LONDON -- Money managers are heartened by Russian President Boris Yeltsin's unexpected resignation last month, but few said they would increase their exposure to Russia ahead of the presidential election expected in late March.
And they warned recent gains in Russian equities would be sustained only if acting President Vladimir Putin, who is expected to win the election, shows signs that he will implement the structural reform necessary to attract foreign capital back into the market.
Mr. Putin will find strong support among international money managers in his campaign for the presidency. Many see recent events -- namely Mr. Yeltsin's resignation, the upcoming election and Mr. Putin's appointment as acting president -- as important factors for reducing domestic political risk.
"If you were uncertain before, you would be less uncertain now," about the country's prospects, said Keith Swabey, emerging market bond manager at Fleming Asset Management Ltd., London. Flemings is slightly overweight in Russian debt compared with the 9% weighting in the J.P. Morgan Emerging Market Bond Index Plus. The group would maintain that position until the election, he said.
But managers were concerned Mr. Putin had not yet spelled out his views on economic policy and that his electoral success would be too highly correlated with developments in the war in Chechnya.
Nonetheless, most managers expected the Russian market to continue rallying in the next few months but said price gains might be reversed after the election.
"A rally is possible but it may not be sustainable due to the lack of evidence that rhetoric will be matched by action," said Murray Davey, a director of Rexiter Capital Management Ltd., London. As a result, he does not plan to change the group's position in Russia of less than 5% of the firm's $800 million in total assets under management.
Russian equities were the world's best performers in 1999, with the Moscow Times index of blue-chip stocks recording a 300% gain. Admittedly the market came off a low base following the financial crisis of 1998.
No great rush
During the first week of January 2000 alone, the market jumped 23.3% on news of Yeltsin's resignation. That's not bad compared with the performance by markets in the U.S. and U.K., but it pales in significance compared with the eye-popping 75.6% jump in the index between early December and the first week of January.
David Soden, head of emerging markets at Merrill Lynch Mercury Asset Management Ltd., London, said his group also would hold steady its "reasonably aggressive" overweight position in Russia. The firm has roughly $90 million dollars in assets under management in Russia, representing just 0.02% of total assets under management.
"Putin is a safe pair of hands, but he is not going to do anything dramatic. . . . There is no reason to suspect dramatic reform," he said.
Henk Vaandrager, head of emerging markets for ABN AMRO Asset Management, Amsterdam, expects political uncertainty to put a cap on gains in the country's equity and bond markets. "There will be no great rush" into the markets, he added.
ABN AMRO increased its exposure to Russia by "a few million dollars" in early December after parliamentary elections that shifted the balance of power away from the hard-line Communists.
"I would not exclude our adding a little bit more to our positions before the elections," Mr. Vaandrager said. "We feel the market is correctly pricing in the current political environment. But after the election it's a whole new ballgame."
Martin Taylor, Baring Asset Management's London-based head of Eastern Europe is more bullish and expects the Russian equity market to easily double in the next few months on strong prospects of reform. These reform prospects are strong enough to keep Mr. Taylor committed to Russia. He would not say how much the firm has invested in Russia.
"The market deserves a partial rerating. Putin states clearly Russia needs structural reform. For an alleged nationalist to say Russia needs foreign investment shows that he is a realist and is pretty open," said Mr. Taylor.
Mr. Putin's strong support in the Duma, Russia's parliament, will be an important factor in future legislative change. December's parliamentary elections broke the previous domination of the Communist party and led to the development of a strong centrist/reformist bloc, which was prepared to work with the Kremlin and was dominated by Mr. Putin's Unity party.
Risks at home
Domestic risks remain, but Mr. Taylor believes they have been overdiscounted into asset prices and as a result the market is looking "very, very cheap."
But hurdles remain. A debt default is a serious matter for foreign investors. Memories are still fresh of events in 1998 when Russia defaulted on its government debt, and reports last year of money laundering through the Bank of New York added fuel to the fire of investors' concerns.
"Because of these bad vibes, the change in the presidential position is unlikely to sway" institutional investors' fears about Russia, said David Callund, chairman of Callund Consulting Ltd., Maidenhead, England.
Relationships with international markets might thaw, however, with Mr. Putin in the hot seat at the Kremlin. The United States might be more willing to work with Russia now that the often unreliable Mr. Yeltsin is out of the way, said Jerome Booth, head of research at Ashmore Investment Management Ltd., London, which has around $25 million dollars invested in Russian debt.
London or Paris
But the wildcard remains the outcome of the London and Paris Club talks going on now on the restructuring of dollar-denominated Soviet-era debt that first defaulted in 1998.
"A settlement of the London Club debt will set a precedent for future access by Russia to the capital markets," he added.
But Claude Guillaume, a fund manager covering Eastern Europe for Paribas Asset Management, Paris, has no intention of investing in Russia over the short term after the group liquidated its holdings there in 1998. He remains concerned that corporate governance and transparency has not improved in many Russian companies.
"Most investors are not ready to take the risk. This is a market for hedge funds," he added.
Although the economic performance of Poland, the Czech Republic and Hungary are now closely aligned to Western Europe, the Russian political reshuffle might provide some comfort to the economies of Central and Eastern Europe. Food and pharmaceutical companies that used to export products to Russia should see some benefit from a pickup in the Russian economy.
"These factors are positive for sentiment but they won't impact the fundamental outlook for the region," said Mr. Guillaume.