Querying XML into a file needs to know a little bit about character encoding...
Try this:
USE master;
GO
CREATE DATABASE TestDB;
GO
CREATE TABLE TestDB.dbo.TestTbl(TestString1 VARCHAR(100),TestString2 NVARCHAR(100));
INSERT INTO TestDB.dbo.TestTbl VALUES('abc',  N'abc')
                                    ,('<&> Russian: "слов в тексте"', N'<&> Russian: "слов в тексте"');
GO                           
SELECT * FROM TestDB.dbo.TestTbl FOR XML PATH('Test'),ROOT('String');
/* The result of the simple SELECT shows, that VARCHAR cannot deal with russian letters
<String>
  <Test>
    <TestString1>abc</TestString1>
    <TestString2>abc</TestString2>
  </Test>
  <Test>
    <TestString1><&> Russian: "???? ? ??????"</TestString1>
    <TestString2><&> Russian: "слов в тексте"</TestString2>
  </Test>
</String>
*/
GO
--Two times the same command, only difference is -w instead of -c:  
--And: YOU HAVE TO FULLY QUALIFY THE OBJECT's NAME!                  
DECLARE @cmd1 VARCHAR(4000)='bcp "SELECT * FROM TestDB.dbo.TestTbl FOR XML PATH(''object''),ROOT(''objects'');" queryout "c:\dvp\test1.xml" -T -c -S' + @@SERVERNAME;
DECLARE @cmd2 VARCHAR(4000)='bcp "SELECT * FROM TestDB.dbo.TestTbl FOR XML PATH(''object''),ROOT(''objects'');" queryout "c:\dvp\test2.xml" -T -w -S' + @@SERVERNAME;
EXECUTE master..xp_cmdshell @cmd1;
EXECUTE master..xp_cmdshell @cmd2;
GO
DROP DATABASE TestDb;
GO
The result of the first command with -c will now destroy the russian letters even with NVARCHAR
<objects>
  <object>
    <TestString1>abc</TestString1>
    <TestString2>abc</TestString2>
  </object>
  <object>
    <TestString1><&> Russian: "???? ? ??????"</TestString1>
    <TestString2><&> Russian: "???? ? ??????"</TestString2>
  </object>
</objects>
The result of the second command with -w is as expected:
<objects>
  <object>
    <TestString1>abc</TestString1>
    <TestString2>abc</TestString2>
  </object>
  <object>
    <TestString1><&> Russian: "???? ? ??????"</TestString1>
    <TestString2><&> Russian: "слов в тексте"</TestString2>
  </object>
</objects>