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Hot Russia: will it last?
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April 3, 1997: 12:43 p.m. ET
Stock market booms on low inflation, emerging service economy
From Contributing Editor William S. Rukeyser
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NEW YORK (CNNfn) - Not even eight years after the fall of the Soviet Union, the former citadel of communism is ground zero for just about the hottest stock market on planet earth.
But will it last?
The new bounce in Boris Yeltsin's step has lifted lots of spirits -- none more than those of investors in Russia's booming stock market.
"The stock market has done extremely well," said Marianne Hay, a managing director at Morgan Stanley. "It was up in excess of 150 percent in 1996 and is also one of the strongest stock markets in our emerging markets universe in 1997 to date.
"The Russian stock market has been very strong on the back of demand for Russian securities outside Russia," she said.
That demand has been powered by the economic reforms that Yeltsin's new cabinet is determined to reinforce.
Since 1992, inflation has dropped from a dizzying 2,500 percent to around 20 percent. Factories have replaced bureaucrats with business managers. And while energy companies still account for more than half the stocks traded, a service economy is emerging.
Despite huge remaining problems in everything from taxation to accounting standards, the good economic news bodes well for stocks.
"We believe firmly that reforms are irreversible at this point and we don't see a threat where a communist party would come in and nationalize everything," said Richard Hisey, an investment strategist with the Lexington Troika Dialog Russia Fund.
Many investment advisers now recommend putting 1 percent to 3 percent of a portfolio into Russia through a mutual fund.
But choices are limited. The big Vanguard Group, for instance, still regards Russia as a "pre-emerging" market and has no Russian stocks in any of its funds.
Only three funds invest mostly in Russian companies, and none has been around long. Since September, however, all have outstripped most other funds.
"It is a high potential return market, but it is still a high-risk market," Hay said.
Risky enough, in fact, that prudent investors might cash in any gains that pushed the Russian portion of their portfolios above that 1 to 3 percent range. 
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