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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

A SPUTNIK RIDE

Profits -- and risks -- in Russia


INVESTORS ARE GETTING A rush over Russia. And why not? The Moscow stock exchange index soared 356% in 1996. It is up another 80% so far this year. At about $50 billion, Moscow's market capitalization is just about a tenth of Hong Kong's -- and even smaller than those of all other Asian bourses except Karachi. No matter. Some 2% to 3% of annual global portfolio flows are now estimated to be going to Russian counters, about half what Hong Kong gets. The rewards? Mutual funds investing in Russia took seven of the top ten slots in a ranking of the world's best-performing unit trusts last year (see table).

The bad news for Asian investors: no Russia fund is authorized in Hong Kong or Singapore. That means they cannot be marketed there, though some can be sold on a case-by-case basis. (You need at least $100,000 to buy into the Tiger funds, which are run by Hong Kong's Regent Fund Management.) That is also why no Russia fund appears in Asiaweek's list of the region's top 100 emerging-markets unit trusts, apart from the fact that none has compiled a three-year track record.

Buy if you must, but be wary. The Moscow index can fall 20% in one week. "Russia is not a traditional emerging market," says Danielle Downing, a strategist for Salomon Brothers in London. "It is a huge economy in transition." During the first years of privatization under President Boris Yeltsin, state assets were rapidly transferred to individuals and "it didn't matter to whom," she recalls. A second wave began last year. A new tier of more progressive companies such as telecommunications firm Rostelekom and gas enterprise Gazprom have emerged. Says David Mulford, chairman of CS First Boston Europe: "Russia is fast becoming one of the great markets and economies in the world."

The question is whether Yeltsin and his men can continue economic reforms and whether privatized firms can restructure and adapt to a freed market. "Crime is definitely an issue," says Downing. As corporate empires are created from the ruins of the centralized Soviet system, so carpetbaggers have seized the chance to wrest companies from joint-venture partners, often with violence. Mark Mobius, chief of Templeton Emerging Markets Funds, adds problems with corporate governance and shareholder rights to the brew. The closed-end Templeton Russia, which is listed in New York, saw its stock price jump 66% last year.

"I doubt if Russia is going to have another 356% increase ever again," Mobius says. "That was on very small volume and is very misleading. As trading volumes rise, the market would stabilize." That said, he believes Russia will show strong growth over the next 12 months. Downing is also bullish. "The legal framework is improving and tax reform is now on the agenda," she says. "My advice is to go overweight on Russia over a five-year period. Telecommunications will be a good sector this year. Go for high-growth companies -- not necessarily the cheapest counters." But remember to fasten your seat belt.

-- By Choong Tet Sieu and Alejandro Reyes

THE WORLD'S HOTTEST FUNDS

Percentage gains in 1996, Russia funds in LARGE TYPE

Source: Micropal

1. Korea Small Companies Trust 168.95
2.

White Tiger Investment Co.

150.46

3.

Firebird Fund LP

145.61

4. Mercury ST Eastern European 137.95
5.

Blue Tiger Investment Co.

137.53

6.

Red Tiger Investment Co.

122.60

7.

Fleming Russia Securities

119.69

8.

Russia Value Fund LP

112.41

9.

Optima Opportunity Fund

100.48

10. Baring Emerging Europe Trust 92.00
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