A little more than a year ago, in July 1997, the Templeton Russia Fund had zoomed to 53 from 22 where I had recommended it (and 13 or so, where I had previously recommended it), and now a reader wanted to know what to do. My advice was not terribleyou can read it for yourself – but neither was it remotely on target.

TRF briefly jumped to 64-3/4, then collapsed to back into the high 20s, to a more rational level when things seemed reasonably hopeful in Russia. Now that they don’t, it has collapsed into the high single-digits.

Writes my wise, modest friend Gennady:

“It is a bloody mess here. I won’t bother you with the economics since you probably know that already. The issue lies with the fact that it is suddenly dawning on everyone that a) nobody cares, b) nobody is in charge and c) everyone is corrupt. People are less and less inclined to pay the little taxes they have been paying. Fewer and fewer organisations expect to survive the storm. The veins of the country are clogged. You cannot transfer money between banks since there is no assurance of your instructions being executed and you not losing the money. Cash is king again. The Duma appears to be ready to confront the president all the way and it is probably better for the country if they do. The new/old prime minister [Chernomyrdin] appears a downright idiot on TV when he blames the 5-month long reign of the Kirienko government for all the current ills.

“Western press compares what is happening in Russia to Brazil and Mexico of old and Asia of new. I think the real danger is that they do not understand Russia. It is nothing like Brazil or Thailand. When I was growing up there was no third-world poverty in Russia. Medicine and education were available. Russians will not go into the conditions many developing countries send their people into. Thus, when the government turns on the ruble presses (to pay wages and the bank deposits they guarantee so vociferously) and the hyperinflation hits, I am not quite sure if social unrest is out of the question. Today’s situation does somewhat mirror 1917: a weak executive branch confronts a disorganized legislative branch.

“The financial markets are dead, probably for a while. My friends at Credit Suisse First Boston [the leading investment bank working in Russia] say that there is nothing for them to do in Russia short-term, probably something to do long-term. What they cannot yet tell is if there are any medium-term prospects. The next few weeks will be quite telling. Will Yeltsin be forced to resign? Quite a possibility. Is he willing to confront Duma all the way? In his debilitated state not very likely. Will [Moscow] mayor Luzhkov become the next prime minister (and eventual president)? Possible. Will he then install his head of sanitation services in charge of defense and head of parks and recreation as economics minister. Undoubtedly.

“There is an old Chinese curse: may you live in interesting times. I will keep you informed.”

A.T.: I must say I’m less excited by TRF at 9 today than I was at 15 when it was first offered (or 13, when it first dipped). The problems are so big, and the initial wave of hope and fresh energy that might have become self-propelling seems to have given way to disillusionment. That said, Russia may yet hang together. It has enormous natural resources and a well-educated people. If they could ever get their act together, the appreciation in investments there would be enormous. And the biggest gains will come to those who took the bet when few others would. So for very patient, very speculative chips – and just a few! – Russia is a place to consider. By the time things begin to look up (a time which may not come, or at least not before all current property ownership is wiped out), some of the early gains would already be gone.

The more important question, of course, is not whether we can make a few bucks betting on or against Russia. It’s how these 147 million people can get back on a just and prosperous track – important not just for them, but for the security and prosperity of the rest of the world as well.

If things get bad enough, maybe they’ll enact a low, simple, collectible tax and persuade people, via carrots (patriotism) and sticks (have you ever seen a Russian prison?) to pay them. And no, it doesn’t have to be a flat tax. It would not be complex to have the Russian billionaires pay at a higher rate than the coal miners.

If things get bad enough, maybe they’ll enact some laws for property ownership and enforce them.

If things get bad enough, maybe the Russian robber barons – seeing their fortunes and their country threatened – will, Joe-Kennedyesque, rise to the level of statesmen instead.

But maybe they won’t.



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