THE ROUBLE IN TROUBLE

Russia was the world's best performing market in 1996 and 1997. Are we seeing a correction or are there fundamental problems?

A bit of both. When a market goes up 400% or 500% in a short period, you can be sure it is heading for a sharp correction. The market went up too far, too fast because there was very little liquidity and very few stocks. Second, there was an exotic quality to Russia that investors found irresistible. But really, the fundamental story was, and probably still is, exciting: a well-educated population, incredible resources, cheap assets and inefficient enterprises that could be turned around with the right management and skills. Add to all that the general boom in emerging markets. Investors who previously made a lot of money in Asia and Latin America realized that the Russian market was really at bargain basement [levels].

But now Russia has to move forward on some structural changes. It has to reform the tax system and stop crime. Russians are expecting that someone will come and help them out. I don't think they deserve any more money [from the International Monetary Fund] until they can put their house in order. Prime Minister Sergei Kiriyenko recently moved to cut the budget deficit and solve balance-of-payment problems. If his measures work, tax reforms are put in place and Russia starts to make other structural changes, we would see investors return. Without new investments, Russia will just stagnate. It needs money and know-how to restructure its companies, buy modern equipment and become efficient.

The stock market has stabilized in the past few days.

Interest rates were jacked up to 150%. The bond rate is really very attractive. So even if the rouble falls 20%, if you are getting such ridiculous yields, there will always be some hot money coming in. The other thing to remember is that nearly 50% of the Russian economy [operates] in barter. In Moscow, executives of one utility company were telling me last week that half of the payments they receive are not in roubles - the utility gets oil for the electricity it supplies. It also gets pencils, which it can sell [for a big profit].

You have been critical of Russia's privatization program.

Basically, I feel things are not being done in a fair and transparent way. The loans-for-shares schemes [in the privatization] of banks were an outright transfer of wealth without adequate compensation to the government. Even the recent big deal involving the [Svyazinvest] telephone company was not done in a fair, transparent manner. From the beginning, when they had a vouchers system, Russians have done things haphazardly, without adequate preparation and safeguards. Even today there is no proper stock-registration system [in the bourse].

Are there stocks in Russia that are looking attractive?

There are two companies that look solid. One is Red October, which makes chocolates. Then there is Mosenergo - the Moscow Electric Power Co. People always eat chocolates and utilities are a defensive play. Moreover, these companies have a modicum of transparency.

With Asian markets still in a tailspin and others like Russia and Brazil also melting, are emerging markets going out of fashion?

I think the events in Asia and now in Russia are a wake-up call to emerging markets around the world, especially their regulators and governments. Unless there is transparency and improved corporate governance, investors will not touch these markets. Regulators must make sure there is an efficient settlements system. We are moving toward open economies and free trade, whether governments in Asia and elsewhere like it or not. There is a lot of competition for capital. Countries that are able to welcome, nurture and keep [foreign] capital will be the winners.

Which emerging markets do you like right now?

I think Hong Kong and Singapore are looking attractive at these levels. They are also the most open and transparent in Asia. The good news is that emerging markets have had a correction and are now quite cheap. Probably some will become even cheaper in the months to come. As the Dow and other developed stock markets which are grossly overvalued correct themselves, there will be more money flowing back to emerging economies. But it won't be like 1993, when almost all Asian markets went up 100%. This time around, only markets where there is transparency and fair systems in place would see a big influx of investors.