Taking a shot in the dark

Rory Cellan-Jones on the hazards and rewards facing investors VIEW FROM RUSSIA

Late last month rumours suddenly spread through one of Moscow's 15 stock exchanges. Shares in the collapsed Russian investment firm MMM were being snapped up by a group of visitors which included some of the biggest names in Western finance - Citibank, Schroders, Nikko. Did they know something local brokers had missed? Was MMM, whose collapse saw millions of Russians lose their savings, about to rise from the ashes?

The traders, who sell shares from trestle-tables in a room guarded by armed militia, need not have worried. The MMM certificates, trading at rock-bottom prices, were being bought as souvenirs to hang on the office wall by a party of fund managers on a week-long tour of Russia and Ukraine. For many on the trip, these will be their only investments in the former Soviet Union for a while.

With some commentators now describing Russia as a submerging rather than an emerging market, this might seem a strange time for Smith New Court to take its clients there. "It's the perfect time," insists Gordon Muir- Carby, director of emerging markets at the London stockbroker. "Everyone's negative about it, the stock market may be bottoming out after big falls - let's go and see how risks balance out against rewards."

As they make their way from one massive, dilapidated factory to another, the scale of Russia's problems becomes clear. In St Petersburg, the city- suited and fur-coated visitors make an incongruous sight as they process around the dark, satanic steelmill of the Kirov works. On a site the size of a small town, Kirov starts with steel and ends up with tractors, bulldozers, even garden tools. But the visitors find the tractor line at a halt. The plant is on a three-day week because its customers in rural Russia can no longer afford to pay for its products. A factory that produced 25,000 tractors in 1990 made just 5,000 last year.

"The Kirov factory has so many layers of management it should have died long ago," the plant manager tells his guests. "But you know how difficult it is to make senior managers resign."

At the St Petersburg headquarters of Lomo, which used to make spy cameras and night-sight equipment for the Soviet air force, the investors are shown a display of the company's products ."Most of this belongs in a museum," murmurs their host apologetically.

For many of these managers it was the first time they had been confronted by potential investors asking detailed questions about balance-sheets.

Yuri Osintsev, 40, flew into Moscow from Yekaterinburg to give a presentation at the investors' hotel about his company, Uralmash, which makes 90 per cent of the country's oil-rigs.

Using overhead projections and speaking English he impressed his audience with his coherent grasp of the company's prospects and problems - it is owed $10m by other Russian companies who see no urgent need to pay, but when the country's oil industry revives it is well-placed to prosper.

But after his presentation Mr Osintsev admitted that coping with capitalism was all a bit of a strain. "Sometimes it's difficult for me to understand this whole market economy. I graduated 17 years ago. I've never had to think about the real market, or a Western-style balance-sheet - it's only now that I'm learning."

Russian companies' need for foreign capital is made even more pressing by the reluctance of local investors - both institutions and individuals - to put up their money. "Our population isn't very eager to put money into shares after the collapse of MMM," says Yuri Egorov, finance director of Moscow's Red October confectionery company. "They'd rather put it into hard currency."

When the visitors start to quiz Mr Egorov they too begin to have their doubts. A share-issue before Christmas was heavily promoted in London. But Mr Egorov does not seem clear about the current share price and says there is practically no secondary market, anyway.

The proceeds of the share-issue are being spent on new machinery - badly needed, the investors decide, after touring the ancient chocolate production- line just across from the Kremlin. Rival confectioners have been bought by Nestl and Danone, but Red October insists it can thrive on its own.

Discussing the company on the coach to the next meeting the investors are sceptical. Red October's brand name may be familiar to Russians, but will it be able to fight off the challenge of Mars and Snickers?

While the fund managers are impressed to see Russian companies working hard to emerge from their Soviet past, they come away from these encounters with only the haziest idea of the state of their finances. "Investing here is a bit of a shot in the dark," says Teddy Tulloch, on his first trip to Russia. A director of the Edinburgh firm Stewart Ivory, he spends most of his time looking at companies in the US, where he is almost overburdened with information.

Even it they decide they know enough about a company to buy its shares, investors cannot be sure they own them because of the lack of an independent share register.

With the Chechen crisis rumbling on, politicians muttering about re- nationalising some companies and the rouble continuing to slide, it does look as though Russia is only for the brave. But as their coach inches its way through Moscow streets where traffic once ran freely the fund managers become convinced that, whatever the upheavals in the Kremlin, Russians are out and about doing business.

Maxim Shashenkov. a 27-year-old Russian hired by Smith New Court as a political analyst, tells the group he cannot see his country turning back on the road to a market economy. "People are developing a sense of private property, they're building Russian capitalism It's very unlikely to resemble Western capitalism but it's here to stay."

Most of the visitors left convinced that some time along the road they would be investing in Russia - but not quite yet.