“I hope the Russians love their children too …” – Sting, “Russians,” 1985
Growing up during the Cold War era the 1970s and 1980s, lots of popular music featured the superpower conflict between the US and the Soviet Union: “Two Tribes” (Frankie Goes to Hollywood), “It’s a Mistake” (Men at Work), “Land of Confusion” (Genesis, known for their great claymation video on MTV), and I’m sure many others.
I thought the people there were all 10 feet tall, mean and hated Americans. Then I had the opportunity to travel there in 1989. Gorbachev was in power, near the end of the Communist era. It was a fascinating and eye-opening trip. At that time, you could only go on an organized, supervised tour, so I joined a group of 20 or 30 students from the US, Australia and Canada, and off we went.
To my surprise, I found that the people are very nice and generous, despite their sometimes gruff exterior and their language, which to me always sounds like they’re mad.
One of the other students from the US, I’ll call him “Bob,” spoke fluent, colloquial Russian. He would walk around talking to Russian citizens and writing down any slang in a little notebook he carried with him to improve has command of the language. As I look back, I am convinced he is some sort of CIA operative today. Through Bob, we were able to communicate with lots of people on the street. I often had him ask people who their favorite Soviet leader was. Interestingly, the most popular response was Brezhnev. Although he is viewed in the west as ineffective and leading an era of economic stagnation, many of the people we spoke with liked him because there wasn’t a lot of change during the 18 years of his leadership. They liked the stability he provided.
We all want something better for our children than we had. In order to do that, you need to have a healthy economy, currency and financial markets. Let’s talk for a minute purchasing power and the price of currency instability.
For many years, the official exchange rate was $1.60 for 1 Soviet Ruble. At the time I arrived in summer of 1989, there was a widespread black market to trade US dollars for Rubles that began as soon as you walked out the airport door. The black-market rate was 10 Rubles per dollar, a huge difference from the official rate. You had to be careful because you technically needed to document any exchanges of currency and present a form showing the accounting when you left the country. Also there was a Yugoslavian currency that looked very similar to the Soviet Ruble, but was essentially worthless, so you could lose all of your investment if you didn’t know what your Soviet leaders looked like. We exchanged some Rubles in Red Square out in front of Lenin’s tomb (kind of ironic), and that’s how me met Andrei. He was a black-market trader in his early 20’s, and became our unofficial tour guide for our few days in Moscow.
The Ruble was further divided into 100 Kopeks; the smaller 1 Kopek coins were in short supply and needed to operate pay phones. These coins were so worthless that people would just leave them on top of the phones, it was like the “take a penny, leave a penny” dishes you see here at gas stations. You could use dollars or packs of cigarettes to pay for stuff like taxis; dollars were widely accepted and preferred even though it was illegal for Soviet citizens to hold them.
Let’s say you had $10,000 US in 1989. Assuming annual inflation was 3%, the purchasing power of that $10,000 would be about $3,770 today. (Note: if you invested your $10,000 in the S & P 500, it would be worth about $93,000 today after inflation, but that is a story for another time). [Disclaimer: you cannot directly invest in an index, this is before fees and taxes, assumes 10% annual return on the S & P 500 and 3% inflation, which is about right but shown here for illustrative purposes only].
Now let’s take a look at what happened with the Ruble:
Say you walked out of the Moscow airport back in 1989 and exchanged your $10,000 for Rubles (an extreme example, but let’s just do a little math and see what happens). You get 100,000 Soviet Rubles (currency code SUR). Sounds good, right? Not so fast. In 1993 the Soviet Ruble was converted to the Russian Ruble (RUR) 1:1. Then, in 1998, the Ruble is devalued 1000 to 1. So you have 100 new Rubles. These are the very same Rubles that trade today, and recently that currency hit an all-time low of about 86 Rubles to the dollar due to the invasion of Ukraine. Your 100 Rubles (that you paid $10,000 for back in 1989) are now worth about $1.16 today. But wait, that’s before inflation. At 3% annual inflation, your purchasing power is about $0.44 today. Now how on Earth is that going to provide a better future for your children? Imagine if you are a Russian citizen, and what it would cost you for anything that is imported given such a weak currency. Yikes, I feel sorry for them.
The Russians do love their children too, and want a better future for them. They are people just like us, unfortunately swept up by bad leadership. On 2/24/22, there were anti-war protests in several Russian cities, with over 1000 people detained. You would not have that in the 1980s. With the international community almost unanimously united against the invasion, it is our hope that the invasion and the resulting loss of life does not continue for long. Russia further isolating itself from the west will not help improve their already troubled economy, on the contrary it will make things worse. Hopefully the people and their leaders come to see this as well.
Bill Hansen, CFA
President & Chief Investment Officer
The views expressed are those of the author as of the date noted. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results.
