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Investing in Eastern Europe

Profits in Russia and Former Satellite States

By Sam Hopkins
Monday, May 12th, 2008

This is the first of a two-part series international investing guru Sam Hopkins has written on countries that have emerged from Communism to become the most dynamic economies in today's world market. Part One deals with European Investments, and in Part Two we'll look at Asia.

— Brian Hicks, Publisher

Stalin wouldn't approve of decadent Big Macs.

But on a recent trip, from the top of a staircase above McDonald's and across the hall from a casino, I noticed the ruthless Soviet premier's face pointing the way to Prague's Museum of Communism.

Fast food restaurants are just one of a striking set of symbols that exemplify post-Cold War Europe's economic transition. With that in mind, let's take a look at some of the U.S.-listed tickers that have come to us from behind the Iron Curtain.

Eastern Europe Investments: Capitalize on New Capitalism

The Soviet Union, Czechoslovakia, and Yugoslavia are no more. But the countries that comprised them now enjoy some of the world's highest economic growth rates, creating ever-increasing options for investors.

After enduring plenty of economic pain under central planning, Slovakia's new open economy and flat tax plan have brought billions in foreign investment and staggering 8.8% GDP growth in 2007.

With low debt and low inflation they are a model for new EU states, and in turn, the continental body will reward Slovakia with euro accession in 2009.

Let's face it, good national planning makes citizens feel wealthier. We're seeing the flipside of that Stateside these days as Washington's ugly balance sheet has consumers down in the dumps.

But, in former Eastern Bloc countries, optimism rules, and spending on all kinds of goods creates opportunities for companies to move products in and out.

Take Central European Distribution Company (NASDAQ:CEDC), whose base in Poland eases its spread into new European Union member states and the strong euro currency zone.

CEDC, which specializes in liquor distribution, has seen the home-country economy take off too, as the Polish economy logged a robust 6.5% last year.

The result of this regional progress for the company has been a steady and impressive revenue rise, as we see in the CEDC revenue chart below from Morningstar:

cedc revenue

Since its founding in 1990 as Carey Agri by intrepid American executives, CEDC has prospered in free Poland and its environs.

CEDC shares have nearly doubled over the past year, and in April the company issued guidance for the coming year that exceeded analysts' estimates, making this a solid hold for emerging Europe exposure in your portfolio.

So what about Mother Russia, the seat of Eastern European power for half a century?

Is Russia Returning to Old Ways?

There's a new president in the Kremlin as of May 7, as Dimitri Medvedev has taken the reins from Vladimir Putin. Putin will stay on as prime minister and head of the new United Russia party, but Medvedev's leadership should bear some of its own hallmarks.

After all, Medvedev is the first Russian head of state to have earned his stripes entirely in the post-Soviet state apparatus.

Most importantly from a business standpoint, Medvedev is also the head of Russia's natural gas monopoly Gazprom.

Russia provides a quarter of Europe's natural gas. That puts Moscow in a position of power, rolling in the rubles and signing a slew of bilateral agreements with EU members and others eager to secure supply.

But there are relics of Soviet times in Russia's new energy economy: central planning and tight control of political opposition.

The Other Russia coalition, headed by chess legend Garry Kasparov, complain of intense government security monitoring and heavy-handed crackdowns on protest marches.

Yet Russia has had 9 straight years of economic expansion and 7% growth in 2007, putting it in the BRIC pantheon of emerging markets, along with Brazil, India and China.

Gazprom is listed on the London Stock Exchange and Russian stocks in the U.S. have enjoyed a sustained rise.

Hefty Gains from Russian Stocks

Shares of Vimpel Communications (NYSE:VIP), Mechel OAO (NYSE:MTL), and the Market Vector Russia ETF Trust (NYSE:RSX) prove that investor confidence in the country has recovered substantially since the Russian debt default of 1998.

  • Vimpel shares have gained 1107% since 2003 after trading sideways for the five years before.

  • Mining and steel group Mechel has ridden the Russian wave along with surging worldwide materials demand to a 350% one-year gain.

  • The RSX ETF is heavy on Gazprom and Norilsk Nickel—both of which only trade over the counter in the U.S.—and since launching in 2007 RSX gained a handy 38.96%.

Hey, the United States is most people's reference point for capitalist wealth, but we still have plenty of kinks to work out. The progress Russia and former satellite states have made in under two decades is extremely impressive, and it's yielded real returns to investors who stayed up on the latest developments overseas.

There are more Eastern European investment opportunities in the offing. Romania and Bulgaria joined the EU in 2007, and most of the former Yugoslavia is at the doorstep. Stay tuned and we'll let you know where to buy in as those stories develop.

Next week, we'll dive into China, Vietnam, and other Asian countries where socialism is still officially the name of the game, but market economies are really driving progress.

Regards,

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Sam Hopkins



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