Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
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November 30, 2001
Outsiders in an insider's market
Commentary: Understand Russia before investing

By Michael Collins, CBS.MarketWatch.com
Michael Collins is editor of Investing Across Borders and a former Moscow bureau chief for United Press International.

MOSCOW (CBS.MW) -- In the early 1990s, an American correspondent in Moscow asked Boris Yeltsin what seemed like a simple question about land reform: Why don't you just sell land to the highest bidder? The booming reply: "You, sir, do not understand the Russian soul."

Western investors may be wise to repeat Yeltsin's words as they consider the Russian market. It's an amazing country, but a tough place for an outsider to truly understand. And without understanding, it's difficult to invest wisely.

As much as Russia has changed in the last 15 years, it's still far from what we know as an open market system. The government has made great strides in economic, legal and other structural reforms, but there's a long way to go. Financial information is more available but still sparse, corruption still too common and protection for minority shareholders too slim.

The differences can bring opportunity as well as great risk for investors. Those who do understand the system, and can get enough information to make reasonably wise investment picks, can get some real bargains. But most of us will never understand Russian stocks, much less the Russian soul, enough to do anything but make a roll of the dice in this market.

The safe bet is to leave the Russian stock picking to the professional money managers. And even then, you need to be confident that the manager understands the market, and you need to understand the risk. This is not a place for your essential retirement money. See story on mutual funds that invest in Russia.

"Any emerging market is risky," says Bill Rocco, a Morningstar senior analyst who covers emerging markets funds. "As you narrow your geographic focus you get more volatile, and you're subject to individual country political risk. It's especially true for Russia ... There are still issues of corruption, accounting. And there are still political issues."

Funds with significant Russian investments have been hot this year, but some also did well in 1996 and 1997, before crashing in the 1998 default and devaluation crisis. The situation has improved since 1998, but it was only three years ago. Who's to say what will happen in the next three years?

Suspicion of outsiders

Foreign investors who do decide to take the risk should also realize they're unlikely to be viewed by a Russian company as anything but useful outsiders, at best.

That's a natural reaction. Think of how Americans reacted when Japanese or Arab investors took big stakes in well-known U.S. companies not so many years ago.

"I don't think there's a suspicion of foreigners as being bad for Russia, but I think there is definitely a fear that 'We don't want somebody else coming in and taking the piece of a very nice pie at the moment,'" said Roland Nash, strategist and research director for Moscow investment bank Renaissance Capital.

Nash says there's still a fear about foreigners taking over Russian companies. But he added, "I think they are much more open to discussing strategic positioning of the company with foreign investors, rather than automatically thinking the Westerners will aim us in the wrong direction, and negatively impact us, for their own good."

If you do relish the risk and don't mind a bit of a gamble, or maybe you yearn for the days of the Internet-stock roller coaster, Russia might be the place for a small part of your portfolio. See story on investing in Russia.

But never forget that a bear hug can turn into a bear mauling, with little warning. Just ask those caught in the 1998 ruble crisis, including the investment banker who famously is said to have remarked (always anonymously in the many references I've seen): "I'd rather eat nuclear waste than invest again in Russia."

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