MOSCOW - Boris Yeltsin probably will win re-election as Russia's president, opening the dam on a flood of Western money into the post-communist state's stock market and pushing stock prices upward, money managers and securities firms say.
Money managers give Mr. Yeltsin roughly 2-1 odds of beating Communist Party challenger Gennady Zyuganov. The first stage of the election occurs June 16, with a runoff between the top two vote-getters two or three weeks later.
If Mr. Yeltsin prevails, anywhere from hundreds of millions of dollars to more than a $1 billion may pour into the $27 billion Russian stock market.
"A lot of money will come to this country, mostly from American institutional investors, as soon as Boris Yeltsin is re-elected," said Elizabeth Hebert, head of the Moscow office of Flemings (CIS) Ltd., an affiliate of Robert Fleming & Co.
Since polls started showing an upturn in Mr. Yeltsin's re-election chances in March, Western money has started pouring into Russian stocks. Mr. Yeltsin scored a 33% approval rating last month up from 8% in January, while Mr. Zyuganov's rating plateaued at 26%, according to Russian opinion polls.
Driven largely by foreign buying activity, the market has jumped 82% since March 19, in U.S. dollar terms, when the Moscow Times Index hit its low for the year.
Some $250 million in new money has been invested in Russian stocks so far this year, primarily from Western sources, said Georg Kjallgren, a director with Brunswick Brokerage, Moscow, a leading Russian securities firm. Another $50 million or so will be invested prior to the election, he said.
For the first time, major emerging markets and global money managers have been major buyers of Russian stocks, accounting for about one-third of the new money, Mr. Kjallgren said. Another third came from specialized funds, such as country funds, while the remainder is split between hedge funds and domestic investors, he said.
"We've been buying Russia over the last month or so," taking advantage of "tremendously low valuations," said Robert Furdak, managing director, State Street Global Advisors, Boston. He oversees the $120 million Seven Seas Emerging Markets Fund as well as institutional accounts.
Similarly, Ms. Hebert said she planned to increase her holdings prior to the election. "Share prices have gone up, but shares are still extremely cheap compared to shares of similar companies in the West," she said.
If Mr. Yeltsin is re-elected, another $500 million to $600 million of Western money may follow shortly thereafter, Brunswick executives believe. Mr. Kjallgren believes another $150 million will be invested by Russian investors. (Assuming a Yeltsin victory, Brunswick estimates between $23 billion and $38 billion of potential demand from foreign and domestic money in the 12 to 24 months following the election.)
Mr. Kjallgren projects Russian companies are waiting to issue about $150 million in new securities. That means a net of $500 million may be chasing only $7 billion of Russia's freely floating stock.
In a market with average daily turnover of only $10 million, that could lead to a doubling in stock prices, he said.
U.S., British and French investment funds are expecting to increase their Russian stock investments fivefold by year end, according to a Federal Securities Commission survey in January.
Other factors also are encouraging more mainstream investors to invest in Russian stocks. Growing availability of custody services and increasing use of American depository receipts will boost investment by U.S. institutions, which so far have been reluctant to join the bandwagon.
While New York-based Chase Manhattan Bank and Credit Suisse AG, based in Zurich, Switzerland, already provide custody, several other major banks are working on developing custody links.
Even without accepted custody practices, more Russian companies are creating ADRs, sidestepping the custody hurdle. Lukoil, Mosenegro, both in Moscow, and Chernogorneft, Nizhnezartovsk, have ADRs. Six other companies are developing them, including telecommunications giant Rostelecom and power operator Unified Energy Systems, both Moscow-based.
Scott Delman, director-emerging Europe for Foreign & Colonial Emerging Markets, London, believes the Russian stock market will produce gains in the 70% to 80% range that have occurred in Poland and Hungary this year.
"I think this is a sustainable bull market," he said. "Russia has changed. The economy is growing and it is easier for foreign investors to access" securities, he added.
Some question, however, whether Russian stocks will produce sky-high returns for investors. The lack of adequate accounting and disclosure make it hard to discern the true value of Russian stocks, some noted.
What's "'much more dubious" is whether higher stock profits will translate to higher profits and whether such profits will flow through to minority shareholders, said Murray Davey, director, Kleinwort Benson Investment Management, London.
"Some of the risks are unquantifiable in the short term," he added.
Even if Mr. Zyuganov fortunes improve, many observers don't believe it would necessarily mean a return to traditional communism, though a Zyuganov victory clearly would upset markets in the short term.
Mr. Zyuganov is a "market-friendly Communist," though some of his supporters are not, noted Jonathan Hoffman, director-economics, CS First Boston Ltd., London. The question is who would be pulling the strings, he said.
Observers said a Communist government might re-nationalize a few showcase industries. But most believe Russian economic reforms are too far along to be reversed.
Nor is printing more money a viable option. Reigniting inflation - now down to an annualized rate of 21% annualized rate from 205% last year - would alienate the Communist Party's major supporters, a Salomon Brothers report said.
Meanwhile, renationalization would upset corporations, Mr. Kjallgren said.
David Tripple, chief investment officer of Pioneer Group, Boston, said it will take three to four months to sort out Russia's economic policies regardless of who wins, given Mr. Yeltsin's more recent nationalistic sentiments and the Communists' unclear statements. Still, the manager's emerging markets equity fund has boosted its holdings in Russian stocks to 8% from nothing five months ago. (Pioneer also manages a Russian fund for international investors and money for domestic Russian investors.)
In the meantime, many institutional investors are playing it cautiously. Mike O'Hara, a portfolio manager with Glasgow-based Murray Johnstone International Ltd., said his firm has invested 3% of its emerging markets portfolios in Russian stocks, but primarily in big, liquid securities such as Lukoil.
"If something does go wrong, it's easier to get out," he said.