China used the 2008 Summer Olympics as a catalyst for infrastructure development that would benefit the country in the long term. Now Russia is giving itself a makeover before it plays host to the 2014 Winter Olympic Games.

The host city of Sochi and its surrounding areas are busy building what’s needed to accommodate the thousands of visitors expected for the Games. A new $200 million airport opened for business in the fall of 2010, and officials say more than 200 sports and support facilities will eventually be constructed. This doesn’t include the road, railway, port, electrical and telecom infrastructure projects in the works.

And Sochi is just a part of the broader infrastructure effort under way in Russia as it strives to modernize itself out of the Soviet era. Along with the transportation, communication and power investments, Russia is also building schools, hospitals, housing and other social infrastructure.

Given Russia’s geographic size, its infrastructure ambitions are huge both in scale and in price. A new railway across Siberia, for example, is estimated at $13 billion and new airports can run close to $1 billion each.

The Russian Far East city of Vladivostok is preparing to host the 2012 Asia-Pacific Economic Cooperation summit – the infrastructure cost is estimated at close to $5 billion. And Russian President Dmitri Medvedev plans to spend as much as $7 billion in 2010 and 2011 on housing for the nation’s senior military officials.

On top of that, the improving relations between Russia and China stand to spread into the infrastructure realm. The Beijing government is expected to invest heavily in Russia – estimates are $12 billion over the next five to 10 years for a dozen construction projects. These projects include about $250 million to rebuild a rail link between the countries.

Infrastructure creation on this scale requires vast quantities of natural resources – energy, steel, copper, cement and more. As we have seen in China, Brazil and elsewhere, such investment typically pays off in terms of economic growth.

The Russian MICEX Index, which increased 22.5 percent in 2010, has jumped 15 percent so far in 2011, significantly outperforming many other markets.

China is the second-best performer of the BRICs, rising more than 5 percent, while India (down over 10 percent) and Brazil (down over 2 percent) have lagged. Overall, the MSCI Emerging Markets Index has dropped just over 1 percent.

This has effectively recoupled Russia with the other BRIC countries. The Russian economy lagged out-of-the-gate once the global recovery began, leading some to question whether it belonged in the same category as Brazil, China and India. Those sentiments seemed premature and symptomatic of an anti-Russia mindset.

Russian’s outperformance has been driven by several factors. First, the Russian ruble has appreciated 7 percent against the U.S. dollar, boosting stock market performance for U.S. investors.  This development also has a long-term benefit as a strong ruble benefits the country’s domestic sectors, something we’ll discuss later.

A second factor driving Russia has been the geopolitical and natural disaster events that have transpired during the past few weeks. Russia is relatively safe from the type of political uprisings seen in the Middle East and North Africa. Its government is decidedly popular with the public and the one-two punch of President Medvedev and Prime Minister Putin give the government clout on both international and domestic fronts.

The price of oil has risen roughly 25 percent since the unrest and turmoil began in the Middle East and North Africa.  As an energy exporter of crude oil and natural gas, Russia is one of the few large economies in the world that directly benefits from higher energy prices.

Russia is the world’s largest oil producer and it’s estimated that for every $10 increase in the average annual price of oil, Russia’s revenues rise by $20 billion, according to the Financial Times.  Since Russia is not a member of OPEC, it is not bound by production caps and can increase production as it sees fit while prices are at elevated levels.

Russia is also the world’s top exporter of natural gas and Stratfor Intelligence points out the situation in Libya has shut down 11 billion cubic-meters of natural gas flow to Italy. As Europe’s third-largest consumer of natural gas, Italy has turned to Russia for gas supplies. In addition, a shutdown of several Japanese nuclear facilities could mean as much as a 14 percent increase in natural gas consumption to meet the Japan’s energy demands.

In the energy sector, the Eastern European Fund (EUROX) portfolio emphasizes companies that show strong growth in production, reserves and cash flow, relative to their peers. Specifically, Novatek, Rosneft and TNK-BP fit this profile.

Russian energy equities, which carry the largest weighting in the MICEX, have gained 25 percent this year. This is higher than non-oil Russian equities, which have risen only 7.7 percent. However, as oil and gas taxes swell the government’s revenue, these funds are increasingly allocated to social and public works programs which are likely to create an opportunity for non-energy related equities. These sectors appear poised to benefit from the current macroeconomic environment.

This table from Merrill Lynch shows the performance of the different sectors of the Russian market following a sustained rise in oil prices. Merrill Lynch compiled research on the seven instances where oil prices rose 20 percent in a two-month span and maintained at least half those gains over the following six month period.

Historically, the average gain for Russian equities is more than 34 percent. While energy generally jumps out ahead when oil prices move higher, you can see that it lags other sectors as the rally progresses. We have long been positive on both Russian financials and the consumer sector and these sectors appear well positioned going forward.

Consumer-oriented equities such as retailers have historically been the best performers, netting an 85 percent gain on average and triple the gain of energy equities. Retailers X5 and Magnit should be able to capitalize on these trends. Russian financials are next with an average 83 percent gain. Sberbank, Russia’s largest bank, is the largest holding in EUROX.

Another area that could directly benefit from the Kremlin’s cash-filled pockets is infrastructure. Russia is in dire need of a significant revamping of its infrastructure. Similar to the American Society of Civil Engineers report that rates America’s  infrastructure a “D,” the World Economic Forum says the quality of Russia’s infrastructure lags that of other emerging countries such as South Africa, Turkey, China and Mexico.

The areas most in need of upgrading are Russia’s transportation and electrical power grid. The quality of Russia’s roads ranks in the bottom-third in the world, according to Merrill Lynch, and it’s estimated that Russia loses 6 percent of GDP each year due to underdeveloped roads. In fact, the combined length of Russia’s roadways declined 6 percent between 2002 and 2010 despite a 60 percent increase in car penetration, Merrill-Lynch says.

It’s a similar story for Russia’s airports and rail network. Russia currently has roughly 300 operational airports but just 40 percent of them have paved runways and 30 percent do not have an airfield lighting system, Merrill Lynch says. The rail network, almost entirely constructed during the Soviet era, is highly concentrated in the Western region of the country and is estimated to require more than $70 billion in investment for upgrades and repairs by 2020, according to Merrill Lynch.

Russia’s aging power grid is unreliable and accident prone. Merrill Lynch projects that significant investment by 2020 is required to update and modernize the grid. With industrial consumers accounting for 85 percent of electrical consumption, keeping the power up and running is essential to maintaining Russia’s industrial production levels.

To finance the much needed infrastructure improvements, the Russian government created the $420 billion Federal Target Program (FTP). The FTP focuses on key transportation areas such as rails, autos, marine and civil aviation.

The FTP has specific goals to meet by 2015 such as increasing the percentage of roads that meet federal standards by 23 percent. The plan also calls for a 47 percent increase in the shipment of goods and a 40 percent increase in airline penetration through improvements of aviation infrastructure.

In addition to the FTP, three special events will help drive Russia’s infrastructure spending: The 2012 Asia-Pacific Economic Cooperation (APEC) Summit, 2014 Winter Olympics in Sochi and the 2018 World Cup. Merrill Lynch estimates that total spending for the World Cup will reach $50 billion. Construction for the Games in Sochi includes 161 miles of roads and 65 miles of rails, and the APEC calls for 48 new objects to be constructed for a total of $83 million.

While higher energy prices are in danger of slowing down consumers in the U.S., Western Europe and certain emerging market countries, it has the opposite effect for the Russian economy. With increased cash flow from its natural gas and crude oil exports, the Russian government has the much needed capital to invest in the country’s aging infrastructure and to support domestic consumption.

This should drive outperformance of Russian markets throughout 2011 and stimulate demand for infrastructure-related commodities such as crude oil, copper, cement and iron ore.

This commentary was written by Frank Holmes, John Derrick and Tim Steinle the co-managers of the U.S. Global Investors Eastern European Fund (EUROX).

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Bovespa Index (IBOV) is a total return index weighted by traded volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. The Bombay Stock Exchange Sensitive Index (Sensex) is a cap-weighted index.  The selection of the index members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation.  Sensex has a base date and value of 100 on 1978-1979.  The index uses free float. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Holdings in the Eastern European Fund as a percentage of net assets as of 12/31/10: Novatek 5.39%, Rosneft 4.39%, TNK-BP 2.70%, X5 3.42%, Magnit 1.73%, Sberbank 10.19%.

When you envision America’s future, do you picture collapsing bridges, cracking dams and reoccurring brownouts? That’s certainly not the picture of America many would like to paint but it is a possibility if our country’s long-term infrastructure needs aren’t addressed.

A new article from researchers at the Wharton School of the University of Pennsylvania (America’s Aging Infrastructure: What to Fix, and Who Will Pay?) details the precarious nature of neglecting our nation’s network of pipelines, ports and power lines.

Here are some of the paper’s eye-popping statistics:

• The U.S. has about 2.5 million miles of natural gas pipelines operated by roughly 3,000 different companies. More than half of America’s natural gas transmission pipelines were installed before 1970.
• About 75-80 percent of the value of U.S. freight is moved via truck on our nation’s highways.
• Government mandates and subsidies have pushed alternative energy sources up to 17 percent of Germany’s overall power supply, while that figure is roughly 1-2 percent in the U.S.
• Less than 20 percent of America’s infrastructure is publicly owned.

President Obama has pledged $50 billion to rebuild 150,000 miles of roads, 4,000 miles of rails and 150 miles of runways but that’s only a fraction of the amount of investment needed. If America is going to give its infrastructure a comprehensive makeover, a considerable amount of investment will need to come from the private sector and this hasn’t happened yet.

Why haven’t U.S. investors embraced infrastructure investing?

A recent article from DealBook says that many of these private investors have found better opportunities abroad as foreign governments seek to privatize state entities, involve less politics and face fewer delays.

In our Global MegaTrends Fund (MEGAX), we employ a two-pronged approach to investing in infrastructure to offset some of the delays and disappointments often experienced with infrastructure investing.

First, we have taken positions in several infrastructure operators of toll roads, airports and utilities. In general, these companies possess stable cash flows, have regulated profits and pay a dividend.

One such company is Grupo Aeroportuario del Sureste, which operates airports in Cancun and southeast Mexico. As tourism traffic grows with an improving global economy and yield per passenger improves, so, in our opinion, should the company’s margins and profits.

Across the Atlantic, we’ve taken a similar position in Tav Havalimanlari, an airport operator based in Istanbul, Turkey. Tav is benefitting from Turkey’s 10.3 percent GDP growth (year-over-year) and overall growth in the region. Istanbul is only three hours by air from every major city in Europe and the airport has become a major transit hub for the region. In addition, Tav has stakes in the major airports of Macedonia, Georgia and Latvia.

Infrastructure opportunities aren’t always outside the U.S. border. Companies such as American Tower and Crown Castle provide much needed cellular and wireless infrastructure and are companies we currently hold positions in. There’s also pipeline operator NuStar Energy, which has more than 8,000 miles of pipelines and 93 million barrels of storage capacity around North America and overseas.

Second, we invest in the manufacturers and equipment makers that provide the heavy equipment needed to construct and maintain the world’s streets, sewers and electrical grids. Globally, many of these companies have seen a rise in equipment orders which has historically been a precursor to a pickup in construction activity.

The time to invest in America’s future is now, before the lights go out and the bridges fall down.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

By clicking the link(s) above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for its content. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Holdings in the Global MegaTrends Fund as a percentage of net assets as of September 30, 2010: Grupo Aeroportuario del Sureste 3.65%, Tav Havalimanlari 1.93%, American Tower 1.72%, Crown Castle 1.59%, NuStar Energy 2.97%.