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Russia’s financial sector has not been spared by the financial crisis that ravaged stock markets globally. But, if the Russian economy demonstrates resilience in its biggest test since 1998, and if the government offers proper policy responses, on which they have made a good start by reducing the export oil tax and opening the Central Bank window, it would go a long way toward securing the country’s long-term economic development and investment appeal. I just spent 10 days meeting with Russian business and Government leaders and was mightily impressed by the policy moves being implemented to deal with the current world wide crisis.

Russia’s economy will take a pause, but my judgment is that the recovery will be swift.

Let’s begin with some observations:

• As of the end of October the country’s benchmark RTS index has fallen over 75 percent year-to-date; it fell 36 percent in September alone, making it one the worst performers globally. The global macro issues – the liquidity crunch and falling commodity prices – as well as increased concern about Russia’s risks – were the fundamental reasons for the sell-off. The apparently indiscriminate liquidation by funds and leveraged investors added fuel to the fire. While the worldwide flight to the dollar is causing the Ruble to depreciate after years of appreciation against the dollar, the reserves of the Central Bank of Russia are the third highest world-wide and ensure that the Ruble depreciation can be managed within a band and should not be severe. Russian exporters, of course, are delighted.

• At the beginning of the calendar year, Russia’s aggregate P/E was 12x. Today it is approximately 4x. Russia now trades at a significant discount to the other BRIC countries: Brazil, China and India. Clearly, valuations in Russia look to me to be very cheap, and we are seeing the best macroeconomic fundamentals in years.

• Real GDP growth currently is running at 8% in 2008 and retail, measured in terms of PCE, is growing at 20%. The 2009 forecast calls for growth in the 3-5% percent range, but growth nonetheless at a rate that would thrill most countries, including the U.S.

• 85 million Russians qualify as middle class, comprising the largest middle class in Europe. Over the last ten years, Russia’s middle class is moving up from 25% of the population and its sagging demographics are being aided by a baby boomlet in the making.

• There are no sub-prime mortgages in Russia and, in fact, there are few household mortgages of any kind. The consumers, the companies and the country are each under-leveraged!

• Although earnings forecast have been revised downwards due to expected reduced growth in the Russian economy, Russian companies are still projected to enjoy robust earnings in 2009, especially in comparison to what is happening elsewhere in emerging economies.

• Central Bank reserves approach $600 billion, the: third highest after Japan and China. The Government’s budget surplus should continue even if oil falls below $50.

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