MOSCOW - President Boris Yeltsin has dumped his privatization chief, state spending promises threaten to bust the budget, crime is flourishing and elections this June might return the Communists to power. Is this any time to invest in Russian companies?
Western investors are saying "yes."
"Despite all the bad publicity, we are seeing major investors preparing to enter the Russian market in the next few months," David K. Boren, an analyst at Salomon Brothers, wrote recently.
"Major Western investors in Russia increasingly take a three- to five-year perspective on Russian equities and have seen these political battles about austerity and stabilization programs before in most other emerging markets," he continued.
Executives at Framlington Investment Management Ltd. hope Mr. Boren is right. Not only is the London-based money manager's $66 million Framlington Russian Investment Fund nearly fully invested, but the firm is about to close a second Russian fund investing in the Volga River region, considered the Russian counterpart of Germany's industrialized Ruhr Valley.
Later this year, Framlington executives plan to open a Central Asia fund, to invest in companies based in the Asian member states of the Commonwealth of Independent States.
Framlington, which is 51% owned by Paris-based Credit Commercial de France, focuses heavily on private investments in its Russian funds. Originally, the Russian Investment Fund did not invest at all in the secondary market; now, it will invest up to 20% of fund assets in listed securities.
To date, the fund has invested $7 million in five blue-chip stocks: oil and gas producers Chernogorneft and LUKoil Holding; telecommunications firm Rostelekom; and energy producers Mosenergo and Irkutskenergo.
The fund will allocate $4 million to $5 million more to Russian securities in 1996, said Connell Gallagher, chief representative in Framlington's Moscow office.
Framlington executives often take large minority positions in their portfolio companies. While they rarely take board seats, they monitor their investments closely.
AO NIS, a small Russian telecommunications company based in Nizhny Novgorod (known as Gorky under the Communist regime) had problems finding long-term financing until the Framlington fund bought 26% of its stock for $350,000 in January.
Piotr Pletniov, head chairman of AO NIS, explained: "I was looking everywhere for additional funds to finance AO NIS as it has had excellent potential for growth." The 25-person company has installed 75 kilometers of optical cable in Nizhny Novgorod and will extend the line up to 164 kilometers this year.
"Everybody understands this is a great project, it is essential for local stockbrokers, who will be able to work online with Moscow and get the direct access to Western stock exchanges," he added.
"Last summer, Framlington people came to our company for the first time. We talked a lot about telecommunications. They came several times since then, studying every aspects of the business, starting from the business plan," and even brought in a foreign optical cable expert, Mr. Pletniov said. Both Framlington and state-owned Sberbank took equity stakes.
Framlington executives focus on small companies with strong growth prospects. "All the companies we invested in are small companies that are used to do doing well and hopefully in four to five years time will be doing very well," Mr. Gallagher said.
Other portfolio companies also hold out great promise. The fund's largest investment was an 8% equity stake in FGI Wireless Ltd., Moscow, a telecommunications company. FGI's joint venture with Moscow-based Vimpelcom is serving a rapidly growing army of mobile phone users under the brand name of Bee-line. That $3.7 million equity stake since has doubled in value.
The fund also has acquired 20% of oil-producing VF-NEFT L.L.C. for about $3 million.
Holdings also extend to retailers, breweries, computer systems and property development. For example, the fund owns 23% of Irlasto JV, which runs a chain of supermarkets and clothing shops.
It also has invested $1.7 million into property developer FW Sawatzky, an Austrian developer active in East European countries which has been renovating an office building in central Moscow, where quality office space is in short supply.
Even if Mr. Yeltsin loses the election and the privatization process is derailed, "these companies are hardly likely to be nationalized. They are of no strategic interest to the country. And obviously, in the long term, things will go in the right direction in Russia," Mr. Gallagher said.
Investors in the 10-year closed-end fund might have to be patient for the returns. Dividends will not be paid before December 1998. The fund's net asset value is only $10.15 for shares issued at $10.
Returns had best improve, given the fees investors pay for such emerging-markets investments. For Framlington's Volga Fund, Framlington imposes a 3% fee on assets under management plus takes 20% of distributions after investors receive committed capital plus simple interest of 10%.
Framlington has relied on international organizations as its biggest investors. The European Bank of Reconstruction and Development, London, and the International Finance Corp., Washington, have pumped $16.6 million and $8 million, respectively, into the Russian Investment Fund. The IFC has committed to provide one-third of the Volga Fund's capital, up to $20 million.
Philippe Der Megreditchian, investment analyst for the fund, said they hope to attract between $20 million and $30 million from additional investors - meaning the IFC would chip in $10 million to $15 million.
The Volga Fund will target small and medium-sized business, with direct investments ranging from as little as $250,000 to $1 million.
The fund will invest in the major industrial and agricultural area around the Volga River, comprising eight regions and three autonomous republics - approximately the size of Germany and the United Kingdom combined.
Nizhny Novgorod is the region's unofficial capital, and Russia's third largest city, after Moscow and St. Petersburg. The area offers a combination of abundant natural resources, including oil, natural gas and minerals, as well as being a center of scientific research and home to some of Russia's biggest manufacturers, including KAMAZ, the leading truck producer, and automakers GAZ P O and AO AVTOVAZ.
Nizhny Novgorod is a leader in market reforms. Some 27,000 companies have been privatized in the Volga region, while about 900 joint ventures exist with international companies.
The fund will invest in high-growth companies in need of equity capital to rationalize, modernize or expand, the fund's preliminary prospectus said.
Still, the fund comes with a warning: international political risk, changes in government policies on taxation or restrictions on foreign investment, and currency fluctuations all could affect the value of the investments.