Russia: a safe haven in eastern Europe?

Eastern Europe has been a great investment in recent years, with funds such as Elena Shaftan's widely-recommended Jupiter Emerging European Opportunities returning nearly 400% since September 2002, helped by consumer booms across the region. But for how much longer can this winning streak last? Take Hungary, for example, one of the region's key markets. One of the main props behind the boom has been the Swiss carry trade (the less famous cousin of the yen carry trade). At this time last year, Hungarians were snapping up cross-border loans based on Swiss francs. With the interest rate in Switzerland sitting at 1.75%, loans could be secured at better than half the interest rate on the local currency, the forint in fact, 80% of new Hungarian mortgages are in Swiss francs.

But as with everywhere else in the world, the cheap credit lines are beginning to dry up. Swiss interest rates are now sitting at 2.5%, and the forint has fallen by 9.8% against the Swiss franc in the past year, sending mortgage payments soaring. "We're now seeing a vicious cycle where all this goes into reverse. The impact could be enormous," says Hans Redeker, currency chief at BNP Paribas in The Daily Telegraph. Latvia has been the first to feel the pain. The country's banks have halved lending to customers, says The Wall Street Journal, as free and easy lending led to a 70% jump in Riga house prices in 2006, even while wages rose only 33%. Like Hungary, its economy has been over-reliant on a consumer boom fuelled by cheap money. And now that that's ending, Latvia is very vulnerable along with other countries in the region to the sub-prime loan crisis, says S&P, the credit ratings agency.

Russia, on the other hand, is a different story. The commodity boom has filled the country's central bank with over $300bn in assets, allowing it to invest in areas such as infrastructure, where 25% of oil revenues now go. "Russia really is, in the current credit crunch, a bit of a safe haven," says Roland Nash, chief strategist at Renaissance Capital on Bloomberg. It's now the world's tenth largest economy, and grew 6.7% last year (with 7.5% forecast for 2007). And after flat-lining this year because of uncertainties over the upcoming presidential election, the stockmarket is poised to rally, says Prosperity's chief investment officer Alexander Branis. "We think that sooner or later this market will continue re-rating. We believe there is great upside in this market," he tells Reuters. The Russian Prosperity fund is up 694.3% over the past five years and 6.5% for the year to date, but the £25,000 minimum investment may be more than most investors are willing to bet on the country. A better bet might be investment trust JP Morgan Russian Securities (JRS). Managed by a former trainee submarine commander, it's up 481.4% over five years and trades on a chunky 9.8% discount.

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