Bob Crew explains the relative minefield that is Russia for investors eager to explore the new land of opportunity

Russia is perceived as being the area of greatest opportunity in Eastern Europe's emerging financial markets but, with common consent it is fraught with risk for custodian bank and fund managers alike. Even so, there are plenty of takers, not least custodian banks like Credit Suisse First Boston (probably the biggest), Deutsche, Holland's ING, Citibank, Chase and Morgan Stanley. There is even a domestic bank - VTB (a Russian state bank for foreign trade) - that is establishing itself in custody and there are fund management groups with their eyes on the ball including Barings, Regent, Lazard Frere, Flemings and Templeton.

New opportunities in the former Soviet Union have resulted in growing Western and European interest in pooled investment schemes for both equities ant bonds for which actual and potential returns are - like the accompanying risk - high. But, in Russia, custodian banks are not prepared to take responsibility for as much of the risk as they would elsewhere and this is disturbing to investors who prefer to be cushioned by a well-capitalised bank. But, as the global fund custodian manager of the Bank of Bermuda in Luxembourg, Neil Millward points out, Russian markets carry real risk and fund managers need to appreciate this". The Bank of Bermuda, perhaps the leading mutual fund custodian and securities administrator in the world, has been servicing investments in Russia for some three years now and Millward argues that Russian risk is: "Not the sort of risk associated with a particular bank not having a triple-A rating, but genuine loss which may not be recoverable due to an absence of law, or the means effectively to enforce the law. Russia's markets have developed quickly ahead of a supportive infrastructure which is still largely absent, in particular the development of the concept of the independent custodian."

Fund managers must tread with care because the list of risks to be encountered in Russia is long in-deed. We are talking very lengthy purchase and sale agreements; in-vestors who buy a block of shares and are turned away when they try to register them in their name (be-cause the registering authority has not heard of the buyer!); attendance at company registrars by representatives of both buyers and sellers (one might have to travel 12,000 miles from Moscow to Sakhalin and back to purchase shares); no plann-ed settlement and clearing systems for Russian equities; lack of information on every front; the application of laws to practices not dreamt of at the time of their enacting; fledgling Russian bodies struggling to put in place a complete infrastructure in a crumbling system laid waste by the Soviet years; and conflicting intent from within regulatory control boards fuelled by political differences.

Against this background, fund managers could be forgiven for thinking that Russia in not worth the candle. Not so, according to Alistair Stobie, a portfolio manager with Barings who has spent most of his life "kicking custodians to make sure that things happen". He re-ports that, whilst he goes "to bed each night dreaming about the po-tential for enormous horrors in Russia" they "never quite happen" and to unsure that these horrors don't happen, he has "a management team that is one-and-a-half times bigger than our standard East European team, so that we can deal with each issue minutely. This takes an enormous amount of time but it pays dividends. Of course we would like the custodians to gather more dividends on time and provide more corporate action information but we realise that in Russia, custody is not perfect and fund managers must get much more involved than they would normally expect to do. You've got to learn to live with that. It's not just a matter of looking at the accounts and leaving it to the trader. You've got to learn that 'long term' means the end of next month, not next week or the end of next year." Investment problems might well have piled up with disquieting abundance in Russia, but it's water off a duck's back to Stobie. His custodian in Moscow is ING and he insists that his funds are performing well there. He has no regrets and will continue to send managers and investments to Russia with unabated love."

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