Money: Fear of Finance

A cynic might say the Western world will only have itself to blame if Gennady Zyuganov wins the Russian presidential election and tries to reimpose a framework of state control on the Russian economy.

The West has largely watched while the old Soviet system of planned production and distribution has collapsed, creating massive unemployment and runaway inflation, while living standards for most of the population have plunged to Third World levels and below.

Only a tiny proportion of the population, most of them speculators and criminals, are better off than they were a decade ago. Russia has also been isolated diplomatically while its former satellites in eastern Europe have been encouraged to move under the military wing of Nato and the economic umbrella of the European Community.

If Mr Zyuganov wins, and he might well do so, he is unlikely to pose as a kind of cuddly Social Democrat, like the reformed Communists who have already returned to power and influence in Poland, Hungary and the Czech Republic in the wake of disappointment with the progress of economic reform.

Neither can he expect much sympathy and help from the Group of Seven or the IMF and World Bank, who have been heavily backing Boris Yeltsin's campaign for re-election by feeding in financial aid to help reduce the Russian government's public deficit, hold down inflation and reflate the banking system.

Clearly something strange is going on in Russia at the moment, at a time when short-term rouble bills issued by the Russian government are yielding 130 per cent while inflation is only 2 per cent a month.

The withdrawal of this aid if Mr Zyuganov wins will aggravate the crisis for Russia, encourage Mr Zyuganov to reimpose controls and add to the turmoil which a change of government is bound to create in the ranks of the apparatchiks who now control the Kremlin. That could, in turn, provoke a military coup, something the world has been spared since the downfall of the Soviet system.

In the circumstances those Western investors who have invested in Russia since the downfall of the Communists will be shaking in their shoes. But hope springs eternal, and Foreign & Colonial, arguably London's leading experts on investment opportunities in emerging markets, have an investment vehicle, Rusco, ready to launch at a moment's notice if the outcome of the election is favourable and president Yeltsin wins the run-off next month.

It will invest mainly in second-line companies, especially those known to its Indian-based partner, the Sun Group, which has 40 years experience of doing business in Russia.

F&C is not exactly touting for small investor business. The minimum subscription will be $25,000, it will only trade the shares weekly and 20 days' notice is required for selling orders to reflect the illiquidity of the Russian stock market. Redemptions will also be limited to 5 per cent of the fund.

However, the fund manager, Scott Delman, expects a feeding frenzy if Yeltsin wins and some of the Russian bulls are talking of a 500 per cent profit in the next two years. In particular, funds which have made money in Poland and Hungary are expected to switch to Russia in the hope of making a killing.