What Russia is Doing Right

The Russian Central Bank continues to buy gold.  Just yesterday the news came out that Russia had added another 200,000 ounces in June, and that their total reserves have reached 22.8 million ounces.  They’ve been on a tear for the last several years, as you will see from the chart below.

RCB Gold Reserve Growth 2007 - July 2010

This is an obvious trend, and the amounts are large.  Russia is obviously convinced, which should be obvious from their constant rumblings about the dollar, that they need to insulate themselves from the inevitable revaluation of the Greenback.  One can hardly blame them right?  After all, even American, Canadian and European citizens are buying as much gold and silver as their respective mints can pump out.

The Russians are doing a lot of things right these days.  You may remember that back in 2001, Russian President Vladimir Putin, the former head of the KGB, implemented a 13% flat tax and a 20% corporate tax rate.  The votes are split as to whether or not the flat tax has been a success, but it was definitely a move that demonstrated the country was serious about growth.

Putin laid the vital macroeconomic groundwork.  On top of the flat tax and reduction in corporate taxes, he also reduced capital gains taxes to encourage capitalism.  Contrary to what the Americans and Europeans believe about the logic of lowering taxes, this actually had the effect of increasing the Russian government’s revenues to all-time highs. Because of these free-market style reforms, Moscow was able to eliminate debt, build up the third-largest foreign currency and gold reserves in the world (China and Japan are number 1 and 2), and stash a bit of dough on the side, ‘just in case’.

Putin’s policies benefitted the country, businesses AND the little guy.  Moscow’s new policies had a measurable impact on Russia’s poverty levels, reducing it from a whopping 41.5% in 1999 to ‘only’ 12.1% in 2005.  Clearly lower taxation has a measurable effect, even on the poor.

So what about Mr. Medvedev, Russia’s current president?  Well, in June he traveled to the U.S. to meet with technology executives from the likes of Apple, Google and Cisco; stalwarts of the global technology industry.  Just the month before, he presented at the St. Petersburg Economic Forum, where he discussed a ‘Reagan-esque’ proposal to eliminate capital gains taxes beginning in 2011 on long-term investments.  Doesn’t sound like the Russia of old, does it?  In fact, Medvedev is encouraging free-market capitalism and entrepreneurship by breaking down the barriers that prevent money from flowing to enterprise.   Kind of sounds like the exact opposite of Western and European governments huh?

To assist him in this feat he is turning to the Moscow School of Management, located outside of Moscow.  It’s a new graduate institution that is dedicated to training Russia’s best and brightest up-and-coming business leaders to tackle emerging markets.  It’s located in the city of Skolkovo, but its other name is Innograd, which can be translated into innovation city.  It’s not just an educational institution; it’s more like a shiny, state-of-the-art beacon of free-market ideas and reforms.

But, will it be enough?  We don’t know, and frankly we don’t really think it matters to foreigners looking to invest in Russia.  Russia is still a dangerous place for your capital, unless it’s strictly money you can afford to lose.  These reforms are great for everyday Russians looking for better opportunities and less burdensome domestic regulation, no doubt.  But the Russia we know can be a cruel master, adept at separating the unwary from their capital quickly and efficiently.

Live Like You Mean It,

Mark Wallace


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