East of Eastern Europe: a rich distribution landscape emerges in 2008

With the inclusion of 10 previous eastern block (and since 2004 European Union) countries into the Schengen agreement as of December 21st, 2007 the old iron curtain effectively moved eastwards. This area which I call East of Eastern Europe and includes giants such as Russia, Ukraine and Kazakhstan, I predict will bring rich harvests in asset gathering in 2008 for the discerning investment products distributor. I will begin my arguments starting with a survey of almost 400 major wealth and asset managers by Euromoney magazine which found that private banking income in Russia surged by almost 88% in 2007. Granted, this is not surprising as the New York Times has harped on multiple occasions that Russia now has over 50 billionaires worth a total of almost US $300 billion. The surprise here is that private banking as we know it is not developed in Russia and only a few mostly foreign banks offer private banking services. Russia is also reportedly proposing amendments to the current collective investments regulation to offer Hedge Funds to qualified domestic investors. Domestic mutual funds are also around 100.

In Ukraine, signs of conspicuous new wealth are also obvious. Along the tree lined R-12 highway south from Kiev in the suburb of Koncha-Zaspa, a wide array of luxurious multi-million dollar estates are going up at a speed which would make even the most industrious developers in Dubai envious. This wealth is arguably highly concentrated among the Ukrainian oligarchy. Rinat Akhmetov, who ranks 214th on Forbes’s 2007 global rich list with a fortune estimated by Forbes at $4 billion is the owner of System Capital Management which alone is responsible for 8 per cent of Ukraine’s GDP. Ukraine's capital market is relatively small, about US $80 Billion. Investing in Ukraine's equity market remains difficult due to limited investment and local investors have very limited choices among a handful of mutual funds. The scene is similar in Kazakhstan, where there are about 14 pension funds, 40 insurance companies and 113 mutual funds for local investors to choose from. In 2007, the government of Kazakhstan set up a regional financial center in Almaty, (the commercial capital of Kazakhstan) open to any foreign or domestic financial organization to set up operations. Local asset managers such as Almaty based Ansher Fund Management and chief investment officer of the firm's Central Asia Opportunity fund have recognized this unprecedented opportunity and have been very busy floating new funds.

A decade ago, East of Eastern Europe markets seemed very exotic and highly risky to the western investor and yet the tremendous growth offered in these markets over this period has been heady. Ukraine's equity market which was established as part of the country's privatization program started to take off in 2004 and by July 2007 provided the best returns of any equity market globally. From its inception in 1997 to Nov. 20, 2007, the PFTS index has yielded a 131% return. In the last three years, the index has yielded 514% and over 2,000% for the last five years. 2008 is indeed the right year to tap the asset gathering potential of East of Eastern Europe and set up distribution channels for investment products.