Back in 2001, 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.

Such was the case until the global financial crisis happened. Now, Russia is falling out of investor sunlight and into the pits of recession.

Russia’s Economic Development Minister Elvira Nabiullina projects a 2.2% gross domestic product (GDP) decline for 2009, according to EurasiaNet. But the current global financial crisis is making previous estimates look foolish and impossibly rosy (U.S. GDP was originally estimated to fall 3.2% for the fourth quarter. In reality, GDP plunged 6.2%).

The culprits: A falling ruble, plummeting oil prices, war with Georgia and a gas-export dispute with the Ukraine.

Russia’s economy is heavily reliant on its oil reserves, making the effects of falling oil prices easy to measure. But the silent killer of the Russian economy has yet to be full measured – the money spent in a thus-far vain attempt to prop up its falling ruble.

The ruble recently fell to a level not seen since 1998, a scary statistic because that was the year Russia experienced a nationwide banking crisis – and it was also a period during which world markets were being roiled by the Asian Financial Crisis, also known as the “Asian contagion.”

In an effort to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold more than a quarter of the country’s gold and foreign-currency reserves. Russia’s reserves, the world’s third-largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

That has some economists calling for a “free-float” – or a big devaluation – to avoid depleting all of the reserves.

The tactic, and the accompanying effect on investors, is nearly identical to that of 1998, when the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt. Investors are fleeing Russia because the government is tapping its reserves to defend the ruble, further eroding investor confidence and undermining the currency.

Brazil, India and China are currently faring far better than Russia currently, but are still dealing with their own unique struggles. That has led analysts to question the viability of the BRIC acronym.

Milton Ezrati, a senior economist and market strategist at Lord Abbett & Co. LLC, recently published a report titled, “Broken BRIC,” in which he questions the notion of lumping those economies together – especially in view of their wealth of differences.

“We, at Lord Abbett, were always skeptical of BRIC,” Ezrati said in an interview with MarketWatch.com, noting that investors should diversify beyond emerging markets. “The whole concept behind the BRIC, that these four countries were leaders, is no longer the case today.”

Ezrati no doubt has his share of dissenters, who can quickly point out that while the stock markets of China, India and Brazil are taking their lumps, they are the only major economies in the world with positive GDP growth.

Effect on Local Elections

Looking at Russia’s recent local election results, the country’s decline into the financial red is having little effect on the popularity of United Russia, the party of former President and current Prime Minister Vladimir Putin.

Elections were held yesterday and preliminary results show United Russia racking up commanding leads in local elections around the country, The Associated Press reported. Of course, allegations of election violations abound.

But the bottom line is that those in power are keeping it. Doing so engraves their names next to the economy’s decline; but it also gives them a chance to take credit for recovery if their policies work.

Source: Russia’s Economic Demise Could Turn “BRIC” to “BIC”

What ever happened to safe-haven currencies?

You know what I mean, the much-touted coin of the realm in other, smarter, more mature countries. “Hard currencies.” Issued by countries who’d outrun, outplay, outlast the spendthrift United States…

…and “decouple” from the Demise of the Dollar.

Don’t you think it’s quite amazing how poorly those safe havens did when it really counted? The euro, the Aussie, kiwi, loonie dollars (as the cool guys in the currency forecasting racket call them). How about the pound sterling? The Russian ruble? The Icelandic krona?

You might as well have put your money in Bill Miller’s Legg Mason Value Trust.

Could it be that there’s been a mistaking of cause for effect?

China’s rise from rice paddies to riches was so dazzling, its demand for commodities propelled the economies of the supplier economies to new heights. They developed beautiful trade balances by shipping coal to Nanking, gold to Guangzhou, and copper to Chongqing. Budget surpluses even. While at the same time, the U.S. dollar was allowed to do what American manufacturers and exporters wanted it to do: Keep U.S. exports cheap and expanding despite the cut-throat competion from the Far East.

But the main factor behind Chinese expansion was not the conversion from Mao to Tao… but the insatiable demand for consumer goods from the richest economy on earth. A demand so huge that it compensated for the demographic and economic short-comings of most other economies as well.

That fact was recognized by most national financial institutions who figured out that by lending money to America, they’d buy demand for their products.

Somehow, this dynamic must have escaped the dollar demisers. Who didn’t quite think through what effect the decline in American consumption would have on the global economies whose economies, markets, and currencies depended on it.

Those who followed the directive of the doomsday sayers may well say they saw the crisis coming. But given the losses in most “safe havens”, the practical result of their prudence was the equivalent of switching ocean liner tickets from the Titanic to the Lusitania—minus the 3-year delay in between sinkings.

They’re still at it, though. Massive U.S. budget deficits are going to wreck the dollar, they proclaim. Could be. Especially if these deficits were to occur in a world where all other countries had positive balances.

But most other economies are worse off the the United States. (Ironically, one of the few currencies rising in value right now is issued by a country who has never paid much heed to debt levels.) And currencies are by nature reflections of relative value at any given time.

A relatively higher dollar allows Americans to buy more consumer goods… which may give export-dependent countries a chance for survival. It’s simple self-preservation.

Look for the euro to decline to $1.25 by next week.

Source: What ever happened to Alicia Silverstone?

Right now, the lowering strategy is winning, and the lower U.S. dollar interest rate means that investors are likely to park their investments and savings in other currencies that pay higher returns. This reduces demand for dollars and means the dollar may fall even more against other currencies.

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This creates the perfect Multi Currency Sandwich position…an investment strategy that borrows a potentially weak currency at a low interest rate and invests the loan in a potentially strong currency at a higher rate of return.

The troubles of the U.S. dollar are so serious right now that one opportunity–unimaginable in the 1980s and 90s–is to borrow U.S. dollars to invest in Russian rubles!

Russian political stability looks strong with the new president Dmitry Medvedev assuming office. But Russia is facing many economic challenges, especially inflation. One way the Russian central bank will likely solve this is a revaluation of the ruble. This creates the potential for significant gain due to the interest rate differential between the ruble and the dollar…in other words, a “positive carry.”

My banker at Jyske Bank just offered a Bank of Moscow bond issue that matures in 2009. The bond has a coupon of 7.25%, but sells at a slight discount so the yield is 7.35% per annum. Because of falling interest rates in the U.S., Jyske Bank will lend you dollars for 4.5%. This means you make 2.85% positive carry by using Bank of Moscow bonds to borrow dollars.

For example, say that you invest $100,000 in the Bank of Moscow bond mentioned above. You earn $7,350 a year interest. If you use that $100,000 bond as collateral and borrow $200,000, your cost for the loan at 4.5% per annum is $9,000 a year.

You use the borrowed $200,000 to buy Bank of Moscow bonds, increasing your yearly interest income to $14,700, or $5,700 more than the interest cost of your dollar loan.

Now your total return on the $100,000 you originally invested is $13,050. Your Multi Currency sandwich has nearly doubled the return on your investment. Plus, since your Bank of Moscow bond is actually bought with and denominated in rubles, you stand to gain on any appreciation of the Russian currency as well. If the ruble appreciates 10%, your Forex gain would be $30,000…a nice bonus.

Fundamental fiscal conditions in the U.S. suggest that the greenback will remain weak. Economic conditions point toward continued low dollar interest rates. However, there is always a risk of reversal of rising interest rates and a stronger dollar versus the currency you invest in. I suggest using this technique only for mid- to long-range investment timeframes…five or more years. And never leverage more than you can afford to lose.

Gary Scott
For International Living

Editor’s Note: Gary has been dealing with bonds and currencies for almost 40 years. He never worries about the value of the dollar, or the recession as there are always currencies…and companies…that can weather the storm…even prosper…over the long term. To see how you can do this, too, read this special report.

Source: Safe Bonds with 7.35% Yield