Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
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The Guardian (UK)
May 17, 2003
Mob cash oils wheels of Russian economy
Patrick Collinson and Tony Levene

Is Russia the next big investment opportunity? The economy is growing by 4%-5% a year, it has a huge balance of payments surplus and oil revenues are gushing into the Kremlin. Even the famed Russian mobsters and robber barons who stripped the economy bare in the early years of the transition to a market economy are beginning to bring some of the money back home.

Analysts predict that up to $10bn will flood back into Russia this year, much of it into shares on the Moscow stock exchange, helping to boost their price.

Anton Khmelnitski, manager of the Eastern Europe Investment Trust, admits that some of it is "hot money" but reckons Russia could be like Italy two decades ago when mafia money returned to buy shares in legitimate businesses.

This year will also see a broadening of the Russian stock market, which until now has largely consisted of oil companies such as Lukoil. Over the next few months, retailers and services companies are likely to make their debut on the exchange, as Red Square becomes more like Wall Street.

There are three investment trusts which specialise in Russia and Eastern Europe, the Pictet fund, Baring Emerging Europe and JPMF Russia. A string of unit trusts, including Credit Suisse European Frontiers and Jupiter European Emerging Opportunities also have holdings in Russian stocks.

Many push the story of the accession of countries such as Hungary, the Czech Republic and Poland into the EU, although in reality growth has stalled in these nations as Germany (their biggest customer) is mired in economic difficulties.

Anyone thinking of investing in these trusts must also accept that they come with a dot.com-style wealth warning. Someone who bought the Pictet fund four years ago has seen their investment soar 190%. But if they had bought six years ago, just before the Russian financial crisis, the value of their investment would still be down by a third.

Russia still has a long way to travel before the rule of law, corporate governance and good management practices are properly established. A fall in the oil price also hurts the Russian economy badly.

Push Pictet and you get the nightmare scenario. "It's political. If Putin loses the election in June 2004, capital will flow out of Russia. We don't expect him to lose but if he does, money, especially that of dubious legality, will flow fast out of what could be by then an overvalued market," it says.

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