An Eye On Russia

Greetings!

You may have caught wind in my classes a bias against trading with Russia
born of exprience and reputation: first, it has been the case since I began
trading with the Chinese in the 70's that to trade via Hong Kong was always
better than trading directly with the mainland Chinese. When Russia opened
up, I assumed it would be the same, and time bore that bias out. Now my
sense is things are changing fast.

After debacle of 1997 in Russia, and the ouster of the last President,
Yeltsin, the new president Putin has been making some moves that free traders
would spot as very encouraging indeed.

1. Russia has a gold coin currency, the chervonets, that runs simultaneously
with their paper currency, the ruble. Nothing assures a stable currency and
sound govt financing than a gold standard, and an alternative to paper
currency, as Russia now has, is a huge step forward. The coin is tax-exempt,
clearly signalling the Russians mean business with this coin, in the most
literal sense of the word.

When you deposit any savings in a bank in USA, a complex leveraging begins in
which your savings is used to create more "wealth" out of thin air to lend to
others. To put it mildly, some say this has gotten out of hand, with too
much wealth assumed, and malinvestment following miscalculation.

If in Russia you turn your savings over to a bank and get a gold coin in
return you got a perfect bullet to keep the government from inflating away
your value, or wrecking your savings. It many ways it is a small thing, but
it has a profound impact.

2. According to the Economist magazine, a new tax code aims to rationalise
the tax system, reducing the number of taxes and the corporate tax burden.
Changes to the tax regime, which came into effect in January 2001, include
the introduction of a flat rate of personal income tax of 13%, reduction of
the value-added tax (VAT) burden and simplification of the administration of
social security contributions. The corporate tax rate is to be lowered from
35% to 24% at the start of 2002.

Folks, Hong Kong has done exceptionally well with a similar tax regime... and
since tax burden is often the difference between one country's products being
competitive, or not, Russia is clearly planning to compete relatively freely.

3. And this may be off the wall, but In an interview published today by the
Polish newspaper Gazeta Wyborcza, Putin said, "There is no problem in
relations between

Russia and the Vatican. I am willing to invite the Pope at any time." Putin
said that John Paul II "wishes this visit to be an important event, which
means renewing full relations with the Russian Orthodox Church. This,
unfortunately, does not depend on me."

So what? So the Russian government has grown up to the point it does not
feel threatened by "outside influences." This too is a profound shift.

I might add one more thing: Russia has "Islam problems" far more pressing
than any USA faces. To have the USA in Afghanistan sure takes the heat off
the Russians, by giving Islamic radicals something tangible to organize
against. USA suckered Russia into invading Afghanistan in the '80's, and
turnaround is fair play. We may be seeing a country that has become far more
subtle, wise and mature than we suppose.

John

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