the Institute of Contemporary Development, a new thinktank created by Medvedev, has criticized Putin for restricting freedom of the press and stressed that “the most honest and independent opinions on Russia’s problems are coming from the liberal wing, rather than from the so-called statist patriots.”

Even Medvedev himself has taken some thinly veiled shots at Putin, saying at a recent meeting with economic officials that criticized Putin’s response to the financial crisis as “unacceptably slow” and said that instead of action on promised reforms there had been only “talking and talking.”

“Medvedev has got the whiff of power in his nose and he likes it,” Mikhail Delyagin, an analyst and former government adviser on economic policy, told the The Guardian. “He’s given tacit approval for his administration to engage in an information war with Putin’s apparatus.”

Critics continue to allege that Medvedev still has nowhere near enough political muscle to take on Russia’s iron politician, but there is also evidence that Medvedev’s popularity is growing and that Putin is past his political peak.

According to a February 2009 national survey, 73% of those polled said they trust Medvedev, a substantial increase from 56% in 2006. Putin continues to enjoy popularity among the public as well, but his political capital seems to be deteriorating along with the economy.

“Putin used to act as an arbiter standing above the two main clans – the siloviki and the rational economists,” Dmitry Oreshkin, a leading political analyst, told the The Guardian. “Now he’s been dragged down into the fight and he’s under fire from both sides. The siloviki say he’s a weakling incapable of imposing his will and showing the economists their place, while the economists in turn are consolidating around Medvedev.”

Putin is also falling out of favor with Russia’s powerful aristocracy. Russia’s top 10 billionaires alone lost an estimated $150 billion last year, according to the The Guardian.

“It is very conspiratorial,” Vladimir Milov, former deputy energy minister and a leader of the Russia’s Solidarnost political group, told the Financial Times.  “But, for the first time, they are putting the question that perhaps Putin should go, to prevent him from pulling everyone else to the bottom.”

How Might Medvedev Pull the Trigger?

If Putin does go, many believe Medvedev will be the one to show him to the door. One of the many policy changes arranged by Medvedev in recent months has been an orchestrated crackdown on political corruption that dates back to May 2008.

Medvedev’s new anti-corruption measures prohibit conflicts of interest, require government officials to report income and property, and further mandate coworkers to report any noncompliance.

Now, analysts are beginning to wonder whether some of these new laws, shepherded through parliament last December by Medvedev himself, will be his weapon of choice in ousting Putin.

According to Foreign Policy, Stanislav Belkovsky, a Russian political analyst and insider, gave sensational interviews in November 2007 to Die Welt and The Guardian, stating that Putin was worth approximately $40 billion. Belkovsky said Putin was the beneficial owner of 37% of Surgutneftegaz OAO ($18 billion), 4.5% of Gazprom OAO (OTC: OGZPY) ($13 billion), and half of a Swiss-based oil-trading company Gunvor ($10 billion), run by a former St. Petersburg KGB agent. If true, Putin would not only be one of the richest people in the world, but one of the most corrupt.

As Foreign Policy points out, it was Putin who, after being transferred temporary presidential responsibilities a decade ago, sealed his fate as a modern-day tsar by granting former-President Boris Yeltsin and his family lifelong immunity from criminal prosecution, administrative sanction, arrest, detention, and interrogation.

Should the economy continue to falter, it’s possible that Medvedev could end up offering Putin the same deal.

Source: With Russia’s Economy in a Deep Freeze, Is Medvedev Gearing Up to Give Putin Das Boot?

Gazprom has said its decided to push its borders a bit and wants to trade chunks of its prized Russian natural gas fields for foreign assets. But it hasn’t actually made much progress, including today’s deal.

E.On was planning to give away a piece of its Hungarian gas trading-and-storage business and power utility, but the two energy companies couldn’t agree on value (or, less diplomatically:  Gazprom kept demanding a higher return for a cut in the gas field as oil prices moved up this summer, and E.On didn’t want to pay. And then that whole war-in-Georgia thing made the Germans a little less comfortable sitting across the table from the state-controlled Gazprom’s execs everyday.).

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It seems European companies (and others, but mostly the Europeans. Gazprom does loom large on their eastern front.) aren’t too sure about selling stakes in their resources to Gazprom. And the company’s strong-arm tactics don’t exactly go over well in foreign boardrooms.

So what did Gazprom get out of the deal with E.On? 2.93% of its own stock. E.On still holds 3.5%. Ouch.

Gazprom is claiming the Hungarian assets were inadequate and that it couldn’t miss the chance to buy back shares at such low prices.

But in reality (Sorry for using a phrase popularized by MTV, but other options are much less, um, tasteful.) Gazprom got served.

Source: E.On (EONGY) Grabs Gazprom’s (OGZPY) Gas Field

In its haste to reclaim its status as a military superpower, Russia almost completely neglected to forge a coherent economic policy.  Moscow has relied too heavily on its energy exports, veered away from the principles of a free market economy, and ostensibly transformed itself into a rogue nation – isolated from the support and capital, of Western nations.

The dramatic rise in oil prices provided Russia with the world’s third-largest stockpile of currency reserves, as well as a national budget surplus. But rather than channel that money back into infrastructure for the nation’s booming energy and agricultural sectors, the Kremlin funneled the vast majority into the military.

Russia’s revenue for the first half of 2008 amounted to approximately $176.5 billion, according to figures recently released by the State Committee for Statistics. And while expenditures totaled $120.9 billion in the first half, the Russian government is projected to spend roughly $278.6 billion under the full-year 2008 budget.

At least 25% of Russia’s expenditures during that time – or about $31 billion – went directly into defense and security, and that’s before Russian troops flooded into Georgia. The budget also includes $15 billion for discretionary spending, which means the amount allotted to national security could end up being closer to 30%-40% of overall spending.

Meanwhile, a paltry $133 million went into infrastructure for the country’s breadwinning energy sector. And the agricultural sector, which employs a large share of the Russian population, received just $363 million. Combined, those amounts equate to less than 1% of the budget for the first six months of 2008.

In addition to neglecting infrastructure improvement’s for its two most profitable sectors, Russia also failed to shore up what is proving to be an unstable banking sector.

“The Russian banking system is not developed enough to provide the long-term financing that companies need to grow,” Douglas Rediker, a Russia specialist and former investment banker at the New America Foundation, told the Washington Times.

“If the Chinese were to stop lending to the United States tomorrow, it would have a severe impact, but we would still have a pool of domestic funds available,” Rediker said. “In Russia, they don’t have the means to replace [global lenders.]”

That is precisely the problem now, as Russia’s recent military incursion into Georgia, and political interference in the private sector, have scared foreign investment out of the country.

Capital outflows totaled $21 billion in the two weeks ended Aug. 22 – the two weeks following Russia’s Aug. 8 invasion of Georgia – according to Goldman Sachs (NYSE:GS). Estimates of capital flight over the past four weeks range between $15 billion and $20 billion.

“At least in part because of the Georgia crisis, Russian financial markets have lost nearly a third of their value, with losses in market capitalization of hundreds of billions of dollars,” William Burns, undersecretary of state for political affairs, told a Senate hearing. “Capital is fleeing Russia, with $7 billion leaving on Aug. 8 alone.”

In a note to investors, UBS AG (ADR:UBS) reduced its price targets for Russian assets by an average of 20% acoss the board, based on increased political risk.

Putin’s Domestic Agenda Drives Off Investment

However, the military action in Georgia isn’t the only reason foreign investors are fleeing in these times of uncertainty. Over the past several years, and particularly the last few months, the Kremlin has been anything but a gracious host to foreign companies.

Two years ago, the government seized OAO Yukos Oil Co., formerly Russia’s largest oil producer, on trumped-up tax charges, and put its chief executive in jail. Soon after, Royal Dutch Shell (RDS.A, RDS.B) was forced to relinquish control of its Sakhalin-2 oil and gas project to OAO Gazprom for $7.45 billion, after the Russian government threatened to block investment plans by canceling building permits on environmental grounds.

Earlier this month, BP PLC (ADR:BP) finally conceded to the demands of its Russian partners over a dispute involving joint venture TNK-BP. BP gave in to demands by its Russian counterparts to replace TNK-BP’s chief executive, Robert Dudley.

This decision came after Russian authorities raided the venture’s Moscow offices in July, and arrested one employee for espionage, and after the government refused to renew visas for 148 employees, forcing Dudley to flee Moscow.

Finally, in July, Prime Minister Vladimir Putin criticised mining firm Mechel for selling coal cheaper abroad than on the domestic market. Referring to the company’s CEO, who had been taken ill, Mr Putin advised him to get better soon, “or we will have to send him a doctor and clean up all the problems.”

This resulted in an investigation by the Russian Federal Anti-Monopoly Service, and cost Mechel $5 billion in market capitalization.

Events such as these make it apparent that rather than encouraging private enterprise in Russia, policymakers are intent on nationalizing what parts of the energy sector they can, and dissolving what they can’t. This, as much as the war with Georgia and a policy of increasing isolationism, has driven investors from Russia’s market.

“Putin’s comments on Mechel made the initial impact, then after Georgia everyone started pulling out of the stock markets,” a British lawyer working in Moscow, who has seen deals cancelled and business dry up over the past few weeks, told the Independent.

“Add in to the mix that energy and commodity stocks have been falling worldwide on fears of a worldwide recession and you have a fairly bleak picture,” the unnamed lawyer told the newspaper. “If Putin knew how to behave, the crisis would be a lot less serious, as investors had until very recently seen Russia as a good place to weather the global economic storm.”

Source:  Russia’s Politics of Isolation Leave it Economically Stranded in a Time of Crisis

Back in 2003, the Goldman Sachs Group Inc. (GS) – eager to push its clients toward emerging markets investment – created the acronym “BRIC” to stand for Brazil, Russia, India and China, the four emerging markets the investment bank’s strategists believed would become a dominant part of the world economy in the years ahead.

What started as a marketing ploy is now a profit play that global investors have to consider, since at least three of the four countries – Brazil, China and India – feature sound economies with powerful growth rates, and stock markets with reasonable valuations.

In fact, China and India are two of the fastest-growing investable economies on the planet, and have been transformed into global leaders in both the manufacturing and service sectors. At the same time, Brazil and Russia each has become a cornucopia of commodities, and are emerging as global leaders in the white-hot global energy sector.

These newfound global strengths have provided all four of these countries access to massive amounts of capital, a key element of the investing methodology in both Money Morning and The Money Map Report.

With foreign reserves of $1.68 trillion, China basically has all the capital it needs for the development projects it has on the drawing board. India has nearly $300 billion in foreign capital invested in its stock market; and that virtually guarantees it will remain on global investors’ radar screens for the foreseeable future.

After conducting this analysis, we decided to develop “The BRIC Report,” a periodic feature we’ll use to update you on both the latest developments, and the latest profit plays, in each of the BRIC economies and BRIC stock markets.

Building Profits, BRIC by BRIC

While the BRIC countries are by no means the world’s only attractive emerging markets – from time to time, in fact, the BRIC markets may become overpriced or their growth prospects may ebb – over the long haul, these markets remain strong opportunities for investors, and should remain at the top of your list of profit plays. Here are the four top factors why this is true.

• Population: The four BRIC markets are the largest economies and have some of the largest populations among emerging-market countries (which don’t include such already-emerged East Asian markets as Japan and South Korea). Companies from BRIC countries have large-and-competitive domestic markets, meaning they’re already globally competitive when they venture abroad.

• Rapid Growth: China and India have two of the fastest growth rates in the world, and that looks likely to continue. Other rapidly growing countries are much smaller – and more risky.

• Natural Resources: While China and India are the major poles of global manufacturing and service growth, the two other BRICs – Brazil and Russia – are cornucopia of commodities and energy, which in the past have been inadequately exploited. The escalating energy and commodity prices of the last five years have brought rapid growth to both countries, enabling them to develop active consumer sectors with a multitude of investable companies.

• Access to Capital: Brazil recently achieved an investment grade debt rating from Standard and Poor’s Inc., giving the Latin American country access to the major global pools of institutional capital, while also significantly lowering the cost of its debt. Russia has built up foreign-exchange reserves of more than $400 billion, allowing it to break free of a reliance on foreign capital. China, with a record $1.68 trillion of foreign exchange reserves, has access to all the capital it can handle. Finally, India may finally have broken out of the cycle of foreign exchange constraints that had previously prevented rapid growth: With foreign capital of almost $300 billion invested in its stock market, it is very much on investors’ radar screens worldwide.

Let’s take a look at the markets one at a time.

“Two-hundred dollar oil would break the back of the global economy,” Adam Sieminski, chief energy economist at Deutsche Bank AG (DB), told Bloomberg News in an interview yesterday (Wednesday) in Tokyo. “Next step after $200 would be global recession and bad news for everybody.”

Just a little over a year ago, $200 oil seemed out of the question…

But the Deutsche Bank prediction of oil-fueled global recession follows a Goldman Sachs Group Inc. (GS) forecast that oil might climb as high as $200 per barrel in two years.

Keith Fitz-Gerald, Money Morning’s Investment Director – and one of the first global financial gurus to predict triple-digit oil prices – recently boosted his target price for crude oil from $187 to $225.

“The math is really simple here,” Fitz-Gerald said back in May, when oil futures were trading around $123 a barrel.

“We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves,” he said. “Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices.”

Since the time of Fitz-Gerald’s prediction, oil has gone on to several new highs, nearly breaking through the $140 barrier on June 16, earlier this month.

Russia’s Bubbling Oil Troubles

Exacerbating the high oil prices are production problems in Russia, the world’s second largest oil exporter. Aging oil fields and a lack of infrastructure investment has led to the country’s first annual production decline in 10 years. Output fell 0.9% to 9.76 million barrels a day in the first five months 2008, Bloomberg reported.

“Growth last quarter fell on a year-on-year basis, and this has to do with the policies implemented over the prior year to raise taxes on oil industries,” Deutsche Bank’s Sieminski said, speaking of Russia’s oil difficulties. “This made it difficult for foreign capital to come in.”

But “if Russia could reverse some of these policies and get their own oil industry back on, this will help very much” with supply concerns, he added.

Fear of government corruption and takeover of assets has dissuaded some firms from seeking investment in Russia. BP PLC (ADR: BP) is currently in litigation over its Russian joint venture TNK-BP Ltd.

“If the conflict escalates and continues for some time, it will have a negative impact on the company operations,” Stan Polovets, representative of the TNK portion of the Russia-based company, told Bloomberg. At the same time, advanced techniques aimed at improving oil recovery are “not proving to be as successful as we had hoped,” he added.

Production levels of TNK-BP have dropped as the two sides continue to argue and several drilling projects have been halted in disputes over contract workers.

BP is not the only “Oil Major” to run into trouble in Russia.

Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) recently bowed to pressure to sell state-controlled Gazprom OAO (OTC ADR: OGZPY) a majority stake in a $22 billion venture after the government threatened to halt drilling due to environmental concerns.

In a recent Reuters interview, new Russian President Dmitry Medvedev denied the government was trying to make a grab for BP-TNK assets.

Medvedev also defended his predecessor, Vladimir Putin, for tightening state control on certain economic sectors such as energy and defense, saying it was important to “guarantee the strategic interests of the economy in the years to come.”

“But any additional strengthening of the role of the state, increasing its presence in the economy is not foreseen,” Medvedev said. “On the contrary, we will take action to reduce the presence of the state in the economy.”

Source: Declining Russian Oil Production Could Lead to $200 Oil and ‘Global Recession’

What’s tipping us off? The so-called Price/Earnings-to- Growth ratio, better known to investors as the “PEG” ratio.

Let me explain …

One of the most popular stock valuations is the Price/Earnings (P/E) ratio. If you take that calculation one step further and include a stock’s expected growth rate you hit on the P/E-to-growth ratio, or PEG ratio.

Analysts have been using PEG ratios for years, now, to pick undervalued stocks, but now you also can use that same ratio to determine which countries are trading at good value.

A recent Bespoke Investment Group report used the popular PEG ratio to identify which country’s stocks are currently undervalued.

“Late last year, we began performing this analysis on countries to get a better comparison of the valuations of both developed and emerging markets,” the B.I.G. Tips report read. “To do this, we divide the country’s [gross domestic product] growth estimate into the estimated P/E ratio of its major stock market index.”

Like an individual security’s PEG ratio, the lower the ratio, the more undervalued the stock.

The top-three spots on that list go to Russia (1.37), China (1.91) and India (2.06). Brazil clocks in at sixth with 2.80. Money Morning readers may recognize them as member of the “BRIC” nations – a term coined by Goldman Sachs Group Inc. (GS) in 2003 identifying rapidly growing emerging economies (Brazil, Russia, India, China). [For a complete listing of the PEG ratios of the respective countries, please see the chart below.]

Rounding out the top six are Malaysia (2.37) and South Korea (2.66), the latter of which is another investing favorite of both Money Morning and Warren Buffett, chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B).

The United States, on the other hand, comes in near the bottom with an estimated PEG ratio for 2008 of 11.39.

When using the calculations to make investment picks, it’s important to remember that both the P/E ratio and the 2008 GDP growth are only estimates. Still, it’s easy to see how fast-growing economies have the leg up on more mature markets such as Japan and the United States.

How to Play the PEG for Profits

One of the easiest ways for U.S. investors to cash in on a foreign country’s expected stock market growth is with an American-listed exchange-traded fund (ETF) or exchange-traded note (ETN) that mirrors a foreign stock market index.

For the BRICs, you could try the iShares MSCI Brazil Index (EWZ), the Market Vector Russia ETF Trust (RSX), the Barclays IPath India Index ETN (INP), or the iShares FTSE/Xinhua China 25 Index (FXI).

If you prefer to stick to individual securities:

Russia: OAO Gazprom (OTC: OGZPY), the state-owned natural gas monopoly with ambitions to control Western Europe’s gas supplies.

Lukoil (OTC: LUKOY), the other obvious Russian heavyweight, is the largest state-controlled oil company.

China: A terrific way to play China is with the Region Opportunity Fund (USCOX), a mutual fund run by San Antonio-based U.S. Global Investors Inc. (GROW). Indeed, U.S. Global, itself, is a pretty good play on international growth. It manages some of the best emerging-market funds, and natural-resources funds, in the business. As global growth fuels global investments – and it will – U.S. global will see more money pour into its funds, boosting the management fees it collects, as well as its profits and stock price.

India: One of India’s titans is Tata Motors Ltd. (TTM), which recently sealed both ends of the consumer automotive spectrum with its forthcoming $2,500 Nano and its recent $2.3 billion acquisition of the Jaguar and Land Rover brands.

Another is option could be the pharmaceutical company Dr. Reddy’s Laboratories Ltd. (RDY). As many U.S. pharmaceutical patents expire in the next five years, this major generic-drugs manufacturer can expect to benefit.

South Korea: Back in October 2007, Buffett took a 4% stake in this country’s Number One steelmaker, POSCO Ltd. (PKX). Studies have shown that following Buffett’s investment moves, even months after the fact can be the pathway to profits.

Brazil: Companhia Vale do Rio Doce, now referred to only as Vale (RIO), is an iron-ore company with ancillary operations in gold, nickel, copper and other metals. It’s one of the true global blue chips, with a market capitalization of almost $200 billion.

Another Brazilian firm worth a look is Petrobras (PBR). It’s one of the few emerging market oil companies with access to modern technology – and the willingness to work with the oil majors.

Source: Popular Stock Indicator Tells Investors to Hit the BRICs

Judging by the performance of outgoing President Vladimir Putin, Europe should beware: The so-called “links” he’s seeking may resemble those used to chain together prisoners in the Gulag.

On the other hand – though it’s admittedly unpleasant to say so – there’s a point at which the effects of high oil prices are so great that in the short run they far outweigh one’s distaste for the thuggish Russian regime. And at $123 a barrel, we may be at that point.

Politically, Russia has pretty much reverted to the pre-1991 Soviet system.

Today, just like then, there’s only one real party: The United Russia party, which controls 315 of the 450 seats in the Duma (essentially the lower house of parliament) and whose leader is one Vladimir Vladimirovich Putin. There is considerable censorship of the media, and dissident reporters and editors have a habit of disappearing – not that there are many left now. There is huge emphasis on military power, and on throwing Russia’s weight around in foreign policy.

What’s New About the “New” Russia

However, there are a couple of significant economic differences between today’s Russia and the pre-1991 Soviet Union. One key difference is economic: While the state still controls most of the property today, it doesn’t control all of it, as it did before 1991. Even so, foreign investment in strategic sectors of the Russian economy was effectively banned by a decree of May 5. For this purpose “strategic” covers not only the military sector and energy, but also more than half of Russia’s output.

So, if the afore-mentioned difference is one of substance, this next one is all about style. Prior to 1991, Politburo members were relatively impoverished and notorious for their baggy Soviet suits and lack of fashion sense; these days, the top brass – and especially Putin – are snappy dressers with a nice Italian wardrobe, and bank accounts to match.

Putin’s even viewed as a sex symbol: In a recent No. 1 single in Russia, a female pop star cooed that she needed a new boyfriend and that “Takogo kak Putin” (he must be like Putin), and not a useless wimp like her last beau!

If you analyze the economic impact of Putin’s regime since 2000, you’ll find the result has been huge economic growth – an annual average of nearly 10% since that time with growth of 8.1% in 2007. Now a certain percentage of that was due to the proverbial “dead-cat bounce” as the economy recovered from the debilitated state it had reached by 1998-99. An additional portion reflected the benefit of a Ronald Reaganesque tax reform passed in 2001, which produced a “flat tax” income-tax system with a rate of 13%.

That caused many conservative U.S. commentators to favor the Putin regime in its early years, despite the signs of human rights abuses. However, since the arrest and imprisonment of oil company tycoon Mikhail Khodorkovsky and the looting of his company Yukos, it has become obvious that the nominal rate of income tax doesn’t matter much when the state can – and does – seize anything it wants.

Since at least 2004, Russia’s economic growth has been driven almost entirely by high oil prices. At first, oil production increased along with prices, producing real economic progress. Since Putin’s partial seizure of Royal Dutch Shell PLC (RDS.A, RDS.B) concessions in 2006 and BP PLC (BP) earlier this year, it has become obvious that the Russian state will control all economic activity in the energy sector. As a result, output has now stopped increasing and in this year’s first quarter it actually declined slightly.

I wouldn’t want to be a wealthy entrepreneur in today’s Russia, no matter how many bodyguards I surrounded myself with. At the same time, however, there’s also no question that some of the benefits of economic growth have gone to the Russian people – something that was rarely, if ever, true under the old Soviet system.

Consumer spending rose 12% in 2006 and matched GDP growth of 8% in 2007. With a current account surplus of $74 billion in 2007, foreign exchange reserves of $470 billion and ever-escalating oil prices, Russia’s ruble has been strong, making imports super cheap. Given the lack of high quality goods in Russian stores before 1991, and the impoverishment of the country in the 1990s, this consumer boom is not surprising. But it does mean that there are finally investment opportunities in Russia outside the energy sector, in places where the Russian government’s heavy hand is less evident.

As long as global oil prices remain high, or continue increasing as they have in the past five years, Russian energy companies will make record profits and Russian consumers will enjoy a bonanza, producing profits in consumer sectors also. Once energy prices turn around, Russia is in trouble. However, there is no sign of that yet, and at least in the short term, there’s money to be made from the continued advance in energy prices.

Politically, it’s unclear how much of a difference Medvedev will make, since, after all, Putin will now serve as prime minister (one news report described Medvedev as the “puppet president” of Putin’s).

To be sure, as the former CEO of Gazprom OAO (OTC: OGZPY), Medvedev has at least a basic knowledge of how business works. And it’s likely that he’ll continue to follow Russia’s current “mixed economy” policy, meaning that “strategic” sectors will remain government playthings, while non-strategic sectors such as consumer goods are pretty much left to operate freely – and unharmed. Russia even intends to use its version of a “sovereign wealth fund” to go on a bit of a global buying spree, although it remains to be seen just how aggressive it will be.

Presumably, if Putin had wanted to restore full Soviet Communism he would have chosen someone else; that at least is a consolation.

Cashing in on Russian Capitalism

Does this leave any real plays for U.S. investors? It does, but you must keep in mind that this is a highly speculative market, and that you should be ready to sell if U.S. interest rates are increased. The reason: An upward increase in U.S. interest rates could cause a reversal in energy and commodity prices, which would have a major impact on the Russian economic advance. Here are a few Russian profit plays to consider:

• OAO Gazprom (OTC: OGZPY): This is one of the obvious Russian plays, the state-owned natural gas monopoly with ambitions to control Western Europe’s gas supplies. Since its ambitions don’t yet extend to the U.S. market, it is quoted only on the Pink Sheets. It has a Price/Earnings ratio of 12, based on trailing earnings, but gas prices and Gazprom’s dominance are both rising.
• Lukoil (OTC: LUKOY): The other obvious Russian heavyweight, Lukoil is the largest state-controlled oil company; again, the firm doesn’t care if you buy the stock, meaning it also is only available through the Pink Sheets. This one has a trailing P/E ratio of only 8, and that was based on 2007 earnings when oil prices for the year averaged $80. A good speculative play on a further run-up in oil prices.

Moving outside the oil sector, there are two mobile telephone companies you might look at:

• Vimpel-Communications (VIP): This company has 55 million subscribers and mobile operations in Russia, Kazakhstan, Ukraine, Uzbekistan, Tajikistan, Georgia and Armenia. Right now, it trades at 22 times trailing earnings, but only 13 times forward earnings. It does pay a dividend, but the yield is only 0.9%. I slightly prefer its collection of non-Russian operations to those of MBT (the Russian operator we’ll get to in a moment) – you especially want Kazakhstan, which is oil-rich.
• Mobile TeleSystems OJSC (MBT): This mobile operator has 73 million subscribers and operations in Russia, Ukraine, Uzbekistan and Turkmenistan. It is cheaper than Vimpelcom, trading at only 14 times trailing earnings and 12 times forward earnings, and it has a dividend yield of 2.5%.
• Finally, for a flyer on Russia’s consumer-oriented agribusiness, albeit an expensive one, you might look at Wimm-Bill-Dann Foods OJSC (WBD), which manufactures and sells branded dairy, juice, water and baby-foods products in the Russian market. The shares trade at a pricey 37 times trailing earnings, and the forward P/E of 21 isn’t much of an improvement. The dividend yield is tiny at 0.1%. However, earnings are racing forward as the Russian consumer market opens up to quality branded goods.

Don’t put your retirement savings in the Russian market – Vladimir Putin might get tempted! However, for a modest oil-related flutter, Russia is well worth a look.

Gazprom is moving to take control of BP’s Russian oil fields.

Gazprom, Russia’s government-owned energy company, already had plans to buy a stake in British Petroleum’s Kovykta gas field. And now, with rumors circulating that BP (BP: NYSE) is being bullied out of its Russian enterprise, Gazprom (OGZPY: Pink Sheets) could be planning to buy a majority stake in TNK-BP, the joint venture between BP and four Russian billionaires.

The Russian government in general, and Gazprom in particular, has a history of forcing foreign oil and gas companies out of local fields through corporate and legal harassment and tax hikes. The government hasn’t gone so far as to say, “leave Russia to the Russians,” publicly, but you can imagine the sentiment being passed between cabinet ministers and police chiefs as they rifle through TNK-BP’s Moscow offices (which they did a couple of weeks ago).

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Government officials accused a TNK-BP employee of industrial espionage to gain access to its corporate headquarters, and the company is currently under investigation for tax evasion and environmental violations. TNK-BP could very well be guilty of all three accusations, but so is every other corporation in Russia, where corruption runs rampant and bribery is sometimes the only way to receive legal approval.

BP owns 51% of its Russian joint venture, and TNK-BP contributes about a quarter to the company’s total yearly oil and natural gas production. Its stake is worth about $20 billion, as far as analysts can tell.

TNK-BP’s other owners, Russian billionaires Viktor Vekselberg, Len Blavatnik, Mikhail Fridman and German Khan, agreed not to sell their combined 50% stake in the company before 2008… No wonder Russia’s enforcement agencies just discovered an interest in TNK-BP’s legal dealings.

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Convincing the Russian owners to sell shouldn’t be very hard for Gazprom. The company wields a lot of government clout (or maybe at this point I should say the government wields a lot of Gazprom clout), and any billionaire worth his Solikamsk salt (look it up) knows that staying on the good side of the Kremlin is more profitable than any minority stake in a foreign oil venture.

All that’s left is for Gazprom to wrench away 1% of BP’s portion of the company to gain majority control — that’s if its willing to give BP nearly half the profits.

Gazprom’s eventual goal could be to force BP out of the country altogether. But with global oil supplies growing scarce and harder to extract, the world’s third largest energy company will fight tooth and nail (or possibly hammer and sickle) to keep its hands on a healthy supply of oil and natural gas, even if it is on the other team’s home turf.

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