Russians are becoming happier about holding rubles and less enthusiastic about owning dollars, Russia’s St. Petersburg Times reports.

A poll conducted by the Public Opinion Foundation of 1,500 citizens in 100 cities showed that 63% trust the ruble more than the dollar or the euro. It also found that the “dollar in Russia has lost significantly more in prestige than in real exchange value.” A similar survey taken in 2002 found that 37% of Russians preferred the ruble to the dollar or the euro.

The manager of an eponymous company investing in so-called hard currencies, Axel Merk, corroborates this turnabout. “Russians are not afraid of holding rubles anymore,” he said. “Ten years ago they were taking rubles out of the country as fast as they could and converting them into anything available. Now, with the rise in commodities prices, they are convinced the ruble will have its place in the world.”

This about-face is a little unsettling. Anyone who has visited Russia in recent years can remember the eagerness with which street vendors and waiters grabbed greenbacks, though prices are quoted in rubles.

It is true that the ruble, which today is worth 3.77 cents, and five years ago stood at about 3.25 cents, has shown relative strength. It’s easy to understand why. The Russian government is so pumped up by its large oil revenue windfall that it has blinded its citizenry to the dreadful things going on inside its government and its economy. (The Bush administration should consider hiring some of the spinmeisters in President Putin’s entourage — America has a great economic story to tell but no one capable of telling it.)

Some measure of Russia’s state of affairs can be gleaned from the recently released Heritage Foundation’s 2007 Index of Economic Freedom. This report, now in its 13th year, tracks policies across the globe concerning investment, trade, labor, property rights, and other issues that define an economy. The findings demonstrate a convincing relationship between economic freedom and measures of prosperity such as per capita GDP. They also show an inverse relationship between its ratings and the availability of jobs and price stability. That is, the lower the economic freedom score, the higher the inflation and unemployment levels.

It may come as no surprise that Russia does not fare too well in the foundation’s rankings. It comes in at no. 120 out of 157 nations, below Ivory Coast, Pakistan, and Mongolia, and just behind China. America, for those keeping score, comes in fourth, behind Hong Kong, Singapore, and Australia.

Russia scores particularly poorly on monetary, investment, and financial freedom, as well as property rights issues and freedom from corruption. High inflation rates — 12.3% between 2003 and 2005 — and a high degree of government interference in manipulating prices, combined with convoluted restrictions on foreign investment and currency flows, damage Russia’s scores.

The most punishing assessment, though, comes from Transparency International’s Corruption Perceptions Index for 2006, which ranks Russia 127th out of 163 countries. On that measure, it scores the same or worse than, for instance, Libya, Uganda, and Nicaragua.

This does not mean Russia is not growing, or that the country’s financial situation is dire. Far from it. Russia’s real GDP growth rate for the past four years has topped 6%, and its 2006 balance of payments figures show a net estimated surplus of $108 billion. However, fully 63% of exports are made up of oil, fuel, and gas. Rising oil prices have proved a major windfall.

Predicting oil prices is about as tricky as picking up spilt jello, but it seems unlikely that the boost to Russia’s economy from energy price increases will continue at recent rates. Russian leaders will have to engineer a diversification of the economy, which will likely mean encouraging foreign firms to invest in the country. The pervasive culture of corruption will hamper such a program.

Instances of criminal activity are well documented and involve Russian leaders at all levels. According to a two-year study by the INDEM think tank, Russians pay out more than $300 billion a year in bribes and unofficial fees, about equivalent to 20% of GDP. Based on figures from an earlier study, the report showed that bribes had multiplied tenfold over a four-year period. In other words, corruption is not only one of Russia’s leading industries, it is also one of its fastest-growing.

A ramping up of foreign investment will also require some assurance of an ample and ready workforce in Russia, another challenge. The demographics of the country are sobering. The fertility rate has dropped steadily — to 1.4 children per two adults in 2005 from 1.9 in 1990 and 2.0 in 1970 — one of the lowest in the world. Average life expectancy figures are also grim, dropping to 65 years in 2005 from 70 in 1970. For males, the figure is even lower. Repeated attempts to encourage citizens to have more babies have been ineffective.

As a consequence, the population is shrinking. It stands at approximately 143 million today, and is forecast by some to drop to less than 100 million by 2050.

So those holding rubles may not be seeing the big picture. While currency values in the short run are influenced by trade figures and the ups and downs of interest rates, long-term moves will depend on the solidity of the economy and the country.

Consider, after all, the Swiss franc, which has long been the currency of choice for those expecting financial chaos. What does Switzerland have to offer other than stability? It is a country with limited resources and low growth, but with a deep history of free enterprise. It is ranked no. 9 in the Heritage Foundation index.

In 2008 Mr. Putin is required by the Russian constitution to step aside. The transfer of authority will be interesting to watch, and will undoubtedly signal whether Russia’s embrace of democratic principles is temporary or profound. As the drama unfolds, holding rubles could be a chancy investment.

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