<PAGE>
--------------------------------------------------------------------
MORGAN STANLEY
RUSSIA & NEW EUROPE
FUND, INC.
--------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
RUSSIA & NEW EUROPE FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank
Chaseside
Bournemouth BH7 7DB
United Kingdom
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the six months ended June 30, 1998 the Morgan Stanley Russia & New Europe
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of -30.40% compared to -38.17% for the Fund's benchmark index. The Fund's
performance is compared with a market weighted benchmark composite comprised of
the MSCI Local index for each of Russia, Poland, the Czech Republic and Hungary.
For the one year ended June 30, 1998, and for the period since the Fund's
commencement of operations on September 30, 1996 through June 30, 1998, the Fund
had a total return, based on net asset value per share, of -30.92% and 7.44%,
respectively, compared with -38.79% and 6.44%, respectively, for its benchmark.
On June 30, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $15.19 representing a 14.8% discount to the Fund's net asset value
per share.
The financial crisis that has plagued Russia since the end of 1997 and
precipitated a sell-off in the equity market reached a critical point during the
second quarter of 1998. Continued delays on fiscal reforms, particularly an
overhaul of the country's ineffective tax system, forced the government to tap
the debt markets at incredibly high costs. The political shakeup in April that
led to Viktor Chernomyrdin's replacement by Sergei Kiriyenko as Prime Minister
has dramatically increased the reformist strength and technocratic capability of
the government. But during the political turmoil, Russia's reform pace
faltered. According to government statistics, for the first five months of the
year, federal budget revenues dropped 15%. The poor tax collection and a
growing lack of confidence in the government's ability to implement change led
foreign investors and some domestic entities to exit ruble assets. Capital
flight put pressure on the Russian ruble and, several times during the quarter,
government debt auctions failed to raise sufficient revenue to allow the
government to roll-over its growing debt burden. Negative sentiment in emerging
markets globally aggravated the situation. Continued problems in Asia,
particularly the potential crisis in Japan, refocused attention on Russia's
predicament. Hard currency reserves dwindled to below $15 billion as the
Russian Central Bank (RCB) sold dollars in order to support the ruble and
treasury yields at one point reached 120%.
Growing fears of devaluation led to a staggering 53.5% fall in the Russian stock
market for the quarter and a 59.7% fall for the year as measured by MSCI Russia
Index in dollar terms. Oil stocks in particular suffered from a combined Russia
meltdown and a major drop in the price of oil, leaving stocks such as Lukoil
down 63.5% year-to-date. Utility stocks, led by electricity giant Unified
Energy Systems (UES), are heavily dependent on reform to unlock company value.
As a result, they performed poorly. UES, which represents around 30% of the
Russia Index, fell over 50%. The telecommunications sector was relatively more
resistant to the crisis, due to better fundamentals. Rostelecom, Russia's
international operator was off 30.9% year-to-date. The Fund maintained an
underweight position in Russia versus the Index which was implemented at the end
of last year. In particular, a large underweight in oil and utility stocks
helped the Fund's performance relative to the Index.
On June 23, Kiriyenko unveiled his "anti-crisis" plan designed to attack
critical fiscal problems and submitted it to the lower house for approval.
In addition, intense negotiations between the Kremlin and the International
Monetary Fund (IMF) over a major bailout package ensued. But the package
will only give the Russian government a window of opportunity to enact fiscal
austerity and increase tax collection. Meanwhile, the economic crisis has
begun to impact the real economy--for the first five months of the year,
gross domestic product contracted by 0.2%, reversing the positive trend that
began last year. Over the course of 1998, the Russian economy is likely to
fall by more than 2%. In addition, Russia is a large exporter of commodities
and the dramatic fall in prices has pushed Russia's trade deficit into
negative territory and led to current account deficits. While the crisis
situation should speed up the overall reform process, both governmental and
corporate, the next six months will likely be a difficult environment for
Russian investments.
Market performance in Central Europe suffered a contagion effect from Russia's
turmoil as virtually every market in the region fell significantly, including
stocks in the Baltics and Romania. There is little fundamental impact, however,
of Russia on Central Europe. Although the economies were heavily integrated
during the Soviet-era, since the fall of the Berlin wall, trade patterns have
shifted radically towards Western Europe and today direct trade links are
limited. Not surprisingly, the few stocks with a high level of sales directly
to Russia suffered disproportionately. The Hungarian pharmaceutical Gedeon
Richter, with a large market share in the CIS, fell around 25% during the second
quarter on fears of a slow down in exports. Hungarian banks were forced to
marginally increase provisioning for loans to Russia, but this will have a
negligible impact on earnings this year. The real risk remains market
sentiment--a Russian crisis may reduce the abundant flow of investment capital
to Central Europe.
After a long hiatus, investor focus returned to the Czech market during the
second quarter due to political changes.
2
<PAGE>
While the Social Democrats won the largest number of seats in June elections as
expected, the right-wing parties did particularly well at the expense of far
left-wing parties. It will be difficult for the Social Democrats to form a
coalition as the party's natural governing partners failed to win Parliamentary
representation. Clarification on the political front is necessary for the
market to move forward. And bank privatization, in particular, is pivotal. The
country's largest bank, Komercni Banka, has endured significant operational
problems in the past. However, if the company were privatized to strategic
shareholders, the fundamental outlook would dramatically improve.
The Fund has increased its exposure to the Czech market during the second
quarter, in part through participating in the IPO of Ceske Radiokomunice, a
telecommunications and media concern. The company is a majority owner of
RadioMobil, one of two cellular operators in the Czech Republic, where
subscriber growth has been phenomenal over the last year. With the addition of
Vimpelcom, the Moscow cellular operator, the Fund's exposure to cellular stocks,
reached a total 6% allocation and total telecom exposure of almost 20%.
Cellular operators have displayed strong operating performance in their early
stages in Western Europe through growing penetration and revenue per subscriber,
a process which is being repeated in Central and Eastern Europe.
In another surprise election result, the ruling Hungarian Socialist party was
ousted by the center-right parties. The resulting political uncertainty dragged
down the market 11% for the second quarter. The new administration is not
likely to significantly alter basic economic policy due in part to the
requirements of European integration, thus the market has rebounded from its
lows reached in May. Both macroeconomic and corporate fundamentals remain
sound. Real gross domestic product growth is on track to reach 5% this year,
aided by continued strong export performance. Corporate earnings remain the most
robust in the region.
The Polish market fell 3.9%, but the market remains the best performing in the
region, up 14% for the year. Foreign direct investment (FDI) into the country
has picked up significantly, reaching $4 billion in the first 5 months of the
year and at this pace will reach $8 billion for the year. FDI has significant
positive effects for developing countries, such as the transfer of technology
and Western know-how. Poland's economic performance continues to impress.
Gross domestic product growth is likely to break 6% for the year, led by both
strong industrial production and investment. In addition, the central bank is
winning its war against inflation, which continues to fall at a steady pace and
is expected to reach single digit levels by next year. Falling inflation should
allow the central bank to lower interest rates, which will benefit the entire
market, particularly the banks.
The key strategic allocations, underweight Russia and overweight Central Europe,
remained in place through the end of the second quarter. The Fund awaits
further developments with regards to a bailout package and reform requirements
from the International Monetary Fund. The long-term investment case for Central
Europe continues to improve. Current macroeconomic trends point to continued
closer integration with Western Europe.
Beginning with this report, we are discontinuing our practice of designating an
individual portfolio manager to sign our reports to shareholders in order to
better reflect the "Team" investment approach of the Fund's investment adviser,
Morgan Stanley Asset Management ("MSAM"). The global emerging markets team at
MSAM has general oversight of the investment management of the Fund. Paul C.
Psaila continues to have primary responsibility for the day-to-day management of
the Fund's assets.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
July 1998
3
<PAGE>
Morgan Stanley Russia & New Europe Fund, Inc.
Investment Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION TOTAL RETURN (%)
------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
---------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year to Date -33.98% -- -30.40% -- -38.17% --
One Year -39.93 -39.93% -30.92 -30.92% -38.79 -38.79%
Since Inception* - 8.48 - 4.94 7.44 4.19 6.44 3.63
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
SEPTEMBER 30, 1996* YEAR ENDED ENDED
TO DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
-------------------- ----------------- -------------
<S> <C> <C> <C>
Net Asset Value Per Share. . . . . . . . $ 20.77 $ 26.59 $ 17.83
Market Value Per Share . . . . . . . . . $ 18.00 $ 23.88 $ 15.19
Premium/(Discount) . . . . . . . . . . . -13.3% -10.2% -14.8%
Income Dividends . . . . . . . . . . . . $ 0.07 -- --
Capital Gains Distributions. . . . . . . -- $ 3.68 $ 0.67
Fund Total Return (2). . . . . . . . . . 4.18% 48.19% -30.40%
Index Total Return (3) . . . . . . . . . 9.55% 57.12% -38.17%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The Russia and New Europe Blended Composite is a market capitalization
weighted benchmark composite comprised of the Morgan Stanley Capital
International local index for each of Russia, Poland, the Czech Republic
and Hungary.
* The Fund commenced operations on September 30, 1996.
4
<PAGE>
Morgan Stanley Russia & New Europe Fund, Inc.
Portfolio Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (91.7%)
Debt Securities (2.6%)
Short-Term Investments (5.7%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Banking (10.0%)
Beverages & Tobacco (3.4%)
Broadcasting & Publishing (3.1%)
Building Materials &
Components (2.3%)
Data Processing &
Reproduction (3.5%)
Energy Sources (22.9%)
Health & Personal Care (4.7%)
Multi-Industry (5.1%)
Telecommunications (24.0%)
Utilities -- Electrical & Gas (12.3%)
Other (8.7%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Russia (44.0%)
Other -(0.6%)
Hungary (31.3%)
Poland (20.8%)
Czech Republic (4.1%)
Slovakia (0.4%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. MOL Magyar Olaj-es Gazipari Rt. (Hungary) 10.3%
2. MATAV Rt. (Hungary) 10.1
3. Unified Energy Systems (Russia) 9.0
4. Lukoil Holdings (Russia) 6.6
5. Gedeon Richter Rt. (Hungary) 4.8
6. Surgutneftegaz (Russia) 4.1
7. Vimpel-Communications (Russia) 3.9
8. OTP Bank Rt. (Hungary) 3.3
9. Storyfirst Communications 'A' (Russia) 3.1
10. Svyazinvest (Russia) 2.8
----
58.0%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
- ---------
JUNE 30, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.8%)
(Unless otherwise noted)
- ---------------------------------------------------------------------------
CZECH REPUBLIC (4.1%)
BANKING
(a)Komercni Banka 14,700 U.S.$ 494
------------
TELECOMMUNICATIONS
(a)Ceske Radiokomunikace GDR 44,588 955
(a)SPT Telekom 80,000 1,107
------------
2,062
------------
UTILITIES -- ELECTRICAL & GAS
(a)Czech Power Co. 39,300 1,093
------------
3,649
------------
- ---------------------------------------------------------------------------
HUNGARY (31.3%)
BANKING
OTP Bank Rt. 60,700 2,984
------------
BUILDING MATERIALS & COMPONENTS
Zalakeramia Rt. 27,500 977
------------
ENERGY SOURCES
MOL Magyar Olaj-es Gazipari Rt. GDR 341,600 9,206
------------
HEALTH & PERSONAL CARE
(a)Gedeon Richter Rt. GDR 51,780 4,246
------------
MISCELLANEOUS MATERIALS & COMMODITIES
(a)Graboplast Rt. GDR 154,000 662
Pannonplast Rt. 23,825 883
------------
1,545
------------
TELECOMMUNICATIONS
MATAV Rt. ADR 305,450 8,991
------------
27,949
------------
- ---------------------------------------------------------------------------
POLAND (20.8%)
BANKING
Bank Rozwoju Eksportu 35,000 948
BIG Bank Gdanski 1,375,000 1,834
BIG Bank Gdanski GDR 24,523 477
Wielkopolski Bank Kredytowy 279,000 2,160
------------
5,419
------------
BEVERAGES & TOBACCO
(a)Okocimskie Zaklady Piwowarskie 304,000 2,354
------------
BUILDING MATERIALS & COMPONENTS
Zaklady Lentex 114,914 1,055
------------
CONSTRUCTION & HOUSING
(a)Exbud 43,250 521
(a)Exbud GDR 71,850 865
------------
1,386
------------
DATA PROCESSING & REPRODUCTION
(a)Computerland Poland 60,300 1,081
(a)Prokom GDR 120,700 2,013
------------
3,094
------------
FOOD & HOUSEHOLD PRODUCTS
Farm Food 137,204 U.S.$ 1,003
------------
MULTI-INDUSTRY
(a)Elektrim 184,000 2,242
(a)Mostostal-Warszawa GDR 110,000 770
------------
3,012
------------
RECREATION -- OTHER CONSUMER GOODS
(a)Orbis 140,000 1,245
------------
18,568
------------
- ---------------------------------------------------------------------------
RUSSIA (41.2%)
BEVERAGES & TOBACCO
(a)SUN Brewing Ltd. GDR 50,000 675
------------
BROADCASTING & PUBLISHING
(a,b)Storyfirst Communications
'A' (Preferred) 1,920 2,746
------------
ENERGY SOURCES
AO Tatneft ADR 206,000 1,596
Lukoil Holdings 370,000 3,163
Lukoil Holdings ADR 66,620 2,215
Lukoil Holdings (Preferred) 130,000 481
(a)Purneftegaz 50,000 123
Surgutneftegaz ADR 895,000 3,692
------------
11,270
------------
MACHINERY & ENGINEERING
(a)Uralmash Zavody 86,190 690
------------
MERCHANDISING
TSUM 2,882,000 504
------------
METALS -- NON-FERROUS
(a)Norilsk Nickel 144,000 299
(a)Norilsk Nickel (Preferred) 100,000 220
------------
519
------------
METALS -- STEEL
(a)Izhorskie Zavody 13,774 317
(a)Seversky Tube Works 200,000 400
(a)Seversky Tube Works ADR 10,000 258
------------
975
------------
MULTI-INDUSTRY
Pliva d.d. ADR 144A 97,600 1,586
------------
TELECOMMUNICATIONS
(a,b)Mustcom 5,356,352 1,846
(a)Nizhnovsvyazinform 90,000 158
Rostelecom 881,000 1,982
St. Petersburg Telephone Network 705,000 429
(a)Vimpel-Communications ADR 78,200 3,500
------------
7,915
------------
UTILITIES -- ELECTRICAL & GAS
Gazprom ADR 98,800 1,055
Irkutskenergo 4,000,000 392
(a)Lenenergo 1,000,000 405
Unified Energy Systems (UES) 62,042,000 8,022
------------
9,874
------------
36,754
------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
SLOVAKIA (0.4%)
PHARMACEUTICALS
Slovakofarma GDR 75,000 U.S.$ 422
------------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$94,858) 87,342
------------
- ---------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------
DEBT INSTRUMENT (2.8%)
- ---------------------------------------------------------------------------
RUSSIA (2.8%)
TELECOMMUNICATIONS
Svyazinvest (Cost U.S.$3,146) U.S.$ 3,146 2,517
------------
- ---------------------------------------------------------------------------
SHORT-TERM INVESTMENT (5.7%)
- ---------------------------------------------------------------------------
UNITED STATES (5.7%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.40%,
dated 6/30/98, due 7/1/98,
to be repurchased at
U.S.$5,062, collateralized by
U.S.$3,150, United States
Treasury Bonds, 11.25%, due
2/15/15, valued at
U.S.$5,179
(Cost U.S.$5,061) 5,061 5,061
------------
- ---------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.4%)
Hungarian Forint HUF 5,466 25
Polish Zloty PLZ 1,015 291
------------
(Cost U.S.$315) 316
------------
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (106.7%)
(Cost U.S.$103,380) 95,236
------------
- ---------------------------------------------------------------------------
OTHER ASSETS (2.6%)
Receivable for Investments
Sold U.S.$ 1,290
Interest Receivable 748
Dividends Receivable 195
Deferred Organization Costs 52
Other Assets 10 2,295
-------------- ------------
- ---------------------------------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES (-9.3%)
Payable For:
Distributions Declared U.S.$ (3,351)
Investments Purchased (2,338)
Bank Overdraft (2,118)
Custodian Fees (197)
Investment Advisory Fees (129)
Professional Fees (60)
Shareholder Reporting Expenses (32)
Directors' Fees and Expenses (21)
Administrative Fees (14)
Other Liabilities (12) U.S.$ (8,272)
-------------- ------------
- ---------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 5,005,000, issued and
outstanding U.S.$0.01 par value shares
(500,000,000 shares authorized) U.S.$ 89,259
------------
------------
- ---------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 17.83
------------
------------
- ---------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
Common Stock U.S.$ 50
Capital Surplus 100,051
Accumulated Net Investment Loss (320)
Accumulated Net Realized Gain (2,371)
Unrealized Depreciation on Investments
and Foreign Currency Translations (8,151)
- ---------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 89,259
------------
------------
- ---------------------------------------------------------------------------
</TABLE>
(a)-- Non-income producing
(b)-- Security valued at fair value -- see note A-1 to financial statements.
144A -- Certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- ---------------------------------------------------------------------------
JUNE 30, 1998 EXCHANGE RATES:
- ---------------------------------------------------------------------------
HUF Hungarian Forint 218.680 = U.S. $1.00
PLZ Polish Zloty 3.487 = U.S. $1.00
- ---------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ---------------------------------------------------------------------------
<S> <C> <C>
Banking U.S.$ 8,897 10.0%
Beverages & Tobacco 3,029 3.4
Broadcasting & Publishing 2,746 3.1
Building Materials & Components 2,032 2.3
Construction & Housing 1,386 1.5
Data Processing & Reproduction 3,093 3.5
Energy Sources 20,477 22.9
Food & Household Products 1,003 1.1
Health & Personal Care 4,246 4.7
Machinery & Engineering 689 0.8
Merchandising 504 0.6
Metals -- Non-Ferrous 519 0.6
Metals -- Steel 975 1.1
Miscellaneous Materials &
Commodities 1,545 1.7
Multi-Industry 4,598 5.1
Pharmaceuticals 422 0.5
Recreation -- Other Consumer Goods 1,245 1.4
Telecommunications 21,486 24.0
Utilities -- Electrical & Gas 10,967 12.3
Other 5,377 6.1
-------------- ------------
U.S.$ 95,236 106.7%
-------------- ------------
-------------- ------------
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 1998
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- ---------------------------------------------------------------------------
<S> <C> <C>
Czech Republic U.S.$ 3,649 4.1%
Hungary 27,949 31.3
Poland 18,568 20.8
Russia 39,271 44.0
Slovakia 422 0.4
United States (short-term investment) 5,061 5.7
Other 316 0.4
-------------- ------------
U.S.$ 95,236 106.7%
-------------- ------------
-------------- ------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 465
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22)
- ---------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,252
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 971
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
- ---------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,510
- ---------------------------------------------------------------------------------------------------------------------
Net Investment Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (258)
- ---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,038)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (228)
- ---------------------------------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,266)
- ---------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,014)
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . 77
- ---------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . . . . . . . . (37,937)
- ---------------------------------------------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . (40,203)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . U.S.$(40,461)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ (258) U.S.$(1,921)
Net Realized Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,266) 23,151
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . . . . . . . . (37,937) 26,306
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations. . . . . . . . . . . . . . . (40,461) 47,536
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Realized Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,351) (18,410)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,812) 29,126
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,071 103,945
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period (including accumulated net investment loss
of U.S.$320 and U.S.$62, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 89,259 U.S.$ 133,071
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD FROM
JUNE 30, 1998 YEAR ENDED SEPTEMBER 30, 1996* TO
SELECTED PER SHARE DATA AND RATIOS: (UNAUDITED) DECEMBER 31, 1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . U.S.$ 26.59 U.S.$ 20.77 U.S.$ 20.00
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss). . . . . . . . . . . . . . . . . . . (0.05) (0.38) 0.06
Net Realized and Unrealized Gain (Loss) on Investments . . . . . (8.04) 9.88 0.78
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . . . . . . . . . . (8.09) 9.50 0.84
- ----------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . . . . . . . -- -- (0.07)
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . (0.67) (3.68) --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . . . (0.67) (3.68) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . U.S.$ 17.83 U.S.$ 26.59 U.S.$ 20.77
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . . . . . . . . . . . U.S.$ 15.19 U.S.$ 23.88 U.S.$ 18.00
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value. . . . . . . . . . . . . . . . . . . . . . . . . . (33.98)% 53.53% (9.72)%
Net Asset Value (1) . . . . . . . . . . . . . . . . . . . . . . (30.40)% 48.19% 4.18%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . . . . . . . . . . . . U.S.$89,259 U.S.$133,071 U.S.$103,945
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . 2.52%** 2.50% 3.30%**
Ratio of Net Investment Income to Average Net Assets. . . . . . . (0.43)%** (1.27)% 1.15%**
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 36% 71% 2%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- -------------
Morgan Stanley Russia & New Europe Fund, Inc. (the "Fund") was incorporated
in Maryland on February 3, 1994 and is registered as a non-diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund's investment objective is long-term capital
appreciation through investments primarily in equity securities.
A. The following significant accounting policies, which are in conformity with
generally accepted accounting principles for investment companies, are
consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sales
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices. Securities which are traded
over-the-counter are valued at the average of the mean of current bid and
asked prices obtained from reputable brokers. All non-equity securities as
to which market quotations are readily available are valued at their market
values. Short-term securities which mature in 60 days or less are valued at
amortized cost. All other securities and assets for which market values are
not readily available (including investments which are subject to
limitations as to their sale) are valued at fair value as determined in
good faith by the Board of Directors (the "Board"), although the actual
calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as such income and/or gains
are earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates
of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period
is reflected in the Statement of Operations.
11
<PAGE>
The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund intends
to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund intends to utilize:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. LOAN AGREEMENTS: The Fund may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions
("Lenders") deemed to be creditworthy by the investment adviser. The Fund's
investments in Loans may be in the form of participations in Loans
("Participations") or assignments of all or a portion of Loans
("Assignments") from third parties. The Fund's investment in Participations
typically results in the Fund having a contractual relationship with only
the Lender and not with the borrower. The Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. The Fund generally has no right
to enforce compliance by the borrower with the terms of the loan agreement.
As a result, the Fund may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. When the Fund
purchases Assignments from Lenders it acquires direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the
rights and obligations acquired by the Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
8. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is re-
12
<PAGE>
corded as unrealized gains or losses in the Statement of Operations.
Periodic payments received or made at the end of each measurement period,
but prior to termination, are recorded as realized gains or losses in the
Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
9. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities generally
will expose the Fund to credit risks of the underlying instruments as well
as of the issuer of the structured security. Structured Securities are
typically sold in private placement transactions with no active trading
market. Investments in structured securities may be more volatile than
their underlying instruments, however, any loss is limited to the amount of
the original investment.
10. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-date (except certain dividends which may be recorded as soon as the
Fund is informed of such dividends) net of applicable withholding taxes
where recovery of such taxes is not reasonably assured.
The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments for foreign currency
transactions, gains on certain securities of corporations designated as
"passive foreign investment companies" and the timing of the recognition of
gains or losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory
Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee
computed weekly and payable monthly at an annual rate of 1.60% of the Fund's
average weekly net assets.
C. The Chase Manhattan Bank, through its corporate affiliate Chase Global Funds
Services Company (the "Administrator"), provides administrative services to the
Fund under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of 0.09% of the Fund's average weekly net assets, plus $65,000 per annum.
In addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank acts as global custodian for the Fund's
assets.
D. For the six months ended June 30, 1998, the Fund made purchases and sales
totaling $41,617,000 and $45,682,000, respectively, of investment securities
other than long-term U.S. Government securities and short-term investments.
There were no purchases or sales of long-term U.S. Government securities. At
June 30, 1998, the U.S. Federal income tax cost basis of securities was
$103,065,000 and, accordingly, net unrealized depreciation for U.S. Federal
income tax purposes was $8,145,000, of
13
<PAGE>
which $9,865,000 related to appreciated securities and $18,010,000 related to
depreciated securities.
E. A significant portion of the Fund's assets consist of securities of issuers
located in emerging markets, which are denominated in foreign currencies.
Changes in currency exchange rates will affect the value of and investment
income from such securities. Securities in emerging markets involve certain
considerations and risks not typically associated with investments in the United
States. In addition to smaller size, lesser liquidity and greater volatility,
certain securities' markets in which the Fund may invest are less developed than
the U.S. securities market and there is often substantially less publicly
available information about these issuers. Further, emerging market issues may
be subject to substantial governmental involvement in the economy and greater
social, economic and political uncertainty. Accordingly, the price which the
Fund may realize upon sale of securities in such markets may not be equal to its
value as presented in the financial statements.
Settlement and registration of securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible the Fund could lose its share
registration through fraud, negligence or even mere oversight. In addition,
shares being delivered for sales and cash being paid for purchases may be
delivered before the exchange is complete. This may subject the Fund to further
risk of loss in the event of a failure to complete the transaction by the
counterparty.
F. In connection with its organization the Fund incurred $80,000 of
organization costs. The organization costs are being amortized on a
straight-line basis over a five year period beginning September 30, 1996, the
date the Fund commenced operations.
G. The Fund entered into an Agreement with a number of underwriters (the
"Underwriters") including Morgan Stanley & Co. Incorporated, an affiliate of the
Adviser, for the initial public offering of its shares and issued 5,005,000
shares on September 30, 1996. In connection with the initial offering of the
Fund's shares, the Adviser has agreed to pay the related offering costs totaling
approximately $420,000. In addition, the Adviser agreed to pay the underwriters
of the offering a commission equal to 4% of the initial public offering price
per share, other than for shares acquired for accounts managed by the Adviser.
H. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at June 30, 1998 totaled
$14,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
I. During June 1998, the Board declared a distribution of $0.67 per share,
derived from net realized gains, payable on July 15, 1998, to shareholders of
record on June 30, 1998. Also in June, the Board of Directors amended your
Fund's by-laws to require advance notice of any proposals to be made at
stockholders' meetings. For annual meetings the notice must be given to the
Fund's secretary at least 60 days before the anniversary date of the previous
year's annual meeting. This year's annual meeting of stockholders was held on
April 9. This provision was adopted to permit the Fund's stockholders and
Directors to consider every stockholder proposal on an informed basis and in an
organized fashion, taking into account the interests of all affected
constituencies.
J. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Morgan Stanley Russia and New
Europe Fund, Inc. was held on April 9, 1998. The following is a summary of each
proposal presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
FAVOR OF AGAINST WITHHELD ABSTAINED
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
1. To elect the following Directors: Barton M. Biggs. . . . . . . . . . 3,934,993 -- 25,443 --
John A Levin . . . . . . . . . . . 3,934,993 -- 25,443 --
William G. Morton, Jr. . . . . . . 3,934,993 -- 25,443 --
2. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Fund . . . . . . . . . . . . . . . . . . . . . . . 3,851,712 15,378 -- 93,346
3. To approve or disapprove 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 either the energy
sources industry or the electric utilities industry if the Board of
Directors of the Fund determines that certain criteria are met. . . . 1,567,705 23,225 -- 2,369,506
</TABLE>
14
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the shareholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan
Agent in writing. There is no penalty for non-participation or withdrawal
from the Plan, and shareholders who have previously withdrawn from the Plan
may rejoin at any time. Requests for additional information or any
correspondence concerning the Plan should be directed to the Plan Agent at:
Morgan Stanley Russia & New Europe Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
15
