Notes From Underground: From Russia WITHOUT Love–Mikhail Khodorkovsky

A few stories from Russia today. First, the Russian Judicial System rendered a totalitarian decision as the oligarch Khodorkovsky was again found guilty of some type of misappropriation of funds when he controlled YUKOS, the Russian energy giant. This is another black eye for the RULE OF LAW in Russia as the verdict appeared to be predetermined with the heavy influence of Prime Minister Putin. I don’t doubt for a moment the tragic shortage of justice in Russia, but the question is: Do the markets truly care, or as I continually remind, is MONEY FASCIST? Global investors will set aside criticism of a nation’s societal and legal injustices if the investment returns are high enough and the government is stable.

The greatest criticism that arises from our positive outlook for Russia is that it’s a very corrupt country bereft of the rule of law and, therefore, a dangerous place to do business and invest. I don’t condone what takes place in Russia but I wonder where’s the criticism when it comes to corruption in the other BRICs and emerging nations.

The development of CAPITALISM is never a pleasant experience, except in the pure-market theory of the ivory tower. Did America and England not suffer gross injustices as the newly empowered sought to carve out a society in which they legislated themselves every advantage? Are we so devoid of historical depth that the ROBBER BARONS NEVER EXISTED or THAT TEDDY WAS SET UPON TRUST BUSTING?

As history teaches again and again, societal and economic dislocation is a very difficult process. Lest we forget, the Russian story is merely 20 years in the making. It doesn’t justify KHODORKOVSKY but it puts it in perspective. Further, the RUSSIAN OLIGARCHS themselves are not beyond taint as the collapse of the SOVIET UNION allowed those in positions of authority to hijack the state-owned means of production.

The economic news from Russia was positive today as the manufacturing growth accelerated at the highest level since 2008. GDP growth in 2010 has measured 3.8 percent compared to a 7.9 percent contraction in 2009.

Adding another positive note was an announcement from GE that it was partnering with two Russian companies to form a joint venture in healthcare and power generation. This is the third major investment by global firms in Russia within the last month and it makes the case for why I have argued in my favorable outlook for Russia. On a relative basis its assets are cheap. Yes, Moscow may be an expensive city but the business base is cheap relative to other emerging markets, as well as having a highly educated populace. Russia has been unloved as its warts have been very visible but for the right price love may find a way.

A quick hitter out of Switzerland. Swiss Central Bank President Philipp Hildebrand said the bank  “… may prove powerless to stop the FRANC from extending a record rally that he calls a ‘burden’.” The failure of the Swiss currency intervention has left the SNB with a purported loss of 8.46 billion FRANCS. A BLOOMBERG story stated that last year the SNB had a profit of 6.89 billion francs so it has been a significant swing. More importantly, it has been the worry of the impact of the strong Swiss franc on exports.

The Swiss has been the repository of safety from the uncertainty of the PIIGS as European investors choose the solid performance and history of Swiss banking over the capriciousness of the ECB and ECOFIN. Thomas Jordan, SNB VICE CHAIRMAN, said further intervention was unnecessary as long as deflation wasn’t a threat.

As a long-time trader of the Swiss currency and somewhat knowledgable about Swiss banking practices, I would caution that the Swiss may still have a trick or two left. In the late 70s and early 80s, the SNB instituted a negative interest rate on foreign bank deposits. If my memory is correct, it was a negative rate of 2 percent. Imagine if the SNB announced a negative deposit rate of 5 percent or more … HMMMMMMMM.

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