I do understand the inherent problems caused by context, it took many years of reading and listening to push cultural road-blocks out of my head just to deal with the French language..
I think you may be right about the character encoding giving Google heartburn. Normally I want small samples translated, so I select and translate from the context menu. I'm using K-Meleon 75, FWIW, encoding set to Universal/UTF-8.
It's the selected passage that (in German) gives Google a hard time. Translating the entire page works well most of the time, Google can "see" the diacritics better. However, Russian remains a perpetual problem regardless of the method used.
Oddly enough, using the "page" translate from Russian, you can actually see the translation for a second or so, then the page is instantly redrawn into uppercase garbage. This happens with Opera 12.17 as well, so I'm reluctant to blame the browser.
Bing is also not very helpful if it can't read the language required: it doesn't have as wide a repertoire as Google.
And almost all the other online translators can only handle a half-dozen or so languages, usually the "easy" ones. This includes the "pay-per-view" translators!