MORGAN STANLEY RUSSIA & NEW EUROPE FUND INC, PRE 14A, 1998-02-24

MORGAN STANLEY RUSSIA & NEW EUROPE FUND INC
PRE 14A, 1998-02-24

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<PAGE> 1

SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
</TABLE>

Morgan Stanley Russia & New Europe Fund, Inc.
- --------------------------------------------------------------------------------
(Names of Registrant as Specified in Its Charters)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

[ ] (1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by the registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.

C/O MORGAN STANLEY ASSET MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020

---------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
---------------------

To Our Stockholders:

Notice is hereby given that the Annual Meeting of Stockholders of Morgan
Stanley Russia & New Europe Fund, Inc. (the "Fund") will be held on Thursday,
April 9, 1998 at 11:00 a.m. (New York time), in Conference Room 3 at 1221 Avenue
of the Americas, 22nd Floor, New York, New York 10020, for the following
purposes:

1. To elect three Class III Directors for a term of three years.

2. To ratify or reject the selection by the Board of Directors of
Price Waterhouse LLP as independent accountants of the Fund for the fiscal
year ending December 31, 1998.

3. To approve an amendment to the Fund's investment restrictions to
allow the Fund to invest more than 25% of the Fund's total assets in
securities of companies involved in the energy sources industry or the
electric utilities industry if the Board of Directors of the Fund
determines that certain criteria are met.

4. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.

Only stockholders of record at the close of business on March 2, 1998 are
entitled to notice of, and to vote at, this Meeting or any adjournment thereof.

VALERIE Y. LEWIS
Secretary

Dated: March , 1998

IF YOU DO NOT EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY RETURN
THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. IN ORDER TO AVOID
THE ADDITIONAL EXPENSE TO THE FUND OF FURTHER SOLICITATION, WE ASK YOUR
COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE> 3

MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.

C/O MORGAN STANLEY ASSET MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020

-------------------------------

PROXY STATEMENT
-------------------------------

This statement is furnished by the Board of Directors of Morgan Stanley
Russia & New Europe Fund, Inc. (the "Fund") in connection with the solicitation
of Proxies for use at the Annual Meeting of Stockholders (the "Meeting") to be
held on Thursday, April 9, 1998 at 11:00 a.m. (New York time), in Conference
Room 3 at the principal executive office of Morgan Stanley Asset Management Inc.
(hereinafter "MSAM" or the "Manager"), 1221 Avenue of the Americas, 22nd Floor,
New York, New York 10020. It is expected that the Notice of Annual Meeting,
Proxy Statement and form of Proxy will first be mailed to stockholders on or
about March , 1998. The purpose of the Meeting and the matters to be acted
upon are set forth in the accompanying Notice of Annual Meeting of Stockholders.

If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. A Proxy may be revoked at any time prior to the time
it is voted by written notice to the Secretary of the Fund or by attendance at
the Meeting. If no instructions are specified, shares will be voted FOR the
election of the nominees for Directors, FOR ratification of Price Waterhouse LLP
as independent accountants of the Fund for the fiscal year ending December 31,
1998 and FOR the approval of the amendment to the Fund's investment
restrictions. Abstentions and broker non-votes are each included in the
determination of the number of shares present and voting at the Meeting.

The Board has fixed the close of business on March 2, 1998 as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Meeting and at any adjournment thereof. On that date, the Fund had
shares of Common Stock outstanding and entitled to vote. Each share
will be entitled to one vote at the Meeting.

The expense of solicitation will be borne by the Fund and will include
reimbursement to brokerage firms and others for expenses in forwarding proxy
solicitation materials to beneficial owners. The solicitation of Proxies will be
largely by mail, but may include, without cost to the Fund, telephonic,
telegraphic or oral communications by regular employees of the Manager. The
solicitation of Proxies is also expected to include communications by employees
of Shareholder Communications Corporation, a proxy solicitation firm expected to
be engaged by the Fund at a cost not expected to exceed $5,000 plus expenses.

THE FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS ANNUAL REPORT FOR ITS
FISCAL YEAR ENDED DECEMBER 31, 1997, TO ANY STOCKHOLDER REQUESTING SUCH REPORT.
REQUESTS FOR THE ANNUAL REPORT SHOULD BE MADE IN WRITING TO MORGAN STANLEY
RUSSIA & NEW EUROPE FUND, INC., C/O CHASE GLOBAL FUNDS SERVICES COMPANY, P.O.
BOX 2798, BOSTON, MASSACHUSETTS 02208-2798, OR BY CALLING 1-800-221-6726.
<PAGE> 4

Chase Global Funds Services Company is an affiliate of the Fund's
administrator, The Chase Manhattan Bank ("Chase Bank"), and provides
administrative services to the Fund. The business address of Chase Bank and
Chase Global Funds Services Company is 73 Tremont Street, Boston, Massachusetts
02108.

THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF EACH OF THE
MATTERS MENTIONED IN ITEMS 1, 2 AND 3 OF THE NOTICE OF ANNUAL MEETING.

ELECTION OF DIRECTORS
(PROPOSAL NO. 1)

At the Meeting, three Directors will be elected to hold office for a term
of three years and until their successors are duly elected and qualified. It is
the intention of the persons named in the accompanying form of Proxy to vote, on
behalf of the stockholders, for the election of Barton M. Biggs, John A. Levin
and William G. Morton, Jr. as Class III Directors.

Pursuant to the Fund's By-laws, the terms of office of the Directors are
staggered. The Board of Directors is divided into three classes, designated
Class I, Class II and Class III, with each class having a term of three years.
Each year the term of one class expires. Class I currently consists of Peter J.
Chase, David B. Gill and Michael F. Klein. Class II currently consists of John
W. Croghan and Graham E. Jones. Class III currently consists of Barton M. Biggs,
John A. Levin and William G. Morton, Jr. Only the Directors in Class III are
being considered for election at this Meeting.

Pursuant to the Fund's By-Laws, each Director holds office until (i) the
expiration of his term and until his successor has been elected and qualified,
(ii) his death, (iii) his resignation, (iv) December 31 of the year in which he
reaches seventy-three years of age, or (v) his removal as provided by statute or
the Articles of Incorporation.

The Board of Directors has an Audit Committee. The Audit Committee makes
recommendations to the full Board of Directors with respect to the engagement of
independent accountants and reviews with the independent accountants the plan
and results of the audit engagement and matters having a material effect on the
Fund's financial operations. The members of the Audit Committee are currently
Peter J. Chase, David B. Gill and Graham E. Jones, none of whom is an
"interested person," as defined under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Chairman of the Audit Committee is Mr. Jones.
After the Meeting, the Audit Committee will continue to consist of those
Directors of the Fund mentioned above who are not "interested persons." The
Audit Committee met two times during the fiscal year ended December 31, 1997.
The Board of Directors does not have nominating or compensation committees or
other committees performing similar functions.

There were five meetings of the Board of Directors held during the fiscal
year ended December 31, 1997. For the fiscal year ended December 31, 1997, each
current Director attended at least seventy-five percent of the aggregate number
of meetings of the Board and of any committee on which he served.

Each of the nominees for Director has consented to be named in this Proxy
Statement and to serve as a director of the Fund if elected. The Board of
Directors has no reason to believe that any

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<PAGE> 5

of the nominees named above will become unavailable for election as a director,
but if that should occur before the Meeting, Proxies will be voted for such
persons as the Board of Directors may recommend.

Certain information regarding the Directors and officers of the Fund is set
forth below:

<TABLE>
<CAPTION>
COMMON
STOCK SHARE
BENEFICIALLY EQUIVALENTS
OWNED AS OF OWNED UNDER
POSITION WITH PRINCIPAL OCCUPATIONS MARCH 2, DEFERRED FEE
NAME, ADDRESS AND DATE OF BIRTH THE FUND AND OTHER AFFILIATIONS 1998** ARRANGEMENTS+ PERCENTAGE
- ------------------------------------ --------------- ------------------------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Barton M. Biggs*.................... Director and Chairman, Director and Managing 10,023 -- ***
1221 Avenue of the Americas Chairman of Director of Morgan Stanley
New York, New York 10020 the Board Asset Management Inc. and
11/26/32 since 1996 Chairman and Director of
Morgan Stanley Asset
Management Limited; Managing
Director of Morgan Stanley &
Co. Incorporated; Director of
the Rand McNally Company;
Member of the Yale Development
Board; Director and Chairman
of the Board of various U.S.
registered investment
companies managed by Morgan
Stanley Asset Management Inc.
Peter J. Chase...................... Director since Chairman and Chief Financial 300 0 ***
1441 Paseo De Peralta 1996 Officer, High Mesa
Santa Fe, New Mexico 87501 Technologies, LLC; Chairman of
10/12/32 CGL, Inc.; Principal/ Owner,
Statements; Director of vari-
ous U.S. registered investment
companies managed by Morgan
Stanley Asset Management Inc.
John W. Croghan..................... Director since President of Lincoln Partners, 1,000 227.6094 ***
200 South Wacker Drive 1996 a partnership of Lincoln
Chicago, Illinois 60606 Capital Management Company;
6/8/30 Director of St. Paul Bancorp,
Inc. and Lindsay Manufac-
turing Co.; Director of
various U.S. registered
investment companies managed
by Morgan Stanley Asset
Management Inc.; Previously
Director of Blockbuster
Entertainment Corporation.
David B. Gill....................... Director since Director of various U.S. 501 0 ***
26210 Ingleton Circle 1996 registered investment companies
Easton, Maryland 21601 managed by Morgan Stanley
6/7/26 Asset Management Inc.;
Director of the Mauritius Fund
Limited; Director of Moneda
Chile Fund Limited; Director
of First NIS Regional Fund
SIAC; Director of Commonwealth
Africa Investment Fund Ltd.;
Chairman of the Advisory Board
of Advent Latin American Pri-
vate Equity Fund; Chairman and
Director of Norinvest Bank;
Director of Surinvest
International Limited; Di-
rector of National Registry
Company; Director of South
Asia Regional Fund Ltd.;
Previously Director of Capital
Markets Department of the
International Finance
Corporation; Trustee,
Batterymarch Finance
Management; Chairman and
Director of Equity Fund of
Latin America S.A.; Director
of Commonwealth Equity Fund
Limited; and Director of
Global Securities, Inc.
</TABLE>

3
<PAGE> 6

<TABLE>
<CAPTION>
COMMON
STOCK SHARE
BENEFICIALLY EQUIVALENTS
OWNED AS OF OWNED UNDER
POSITION WITH PRINCIPAL OCCUPATIONS MARCH 2, DEFERRED FEE
NAME, ADDRESS AND DATE OF BIRTH THE FUND AND OTHER AFFILIATIONS 1998** ARRANGEMENTS+ PERCENTAGE
- ------------------------------------ --------------- ------------------------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Graham E. Jones..................... Director since Senior Vice President of BGK 500 0 ***
330 Garfield Street 1996 Properties; Trustee of ten
Suite 200 investment companies managed
Santa Fe, New Mexico 87501 by Weiss, Peck & Greer;
1/31/33 Trustee of various investment
companies managed by Morgan
Grenfell Capital Management
Incorporated; Director of
various U.S. registered
investment companies managed
by Morgan Stanley Asset
Management Inc.; Previously
Chief Financial Officer of
Practice Management Systems,
Inc.
John A. Levin....................... Director since President of John A. Levin & 2,500 227.6094 ***
One Rockefeller Plaza 1996 Co., Inc.; Director of various
New York, New York 10020 U.S. registered investment
8/20/38 companies managed by Morgan
Stanley Asset Management Inc.;
Director and President of
Baker Fentress & Company.
William G. Morton, Jr............... Director since Chairman and Chief Executive 200 0 ***
1 Boston Place 1996 Officer of Boston Stock
Boston, Massachusetts 02108 Exchange; Director of Tandy
3/13/37 Corporation; Director of va-
rious U.S. registered
investment companies managed
by Morgan Stanley Asset
Management Inc.
Michael F. Klein*................... Director and Principal of Morgan Stanley & 0 -- ***
1221 Avenue of the Americas President Co. Incorporated and Morgan
New York, New York 10020 since 1997 Stanley Asset Management Inc.
12/12/58 and previously a Vice
President thereof; Director
and President of various
investment companies managed
by Morgan Stanley Asset
Management Inc.; Previously
practiced law with the New
York law firm of Rogers &
Wells.
Harold J. Schaaff, Jr.*............. Vice President Principal of Morgan Stanley & 0 -- ***
1221 Avenue of the Americas since 1996 Co. Incorporated and Morgan
New York, New York 10020 Stanley Asset Management Inc.;
6/10/60 General Counsel and Secretary
of Morgan Stanley Asset
Management Inc.; Officer of
various investment companies
managed by Morgan Stanley
Asset Management Inc.
Joseph P. Stadler*.................. Vice President Principal of Morgan Stanley & 0 -- ***
1221 Avenue of the Americas since 1996 Co. Incorporated and Morgan
New York, New York 10020 Stanley Asset Management Inc.;
6/7/54 Officer of various investment
companies managed by Morgan
Stanley Asset Management Inc.;
Previously with Price
Waterhouse LLP.
Stefanie V. Chang*.................. Vice President Vice President of Morgan 0 -- ***
1221 Avenue of the Americas since 1997 Stanley & Co. Incorporated and
New York, New York 10020 Morgan Stanley Asset
11/30/66 Management Inc.; Officer of
various investment companies
managed by Morgan Stanley
Asset Management Inc.;
Previously practiced law with
the New York law firm of Rog-
ers & Wells.
</TABLE>

4
<PAGE> 7

- ---------------
* "Interested person" within the meaning of the 1940 Act. Mr. Biggs is
chairman, director and managing director of the Manager, and Messrs. Klein,
Schaaff and Stadler and Ms. Chang and Ms. Lewis are officers of the Manager.
** This information has been furnished by each nominee, director and officer.
*** Less than 1%.
+ Indicates share equivalents owned by the Directors and held in cash accounts
by the Fund on behalf of the Directors in connection with the deferred fee
arrangements described below.

Each officer of the Fund will hold such office until a successor has been
duly elected and qualified.

The Fund pays each of its Directors who is not a director, officer or
employee of MSAM or its affiliates, in addition to certain out-of-pocket
expenses, an annual fee of $4,000. Each of the members of the Fund's Audit
Committee, which consists of the Fund's Directors who are not "interested
persons" of the Fund as defined in the 1940 Act, will receive an additional fee
of $500 for serving on such committee. Aggregate fees and expenses paid or
payable to the Board of Directors for the fiscal year ended December 31, 1997
were approximately $27,878.

Each of the Directors who is not an "affiliated person" of MSAM within the
meaning of the 1940 Act may enter into a deferred fee arrangement (the "Fee
Arrangement") with the Fund, pursuant to which such Director may defer to a
later date the receipt of his Director's fees. The deferred fees owed by the
Fund are credited to a bookkeeping account maintained by the Fund on behalf of
such Director and accrue income from and after the date of credit in an amount
equal to the amount that would have been earned had such fees (and all income
earned thereon) been invested and reinvested either (i) in shares of the Fund or
(ii) at a rate equal to the prevailing rate applicable to 90-day United States
Treasury Bills at the beginning of each calendar quarter for which this rate is
in effect, whichever method is elected by the Director.

Under the Fee Arrangement, deferred Director's fees (including the return
accrued thereon) will become payable in cash upon such Director's resignation
from the Board of Directors in generally equal annual installments over a period
of five years (unless the Fund has agreed to a longer or shorter payment period)
beginning on the first day of the year following the year in which

5
<PAGE> 8

such Director's resignation occurred. In the event of a Director's death,
remaining amounts payable to him under the Fee Arrangement will thereafter be
payable to his designated beneficiary; in all other events, a Director's right
to receive payments is non-transferable. Under the Fee Arrangement, the Board of
Directors of the Fund, in its sole discretion, has reserved the right, at the
request of a Director or otherwise, to accelerate or extend the payment of
amounts in the deferred fee account at any time after the termination of such
Director's service as a director. In addition, in the event of liquidation,
dissolution or winding up of the Fund or the distribution of all or
substantially all of the Fund's assets and property to its stockholders (other
than in connection with a reorganization or merger into another fund advised by
MSAM), all unpaid amounts in the deferred fee account maintained by the Fund
will be paid in a lump sum to the Directors participating in the Fee Arrangement
on the effective date thereof.

Currently, Messrs. Croghan and Levin are the only Directors who have
entered into the Fee Arrangement with the Fund.

Set forth below is a table showing the aggregate compensation paid by the
Fund to each of its Directors, as well as the total compensation paid to each
Director of the Fund by the Fund and by other U.S. registered investment
companies advised by MSAM or its affiliates (collectively, the "Fund Complex")
for their services as Directors of such investment companies for the fiscal year
ended December 31, 1997.

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT TOTAL COMPENSATION NUMBER OF FUNDS
COMPENSATION BENEFITS ACCRUED FROM FUND AND IN FUND COMPLEX
FROM FUND AS PART OF THE FUND COMPLEX PAID FOR WHICH
NAME OF DIRECTORS (2)(3) FUND'S EXPENSES TO DIRECTORS(2)(4) DIRECTOR SERVES(5)
- --------------------------- ------------ --------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Barton M. Biggs(1)......... $ 0 None $ 0 18
Peter J. Chase............. 4,578 None 72,207 13
John W. Croghan............ 4,917 None 76,959 13
David B. Gill.............. 4,578 None 76,868 13
Graham E. Jones............ 4,578 None 72,703 13
Michael F. Klein(1)........ 0 None 0 18
John A. Levin.............. 4,917 None 86,084 14
William G. Morton, Jr...... 4,313 None 68,543 13
Peter A. Nadosy(1)(6)...... 0 None 0 1
Warren J. Olsen(1)(7)...... 0 None 0 17
Frederick B.
Whittemore(1)(6)......... 0 None 0 17
</TABLE>

- ---------------
(1) "Interested persons" of the Fund within the meaning of the 1940 Act.
(2) The amounts reflected in this table include amounts payable by the Fund and
the Fund Complex for services rendered during the fiscal year ended December
31, 1997, regardless of whether such amounts were actually received by the
Directors during such fiscal year.
(3) Mr. Croghan earned $4,917 and Mr. Levin earned $4,917 in deferred
compensation from the Fund, pursuant to the deferred fee arrangements
described above, including any capital gains or losses or interest
associated therewith, during the fiscal year ended December 31, 1997. Such
amounts are included in these Directors' respective aggregate compensation
from the Fund reported in this table.
(4) Mr. Croghan earned $76,959, Mr. Gill earned $21,239, Mr. Jones earned $496
and Mr. Levin earned $86,084 in deferred compensation from the Fund and the
Fund Complex, pursuant to the deferred fee arrangements described above,
including any capital gains or losses or interest associated therewith,
during the fiscal year ended December 31, 1997. Such amounts are included in
these Directors' respective compensations from the Fund and the Fund Complex
reported in this table.
(5) Indicates the total number of boards of directors of investment companies in
the Fund Complex, including the Fund, on which the Director served at any
time during the fiscal year ended December 31, 1997.
(6) Messrs. Nadosy and Whittemore resigned as Directors of the Fund effective
March 14, 1997.
(7) Mr. Olsen resigned as President and Director of the Fund effective June 30,
1997.

6
<PAGE> 9

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Fund's officers and directors, and persons who own
more than ten percent of a registered class of the Fund's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission") and the New York Stock Exchange, Inc.
[The Manager assumes responsibility for filing such reports for the Fund's
officers and directors and inadvertently failed to file such reports on a timely
basis for .]

The election of Messrs. Biggs, Levin and Morton requires the affirmative
vote of a majority of the votes cast at a meeting at which a quorum is present.
Under the Fund's By-laws, the presence in person or by proxy of stockholders
entitled to cast a majority of the votes entitled to be cast thereat shall
constitute a quorum. For this purpose, abstentions and broker non-votes will be
counted in determining whether a quorum is present at the Meeting, but will not
be counted as votes cast at the Meeting.

THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT YOU VOTE "FOR" THE
ELECTION OF THE THREE NOMINEES AS DIRECTORS.

SELECTION OF INDEPENDENT ACCOUNTANTS
(PROPOSAL NO. 2)

The Board of Directors of the Fund, including a majority of the Directors
who are not "interested persons" of the Fund as defined in the 1940 Act, has
selected Price Waterhouse LLP as independent accountants for the Fund for the
fiscal year ending December 31, 1998. The ratification of the selection of
independent accountants is to be voted on at the Meeting, and it is intended
that the persons named in the accompanying Proxy will vote for Price Waterhouse
LLP. Price Waterhouse LLP acts as the independent accountants for certain of the
other investment companies advised by MSAM. Although it is not expected that a
representative of Price Waterhouse LLP will attend the Meeting, a representative
will be available by telephone to respond to stockholder questions, if any.

The Board's policy regarding engaging independent accountants' services is
that management may engage the Fund's principal independent accountants to
perform any services normally provided by independent accounting firms, provided
that such services meet any and all of the independence requirements of the
American Institute of Certified Public Accountants and the Securities and
Exchange Commission. In accordance with this policy, the Audit Committee reviews
and approves all services provided by the independent accountants prior to their
being rendered. The Board of Directors also receives a report from its Audit
Committee relating to all services that have been performed by the Fund's
independent accountants.

The ratification of the selection of independent accountants requires the
affirmative vote of a majority of the votes cast at a meeting at which a quorum
is present. For this purpose, abstentions and broker non-votes will be counted
in determining whether a quorum is present at the Meeting, but will not be
counted as votes cast at the Meeting.

THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT YOU VOTE "FOR" THIS
PROPOSAL NO. 2.

7
<PAGE> 10

APPROVAL OF AN AMENDMENT TO THE
FUND'S INVESTMENT RESTRICTIONS
(PROPOSAL NO. 3)

The Board of Directors of the Fund has approved an amendment to the Fund's
investment restrictions to allow the Fund to invest more than 25% of its total
assets in securities of companies involved in the energy sources industry or the
electric utilities industry in RNE countries (as set forth in Appendix A to the
Fund's Prospectus dated September 24, 1996) if the Board of Directors of the
Fund determines that the energy sources industry or the electric utilities
industry comprises a significant percentage of the market of an RNE country, and
that, in light of the anticipated return, investment quality, availability and
liquidity of the issues in either such industry, the Fund's ability to achieve
its investment objective would, in light of its investment policies and
limitations, be materially adversely affected if the Fund were not able to
invest greater than 25% of its total assets in either such industry. This change
would provide the Fund with greater flexibility to take advantage of investment
opportunities in the energy sources industry or the electric utilities industry
in RNE countries. The text of this investment restriction and the proposed
amendment is set forth as Exhibit A to this proxy statement. As used herein, the
energy sources industry refers broadly to companies generally involved in the
exploration, production, refining and marketing of oil and gas and the electric
utilities industry refers broadly to companies generally involved in the
generation and distribution of electricity and heat.

In light of the anticipated return, investment quality, availability and
liquidity of the issues in the energy sources industry in RNE countries, and the
significance of such securities in such markets, the Manager believes that it
would be in the best interests of the Fund and its stockholders if the Fund were
permitted to invest more than 25% of its assets in companies involved in the
energy sources industry in RNE countries. In addition, the Board of Directors
has determined that it is appropriate and in the best interests of the Fund and
its stockholders for the Fund to invest more than 25% of its total assets in
companies involved in the energy sources industry in RNE countries. The Board of
Directors has therefore approved investing more than 25% of the Fund's total
assets in the energy sources industry in RNE countries, subject to stockholder
approval of the amendment to the Fund's investment restrictions.

At present, approximately 22% of the Fund's total assets are invested in
securities of issuers in the energy sources industry in RNE countries and
approximately 12% of the Fund's total assets are invested in securities of
issuers in the electric utilities industry in RNE countries.

INCREASED INVESTMENT RISK

If greater than 25% of the Fund's assets are invested in the energy sources
industry or the electric utilities industry in RNE countries, the Fund may be
exposed to increased investment risks peculiar to those industries. The Fund's
performance would be more closely linked to the performance of those industries
and would be more dramatically affected by fluctuations in those industries.
Historically, stock prices of companies involved in the energy sources industry
have been volatile. The prices of these investments are subject to substantial
fluctuations, and may be affected by unpredictable economic and political
circumstances such as social, political or military disturbances, the taxation
and regulatory policies of various governments, the activities and policies of
OPEC (an organization of major oil producing companies), the existence of
cartels in such industries, the discovery of new reserves and the development of
new techniques for producing,

8
<PAGE> 11

refining and transporting such materials and related products, the development
of new technology, energy conservation practices and the development of
alternative energy sources and alternative uses for such materials and related
products. Stock prices of companies involved in the electric utilities industry
also have been volatile and subject to substantial fluctuations dependent upon
unpredictable economic and political circumstances.

STOCKHOLDER NOTICE

Stockholders are hereby notified that, as stated above, the Board of
Directors has approved investing more than 25% of the Fund's total assets in the
energy sources industry in RNE countries, subject to stockholder approval of the
amendment to the Fund's investment restrictions described herein. The Fund will
notify its stockholders of any decision by the Board of Directors to cease
investing more than 25% of the Fund's total assets in the energy sources
industry.

Furthermore, the Fund will notify its stockholders of any decision by the
Board of Directors to permit (or cease) investing more than 25% of the Fund's
total assets in the electric utilities industry in RNE countries. Such notice
will, to the extent applicable, include a discussion of any increased investment
risks peculiar to such industry to which the Fund may be exposed.

STOCKHOLDER APPROVAL

The Fund's investment restrictions are fundamental policies of the Fund and
may not be changed without stockholder approval. Approval of the proposed
amendment to the Fund's investment restrictions will require the affirmative
vote of a majority of the Fund's outstanding shares. As defined in the 1940 Act,
a "majority of outstanding shares" means the lesser of 67% of the voting
securities present at the Annual Meeting of Stockholders, if a quorum is
present, or 50% of the outstanding securities. For this purpose, both
abstentions and broker non-votes will have the effect of a vote to disapprove
the proposed amendment.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

To the knowledge of the Fund's management, the following persons owned
beneficially more than 5% of the Fund's outstanding shares at March [2], 1998:

<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- --------------------------------- ------------------------------------------- ----------------
<S> <C> <C>
Morgan Stanley, Dean Witter,
Discover & Co. ................ 296,513 shares with shared voting power and 9.36%
1585 Broadway shared dispositive power; 172,086 shares
New York, New York 10036 with shared dispositive power but no voting
power(1)
City of London Investment........ 597,600 shares with sole voting power and 10.3%
Management Company Limited sole dispositive power(2)
10 Eastcheap
London EC3M IAJ England
Olliff & Partners PLC............ 585,300 shares with sole voting power and 10.1%
10 Eastcheap sole disposition power(3)
London EC3M IAJ England
The Investable Emerging.......... 307,400 shares with sole voting power and 5.3%
Markets Country Fund sole dispositive power (4)
10 Eastcheap
London EC3M IAJ England
</TABLE>

- ---------------
(1) Based on a Schedule 13G filed with the Commission on February 13, 1998.
(2) Based on a Schedule 13D filed with the Commission on May 27, 1997.
(3) Based on a Schedule 13G filed with the Commission on April 18, 1997.
(4) Based on a Schedule 13D filed with the Commission on April 18, 1997.

9
<PAGE> 12

OTHER MATTERS

No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of stockholders arise,
including any question as to an adjournment of the Meeting, the persons named in
the enclosed Proxy will vote thereon according to their best judgment in the
interests of the Fund.

STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING

A stockholders' proposal intended to be presented at the Fund's Annual
Meeting of Stockholders in 1999 must be received by the Fund on or before
November , 1998, in order to be included in the Fund's proxy statement and
form of proxy relating to that meeting.

VALERIE Y. LEWIS
Secretary
Dated: March , 1998

STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WHO WISH TO
HAVE THEIR SHARES VOTED ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.

10
<PAGE> 13

EXHIBIT A

PROPOSED AMENDMENT TO
INVESTMENT RESTRICTIONS

Currently, the Fund's investment restrictions state:

"As a matter of fundamental policy:

1. The Fund will not invest more than 25% of its total assets in a
particular industry (including for this purpose any securities issued by a
government other than the U.S. government) . . ."

The text of the proposed amendment is set forth below:

"As a matter of fundamental policy:

1. The Fund may not invest more than 25% of its total assets in a
particular industry (including for this purpose any securities issued by a
government, other than the U.S. government), except to the extent, and only for
such period of time as, the Board of Directors of the Fund determines in view of
the considerations discussed below that it is appropriate and in the best
interest of the Fund and its stockholders to invest more than 25% of the Fund's
total assets in securities of companies involved in the energy sources industry
or the electric utilities industry in RNE countries. Since the securities
markets of many RNE countries are emerging markets characterized by a relatively
small number of issues, it is possible that the energy sources industry or the
electric utilities industry may on occasion comprise a significant percentage of
the market of one or more RNE countries. As a result, the Fund has adopted a
policy under which it may invest more than 25% of its total assets in the
securities of issuers in each of those industries. The Fund would only take this
action if the Board of Directors determines that the energy sources industry or
the electric utilities industry comprises a significant percentage of the market
of an RNE country, and that, in light of the anticipated return, investment
quality, availability and liquidity of the issues in either such industry, the
Fund's ability to achieve its investment objective would, in light of its
investment policies and limitations, be materially adversely affected if the
Fund were not able to invest greater than 25% of its total assets in either such
industry. In the event the Board of Directors permits greater than 25% of the
Fund's total assets to be invested in the energy sources industry or the
electric utilities industry in RNE countries, the Fund may be exposed to
increased investment risks peculiar to that industry. The Fund will notify its
stockholders of any decision by the Board of Directors to permit (or cease)
investments of more than 25% of the Fund's total assets in the energy sources
industry or the electric utilities industry in RNE countries. Such notice will,
to the extent applicable, include a discussion of any increased investment risks
peculiar to such industry to which the Fund may be exposed . . ."

A-1
<PAGE> 14
PROXY

MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.

C/O MORGAN STANLEY ASSET MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby constitutes and appoints MICHAEL F. KLEIN, VALERIE Y.
LEWIS, HAROLD J. SCHAAFF, JR. and STEFANIE V. CHANG, and each of them, as
proxies for the undersigned, with full power of substitution and resubstitution,
and hereby authorizes said proxies, and each of them, to represent and vote, as
designated on the reverse side, all stock of the above Company held of record by
the undersigned on March 2, 1998 at the Annual Meeting of Stockholders to be
held on April 9, 1998, and at any adjournment thereof.

The undersigned hereby revokes any and all proxies with respect to such stock
heretofore given by the undersigned. The undersigned acknowledges receipt of the
Proxy Statement dated March ___, 1998.

(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE.)
SEE REVERSE SIDE

[X] Please mark your votes as in this sample.

1. Election of the following nominees as Directors:

FOR WITHHELD

[ ] [ ] Class III Nominees:
Barton M. Biggs, John A. Levin and William G. Morton, Jr.

--------------------------------------
For all nominees except as noted above

2. Ratification of the selection of Price Waterhouse LLP as independent
accountants.

FOR AGAINST ABSTAIN

[ ] [ ] [ ]

3. Approval of an amendment to the Fund's investment restrictions to allow
the Fund to invest more than 25% of the Fund's total assets in
securities of companies involved in the energy sources industry or the
electric utilities industry if the Board of Directors of the Fund
determines that certain criteria are met.

FOR AGAINST ABSTAIN

[ ] [ ] [ ]

4. In the discretion of such proxies, upon any and all other business as
may properly come before the Meeting or any adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE THREE CLASS III NOMINEES AND IN FAVOR OF PROPOSAL NO. 2
AND PROPOSAL NO. 3

PLEASE SIGN EXACTLY AS YOUR NAME APPEARS. WHEN SHARES ARE HELD BY JOINT TENANTS,
EACH JOINT TENANT SHOULD SIGN.

SIGNATURES(S)___________________________________
DATE _______________, 1998

When signing as attorney, executor, administrator, trustee, guardian or
custodian, please sign full title as such. If a corporation, please sign full
corporate name by authorized officer and indicate the signer's office.

If a partnership, please sign in partnership name. PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [ ]