America “Descending into Marxism”

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What a bizarre world we live in. Here at the Q Wealth Report we work hard to explain the world in a way that our readers can understand. But so many things are full of truth, lies, and irony all mixed up together that they defy logical analysis. Nevertheless we are going to try…

Russia’s Pravda, formerly the official organ of the Soviet Communist party, published a blistering attack on the United States last week. That would not seem so strange, except that the post-Communist periodical accused America of “descending into Marxism.”

One of the comments, for example, was that “the population was dumbed-down through a politicized and substandard education system based on pop culture.”

How very true. It was in the pages of our newsletter last year that Dr Richard Cawte warned against the dangers of television. In the constant race to produce more and more “content” for TV and internet, the quality has gone downhill so much. I even watched the BBC World News Channel the other day and the team was clearly half asleep. Fair enough since it was 4 a.m. in London. The point being do we really need people sitting there at 4am talking when they have nothing useful to talk about?

The writer of the Pravda article, it must be said, appears to be a victim of the propoganda machine himself. As we say in England, “the pot is calling the kettle black.” No doubt the communists who founded Pravda would be shocked at how much it has been dumbed down. I just took a look at their lead headline stories such as “Money Stuffed in Bra Saves Brazilian Woman’s Life” and “Men Become Impotent Because of Women’s Bare Legs.”

Nonetheless, some of his points are interesting and relevant. I particularly liked this one:

These past two weeks have been the most breath taking of all. First came the announcement of a planned redesign of the American Byzantine tax system, by the very thieves who used it to bankroll their thefts, loses and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more then ordinary street thugs, in comparison. Yes, the Americans have beat our own thieves in the shear volumes. Should we congratulate them?

Certainly food for thought I would say.

Our attention was drawn to the said Pravda article by our friends over at MoneyMorning, who have recently been writing a lot of good stuff about the Russian economy. For example, contributing editor Martin Hutchinson sent over the following comments for our readers about why NOT to invest in Russia

A country that was wealthy when oil was $140 per barrel became deeply impoverished when oil prices dropped all the way down to the $30 range. Those of us who had been alarmed by Russia’s increasing geopolitical and economic assertiveness indulged in a little schadenfreude, feeling that it couldn’t happen to a nicer bunch of guys.

Now, the table has turned again. At $68.87 a barrel, the price of oil is far higher than the price assumptions on which the majority of Russia’s oilfield-investment calculations were based.

Russia has effectively seized the assets of the British oil company BP PLC (NYSE ADR: BP).  Last week BP accepted the very unpleasant Mikhail Fridman as chairman of its joint venture TNK-BP, a sign that its attempt to control the investment into which it had put the majority of the capital was ended. In the long run, the forced expropriation of foreign investors will prevent the Russian oil sector from remaining truly competitive. But in the short run, the expropriated foreigners have found so much oil there that huge revenues are assured for at least a decade, provided the oil price remains reasonably high.

In other sectors, too, the free cash for those with political connections allows deals to be done. Opel, for example, General Motors Corp.’s (OTC: GMGMQ) European subsidiary, was sold not to the Italian company which had a strategic plan for it, nor to the Chinese company that could use it to enter the European market, but to Magma Group, a Canadian parts company controlled by Russian interests, with financing from the Russian state-controlled bank Sberbank Rossii OAO.

The result may not make much sense operationally, but it is another example of Russian interests controlling major strategic assets in Europe. Needless to say, the various gas and oil joint ventures undertaken by Gazprom OAO (OTC ADR: OGZPY) in Eastern Europe, the Mediterranean and North Africa are also extensions of Russian power.

The fact that Russia’s MICEX stock index is up 100% since early January (albeit still 40% below its December 2007 high) is not very relevant to the people who run Russia.

They appear to have two objectives: Using the capitalist system to make themselves and their colleagues very rich and projecting Russia’s power on the world stage – just as the former Soviet Union used to do.

To Prime Minister Putin, capitalism is an attractive discovery, because it works economically much better than Communism did, and thus allows Russia to regain more of its former power than would have been possible under the Soviet system.

In this sense, Putin and current Russian President Dmitri Medvedev have finally achieved the original goals of Mikhail Gorbachev’s reforms in the 1980s; the objective of those was certainly not to bring down the Soviet government or upset the system, but simply to get the economy working more efficiently towards the leadership’s objective of greater Soviet power. Minus the other ex-Soviet Republics, Russia has now achieved this objective – and it may not stay minus the other Republics for very long, if Russia’s rulers have their way.

Given the way the system is rigged against the outsider, Russia is not a particularly attractive place to invest. Clearly, there may from time to time be a good short-term bet that Russia’s rulers will overcome current difficulties. However, the world contains other good managers besides Putin, and some of those others have a genuine interest in shareholder value and determination to create more of it.

By all means, look for Russian companies in consumer sectors that are outside the grip of the oligarchs – but do not expect to do too well, because you may find your company has a new and very expensive sleeping partner. Probably the best vehicle is the Market Vectors Russia ETF (NYSE: RSX), which benefits from Russia’s still-low Price/Earnings Ratio of 7.2.

But remember this: Russia isn’t a great global growth market like China, India or Brazil. And without major changes, it never will be.

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