Jobs&Money: Has all the Eastern promise just gone West?: As stock markets across Eastern Europe soar Patrick
Collinson looks at the facts behind the hype and discovers Russia is still the best bet
Beware the hype about today's entry of 10 new Eastern European members into the EU. A new wave of Eastern
European unit trusts are hoping to grab investors with talk of a new economic miracle.
Yet behind the scenes, big fund managers are cutting their investments, fearing that a bubble is about to burst.
Stock markets across Eastern Europe have soared over the past year as investors have anticipated the benefits of full
EU membership.
Warsaw's market is up 73% over the last 12 months, while Budapest's bourse is ahead 23% in the last three
months.
The boom has pushed valuations for stocks in Poland to sky-high levels; using the traditional yardstick of the
"price-earnings ratio", shares in Warsaw are nearly twice as costly as shares on the London market.
Elena Shaftan runs Jupiter's Emerging European Opportunities fund, which has doubled in value since its launch
just 18 months ago.
But she has recently cut the fund's exposure to Poland from 18% to 12%. "Poland is a bit of a bubble and
investors have to trade very carefully," she says. Remember Greece, she warns; its market boomed before accession,
then slumped after.
Mark Mobius, the world's best-known emerging markets investor, also warns about current valuations in Eastern
Europe. "In general markets in the region are not cheap on a valuation basis," he says.
But the fund managers are almost united in their optimism for the Russian market, even though it, too, has soared,
going up eleven times in just five years.
A native Russian (with perfect English) Ms Shaftan brims with an infectious confidence, insisting that investors
jumping on the bandwagon today can still enjoy the ride.
She typifies the new Russian middle-class which has emerged with astonishing rapidity not just in Moscow, but across
the former Soviet Union. Cast your mind back to the pre-Putin mid-1990s; output was sliding catastrophically and
Mafia-run oligarchs were ransacking the country. The human cost was immense; alcoholism soared and male longevity went
sharply into reverse.
Yet today, she says, Russian output is soaring; economic growth rebounded in 1999, and has averaged more than 5% a
year since.
Putin appears to be winning the battle against the oligarchs and economic growth this year and next is expected to be
of the order of 7%, putting it in the China league.
But Ms Shaftan's optimism is not universally shared. Income inequality in the new Russia is grotesque; the top
10% have 23 times more than the bottom 10% (the same ratio in Britain is 12, in Poland, seven).
Internet access is low at 5% of households, and the country is divided into a tiny stratum of people who travel
abroad and are wired into global modernity, and a huge mass struggling to survive. Many commentators argue that
Putin's successful economic record depends on the windfall of a high world price for Russia's biggest natural
resource.
Official figures claim oil and gas provide 9% of Russia's GDP, but the World Bank puts it as high as 25%.
But Ms Shaftan says Putin's reforms have sparked a wider entrepreneurial spirit that is broadening the economy
beyond oil.
The fastest growth is in light industry, feeding the new middle classes. "Five years ago I wouldn't be seen
dead wearing Russian-made clothes," says Shaftan.
"Now a lot of manufacturers have sprung up and the quality has vastly improved. You've also seen the same
sort of transformation in the food industry."
Setting up a business, no matter how small, used to require the issue of 15 different licences with officials
everywhere demanding a take. Then an "inspector" would call every month to ensure compliance - and demand more
brown envelopes. Finally, a separate "standards" inspectorate would call by, demanding yet more bribes.
Putin-inspired reforms now mean businesses can be "inspected" only once every two years. "Standards"
have been relaxed.
Corporation tax is low at 24%, personal taxes are tiny at just 13% and personal indebtedness is just a fraction of
the levels in the West.
Shaftan is particularly keen on Russian telecoms, with Vimpelcom her single biggest holding.
When mobile networks were launched in Russia, analysts said that relative poverty meant it would take decades before
they reached the penetration levels common in Western Europe.
Not so. Penetration rates in Moscow are touching 70% and even out in the regions it is close to a quarter of the
population.
But this is no choice for an ethical investor; industries where Russia has a competitive edge include military and
nuclear hardware, such as Sukhoi fighter jets.
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RUSSIA IN FACTS
