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October 5, 1997

Emerging From Chaos, Blue-Chip Paragons


Despite Russia's well-earned reputation for companies run like gangster fiefs, a small but growing number of blue-chip concerns now embrace ideas like shareholder rights, open disclosure and bottom-line management.

Trade House GUM, the Moscow department store that was once a queue-filled monument to central planning, was one of the first companies to make the transition.

The government auctioned 2.5 million shares for about $1 apiece in 1991, and though GUM provided no financial reports -- and though there was still no stock exchange -- foreign speculators pushed the shares up to $4 by 1994. The lure? GUM was one of the few Russian companies that was profitable, and it controlled priceless real estate in Moscow.

Last year, GUM shares began trading in the United States as American depository receipts. But because GUM could not provide adequate audited financial results, the stock started at the lowest ranks of American trading -- over-the-counter pink sheets.

But that did not seem to bother investors. More than a third of the shares quickly migrated to the United States, and the price soared to more than $40 a share before splitting 10 for 1 a few months ago.

Now the company, preparing to list on the New York Stock Exchange, has hired Ernst & Young to audit its results and bring its books into full compliance with American accounting rules.

Other Russian stocks that have adopted Western standards include Lukoil, the giant oil company; Vimpelcom, Russia's No. 2 cellular phone service, and even the Red October candy factory in Moscow, which recently sold $25 million of preferred stock directly to investors in the United States and Europe.

But these companies are the exception. In all, about a dozen big Russian companies have shares that trade in the United States.

For now, many advisers say American investors who want to test the waters of Russian capitalism may do best by putting a toe in a mutual fund with holdings across an array of Russian companies.

Two such funds have been among the best-performing international stock funds this year. Lexington Troika Dialog Russia rose a stunning 149.4 percent for the 12 months ending Sept. 30, ranking first among all mutual funds.

The Vontobel Eastern European Equity fund, whose holdings in Russian stocks have climbed steadily this year to a third of the fund as of last week, was up 33.9 percent for the same 12 months, ranking 47th among 530 international funds.

A closed-end fund, Templeton Russia, has sagged from its high in July of $64.75, but is still up 200 percent in the last year.

And the high-flying Hermitage Fund? Only big fish could have enjoyed its near tripling in value so far this year: the minimum investment is $100,000, and the hedge fund is open only to "qualified" wealthy investors.

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