As filed with the U.S. Securities and Exchange Commission on
March 6, 1995
Securities Act File No. 33-84676
Investment Company Act File No. 811-8788
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-2
Registration Statement Under The Securities Act Of 1933 [ ]
Pre-Effective Amendment No. 2 [X]
---
Post-Effective Amendment No. __ [ ]
and/or
Registration Statement Under The Investment Company Act Of 1940 [ ]
Amendment No. 2 [X]
---
(Check appropriate box or boxes)
____________________
Templeton Russia Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
700 Central Avenue
St. Petersburg, Florida 33701
(Address of Principal Executive Offices)
Registrant's Telephone number, including Area Code: (813) 823-
8712
____________________
Thomas M. Mistele, Esq.
Templeton Global Investors, Inc.
500 East Broward Boulevard
Ft. Lauderdale, Florida 33394
(Name and Address of Agent for Service)
____________________
With copies to:
Allan S. Mostoff, Esq. John A. MacKinnon, Esq.
Dechert Price & Rhoads Brown & Wood
1500 K Street, N.W. One World Trade Center
Washington, D.C. 20005 New York, New York 10048
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this registration statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection
with a dividend reinvestment plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Proposed
Maximum Maximum Amount of
Amount Being Offering Aggregate Registrati
Title of Securities Registered Price Per Offering on
Being Registered (1) Share(2) Price(2) Fee(3)
Common Stock, $.01 4,600,000 $15 $69,000,000 $23,793.10
Par Value . . . . . Shares
(1) Includes 600,000 shares subject to the Underwriters' over-
allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) $23,793.10 previously paid.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that the Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
TEMPLETON RUSSIA FUND, INC.
CROSS-REFERENCE SHEET
Pursuant to Rule 481(a)
Item Number, Form N-2 Caption in Prospectus
--------------------- ---------------------
1. Outside Front Cover........... Outside Front Cover
2. Inside Front and Outside Back
Cover Page.................... Inside Front and Outside
Back Cover Page
3. Fee Table and Synopsis........ Fund Expenses; Prospectus
Summary
4. Financial Highlights.......... Not Applicable
5. Plan of Distribution.......... Outside Front Cover;
Underwriting
6. Selling Shareholders.......... Not Applicable
7. Use of Proceeds............... Use of Proceeds
8. General Description of
Registrant.................... The Fund; Investment Objective and
Policies; Additional Investment
Practices; Investment
Restrictions; Risk Factors and
Special Considerations; Common
Stock
9. Management.................... Management of the Fund;
Directors and Officers;
Custodian and Transfer and
Dividend Paying Agent
10. Capital Stock, Long-Term Debt,
and Other Securities.......... Common Stock; Dividends
and Distributions;
Dividend Reinvestment
Plan; Taxation
11. Defaults and Arrears on Senior
Securities ................... Not Applicable
12. Legal Proceedings............. Not Applicable
13. Table of Contents of the
Statement of Additional
Information................... Not Applicable
14. Cover Page of Statement of
Additional Information........ Not Applicable
15. Table of Contents............. Not Applicable
16. General Information and
History....................... Not Applicable
17. Investment Objective and
Policies...................... Investment Objective and
Policies; Investment
Rationale; Additional
Investment Practices; Risk
Factors and Special
Considerations
18. Management................... Directors and Officers
19. Control Persons and Principal
Holders of Securities........ Not Applicable
20. Investment Advisory and Other
Services..................... Management of the Fund
21. Brokerage Allocation and Other
Practices.................... Portfolio Transactions and
Brokerage
22. Tax Status................... Taxation
23. Financial Statements......... Statement of Assets and
Liabilities
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 6, 1995
PROSPECTUS
4,000,000 SHARES
TEMPLETON RUSSIA FUND, INC.
COMMON STOCK
-------------------
Templeton Russia Fund, Inc. (the "Fund") is a newly incorporated,
non-diversified, closed-end management investment company. The Fund's investment
objective is long-term capital appreciation. To achieve its objective, the Fund
intends to invest primarily in equity securities of Russia Companies. As used in
this Prospectus, the term "Russia Company" means a legal entity (i) that is
organized under the laws of, or with a principal office in, Russia, (ii) for
which the principal equity securities trading market is in Russia, or (iii) that
derives at least 50% of its revenues or profits from goods produced or sold,
investments made, or services performed, in Russia or that has at least 50% of
its assets situated in Russia. In any event, under normal market conditions, the
Fund will invest at least 65% of its total assets in equity securities of Russia
Companies and, subject to a limit of 20% of total assets, in debt securities
issued by Russia Companies or issued or guaranteed by Russian state entities
which offer the potential for capital appreciation.
As used in this Prospectus, "Russia" refers to the Russian Federation, which
does not include other countries that formerly comprised the Soviet Union.
Investments in Russia Companies involve a high degree of risk and special
considerations not typically associated with investments in other more
established economies or securities markets, such as political, economic and
legal uncertainties, currency fluctuations, delays in settling portfolio
transactions and risks of loss arising out of Russia's system of share
registration. Additionally, the securities markets in Russia are emerging
markets characterized by a relatively small number of equity issues and
relatively little trading volume, resulting in substantially less liquidity and
greater price volatility. A substantial number of the securities in which the
Fund will invest will be illiquid. INVESTMENT IN THE FUND SHOULD BE CONSIDERED
HIGHLY SPECULATIVE. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."
(continued on next page)
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC SALES LOAD(1)(2) THE FUND(3)
<S> <C> <C> <C>
Per Share............ $15.00 $ $
Total(4)............. $60,000,000 $ $
</TABLE>
(footnotes on following page)
-------------------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York, New York on or about , 1995.
-------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
-------------------
The date of this Prospectus is , 1995.
<PAGE>
(Cover continued from previous page)
RUSSIA'S SYSTEM OF SHARE REGISTRATION CREATES CERTAIN RISKS OF LOSS THAT ARE
NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER SECURITIES MARKETS. THESE
RISKS ARE DISCUSSED MORE FULLY ON PAGES AND OF THIS PROSPECTUS, AND
INVESTORS SHOULD READ THESE SECTIONS IN DETAIL.
Templeton Investment Management (Singapore) Pte. Ltd. will serve as
investment manager to the Fund.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE FUND'S
SHARES. DURING AN INITIAL PERIOD WHICH IS NOT EXPECTED TO EXCEED THREE MONTHS
FROM THE DATE OF THIS PROSPECTUS, THE FUND'S SHARES WILL NOT BE LISTED ON ANY
SECURITIES EXCHANGE. DURING SUCH PERIOD, THE UNDERWRITERS DO NOT INTEND TO MAKE
A MARKET IN THE FUND'S SHARES. CONSEQUENTLY, IT IS ANTICIPATED THAT AN
INVESTMENT IN THE FUND WILL BE ILLIQUID DURING SUCH PERIOD. THE FUND INTENDS TO
APPLY FOR LISTING ON THE NEW YORK STOCK EXCHANGE SO THAT TRADING ON SUCH
EXCHANGE WILL BEGIN NO LATER THAN THREE MONTHS FROM THE DATE OF THIS PROSPECTUS.
SHARES OF CLOSED-END INVESTMENT COMPANIES THAT INVEST PRIMARILY IN SECURITIES OF
ISSUERS IN FOREIGN COUNTRIES OR GEOGRAPHIC REGIONS HAVE IN THE PAST FREQUENTLY
TRADED AT DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES. THE
RISKS ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES MAY
BE GREATER FOR INVESTORS EXPECTING TO SELL SHARES OF A CLOSED-END INVESTMENT
COMPANY SOON AFTER THE COMPLETION OF AN INITIAL PUBLIC OFFERING OF THE COMPANY'S
SHARES.
This Prospectus sets forth concisely information about the Fund that a
prospective investor should know before purchasing Shares. Investors are advised
to read this Prospectus and retain it for future reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S COMMON
STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
(Footnotes from previous page)
(1) The Fund and the Investment Manager have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) The Investment Manager has agreed to pay Merrill Lynch, Pierce, Fenner &
Smith Incorporated additional amounts. See "Underwriting."
(3) Before deducting expenses payable by the Fund, estimated to be approximately
$ , which includes $250,000 to be paid to the Underwriters in partial
reimbursement of their expenses.
(4) The Underwriters have been granted an option, exercisable within 45 days of
the date of this Prospectus, to purchase up to 600,000 additional Shares to
cover over-allotments, if any. If all Shares are purchased, the total Price
to Public, Sales Load and Proceeds to the Fund will be $69,000,000, $
and $ , respectively. See "Underwriting."
-------------------
The address of the Fund is 700 Central Avenue, St. Petersburg, Florida
33701-3628. The Fund's telephone number is (813) 823-8712.
The information set forth in this Prospectus, including the Appendices,
regarding the economy of Russia has been extracted from various state and
private publications and other sources. The Fund and its Board of Directors make
no representations as to the accuracy of such information.
In this Prospectus, unless otherwise specified, all references to "U.S.
Dollars," "U.S. $," "dollars" and "$" are to United States dollars and to
"Rubles" and "Rbs." are to Russian Rubles. On , 1994, the average of
buying and selling prices of the Russian Central Bank for Rubles against the
U.S. Dollar was Rbs. = U.S. $1.00 [as reported in the Wall Street Journal
on , 1995]. Since 19 the Ruble has experienced significant depreciation
against the U.S. dollar. For example, on , 19 , such rate of exchange was
Rbs. = U.S. $1.00.
2
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
<TABLE>
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The Fund..................... The Fund is a newly organized, non-diversified, closed-end
management investment company that seeks long-term capital
appreciation by investing primarily in the equity securities
of Russia Companies. As used in this Prospectus, the term
"Russia Company" means a legal entity (i) that is organized
under the laws of, or with a principal office in, Russia,
(ii) for which the principal equity securities trading
market is in Russia, or (iii) that derives at least 50% of
its revenues or profits from goods produced or sold,
investments made, or services performed in Russia or that
has at least 50% of its assets situated in Russia.
The Offering................. The Fund is offering 4,000,000 shares of Common Stock
("Shares"), par value $0.01 per Share, at an offering price
of $15 per Share. The Shares are being offered by
underwriters (the "Underwriters") represented by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), A.G. Edwards & Sons, Inc., Nomura Securities
International, Inc. and Prudential Securities Incorporated.
In addition, the Underwriters have been granted an option,
exercisable for 45 days from the date of this Prospectus, to
purchase up to 600,000 additional Shares to cover
over-allotments, if any. See "Underwriting."
Investment Objective and
Policies..................... The Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund intends to
invest primarily in equity securities of Russia Companies.
As used herein, equity securities means common and preferred
stock (including convertible preferred stock); bonds, notes
and debentures convertible into common or preferred stock;
stock purchase warrants and rights; equity interests in
trusts, partnerships, joint ventures or similar enterprises;
and American or Global Depositary Receipts. Under normal
market conditions, the Fund will invest at least 65% of its
total assets in securities of Russia issuers, which will
include equity securities of Russia Companies (including
direct equity investments as discussed below) and may
include debt securities issued by Russia Companies or issued
or guaranteed by Russian state entities which offer the
potential for capital appreciation. The Fund will limit its
investment in debt securities, other than temporary
investments, to a maximum of 20% of its total assets.
Under normal market conditions, assets of the Fund not
invested in equity securities of Russia Companies will be
invested in (i) debt securities issued by Russia Companies
or issued or guaranteed by Russian state entities, as well
as debt securities of corporate and governmental issuers
outside Russia, (ii) equity securities of issuers outside
Russia that the Investment Manager believes will experience
growth in revenue from participation in the development of
the Russian economy, and (iii) short-term and medium-term
debt securities of the type described below under
"Investment Objective
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3
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<S> <C>
and Policies--Temporary Investments." The Fund may invest in
debt securities when the Investment Manager believes that,
based upon factors such as relative interest rate levels and
foreign exchange rates, debt securities offer opportunities
for long-term capital appreciation.
The Fund may invest up to 35% of its total assets in direct
equity investments that the Fund's investment manager,
Templeton Investment Management (Singapore) Pte. Ltd. (the
"Investment Manager"), expects will provide for eventual
disposition either through listing or sale of the securities
to the issuer or another investor. The terms "direct
investments," and "direct equity investments," as used
herein, mean private investments in non-publicly traded
equity securities of Russia Companies. The Fund's direct
investments will involve certain high risks for invested
capital. See "Risk Factors and Special
Considerations--Direct Investments."
No assurance can be given that the Fund's investment
objective will be achieved. See "Investment Objective and
Policies."
Risk Factors and Special
Considerations............... Investing in Russia Companies involves a high degree of risk
and special considerations not typically associated with
investing in the United States securities markets, and
should be considered highly speculative. Such risks include:
(a) the risk of nationalization or expropriation of assets
or confiscatory taxation, which may involve the risk of
total loss; (b) greater social, economic and political
uncertainty (including the risk of war); (c) delays in
settling portfolio transactions and risk of loss arising out
of Russia's system of share registration; (d) risks in
connection with the maintenance of Fund portfolio securities
and cash with foreign subcustodians and securities
depositories, including the risk that appropriate sub-
custody arrangements will not be available to the Fund; (e)
the risk that it may be impossible or more difficult than in
other countries to obtain and/or enforce a judgment; (f)
pervasiveness of corruption and crime in the Russian
economic system; (g) greater price volatility, substantially
less liquidity and significantly smaller market
capitalization of securities markets in which the Fund will
invest; (h) currency exchange rate volatility and the lack
of available currency hedging instruments; (i) higher rates
of inflation (including the risk of social unrest associated
with periods of hyperinflation); (j) controls on foreign
investment and limitations on repatriation of invested
capital and on the Fund's ability to exchange local
currencies for U.S. dollars; (k) the risk that the
government of Russia or other executive or legislative
bodies may decide not to continue to support the economic
reform programs implemented since the dissolution of the
Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors,
including non-market-oriented policies such as the support
of certain industries at the expense of other sectors or
investors or a return to the completely centrally planned
economy that existed prior to the dissolution of the Soviet
Union; (l) the financial condition of Russia Companies,
including large amounts of
</TABLE>
4
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<TABLE>
<S> <C>
inter-company debt which may create a payments crisis on a
national scale, and the fact that Russia Companies may be
smaller, less seasoned and newly organized companies; (m)
the risk that dividends will be withheld at the source; (n)
dependency on exports and the corresponding importance of
international trade; (o) the difference in, or lack of,
auditing and financial reporting standards, which may result
in unavailability of material information about issuers,
particularly in Russia; (p) the risk that the Russian tax
system will not be reformed to prevent inconsistent,
retroactive and/or exorbitant taxation; (q) the fact that
statistical information regarding the economy of Russia may
be inaccurate or not comparable to statistical information
regarding the U.S. or other economies; (r) less extensive
regulation of the securities markets; (s) the risks
associated with the difficulties that may occur in pricing
the Fund's portfolio securities; and (t) possible difficulty
in identifying a purchaser of securities held by the Fund
due to the underdeveloped nature of the securities markets.
Stock corporations are a relatively new concept in Russia.
Russia does not at present have a developed body of
securities laws or laws governing corporations or joint
stock companies. Most of the company and securities laws and
regulations of Russia are in their preliminary stages of
development. Laws regarding fiduciary duties of officers and
directors, and the protection of investors, are in the early
stages of development and existing laws do not cover all
contingencies or are not generally enforced.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are
privately negotiated outside of stock exchanges. The Fund's
holdings of equity securities of Russia Companies are
expected to represent a relatively significant portion of
the total float of such securities available for public
trading and, therefore, the size of the Fund's holdings in
specific securities relative to the trading volume in those
securities could adversely affect the prices at which the
securities are bought or sold and could lengthen the time
period during which buying and selling programs are
effected. Anticipation of the offering in the Russian
securities markets may increase the prices that would
otherwise be paid by the Fund for certain securities and
lengthen the time period required to fully invest the
proceeds of the offering in Russian securities. See "Risk
Factors and Special Considerations--Market Characteristics."
Russia and other of the countries in which the Fund may
invest may be subject to a greater degree of economic,
political and social instability than is the case in the
United States and Western European countries. Such
instability may result from, among other things, the
following: (i) authoritarian governments or military
involvement in political and economic decision-making,
including changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii)
internal insurgencies;
</TABLE>
5
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<TABLE>
<S> <C>
(iv) hostile relations with neighboring countries; and (v)
ethnic, religious and racial disaffection.
The Fund may invest up to 35% of its total assets in direct
equity investments that the Investment Manager expects will
provide for eventual disposition either through listing or
sale of the securities to the issuer or another investor.
Direct investments will consist of (i) the purchase from an
enterprise of an equity interest in the enterprise in the
form of shares of common stock or equity interests in
trusts, partnerships, joint ventures or similar enterprises,
and (ii) the purchase of such an equity interest in an
enterprise from an investor in the enterprise. Such
investments may involve a high degree of business and
financial risk. Due to the absence of a public trading
market for the Fund's direct investments, they will be less
liquid than listed securities. Although these investments
may, in some cases, be resold in privately negotiated
transactions, the prices realized from these sales could be
less than those originally paid by the Fund or less than
what may be considered the fair value of such securities and
in some cases it may not be possible to identify a buyer. If
such securities are required to be registered under the
securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of
registration. In addition, the Fund may be unable to dispose
of its direct investments at then-current market prices and
may have to dispose of such securities over extended periods
of time. Because of the absence of any trading market for
these investments, the Fund may take longer to liquidate
these positions than it would for listed securities. In
addition, securities in Russia, and particularly those that
are not publicly traded, are not subject to the disclosure
and other investor protection requirements that are
generally accepted as necessary in countries with developed
securities laws. See "Risk Factors and Special
Considerations--Direct Investments."
Because of the recent formation of the securities markets as
well as the underdeveloped state of the banking and
telecommunications systems, settlement, clearing and
registration of securities transactions are subject to
significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of
the U.S. Investment Company Act of 1940 ("the 1940 Act")) is
defined according to entries in the company's share register
and normally evidenced by extracts from the register or by
formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not
necessarily subject to effective state supervision and it is
possible for the Fund to lose its registration through
fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be
appropriately recorded either itself or through a custodian
or other agent inspecting the share register and by
obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability
and it is possible that subsequent illegal amendment or
other fraudulent act may deprive the Fund of its ownership
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6
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rights. In addition, while applicable Russian regulations
impose liability on registrars for losses resulting from
their errors, it may be difficult for the Fund to enforce
any rights it may have against the registrar or issuer of
the securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more
than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an
independent entity that meets certain criteria, in practice
this regulation has not always been strictly enforced.
Because of this lack of independence, management of a
company may be able to exert considerable influence over who
can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions
in the share register. This practice may prevent the Fund
from investing in the securities of certain Russia Companies
deemed suitable by the Investment Manager. Further, this
also could cause a delay in the sale of Russia company
securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on
the investment.
The Fund also is permitted to engage in foreign currency
hedging transactions and to enter into stock options and
stock index futures transactions, some or all of which are
commonly known as derivatives, and which may involve special
risks, although these strategies cannot at the present time
be used to a significant extent by the Fund in the markets
in which the Fund will principally invest. See "Additional
Investment Practices" and Appendix C to this Prospectus.
The Fund may invest up to 20% of its total assets in debt
securities that are rated in any category by nationally
recognized statistical rating organizations, as well as
unrated debt securities, when consistent with the Fund's
investment objective and policies. Lower-rated debt
securities (which are commonly referred to as "junk bonds")
generally involve greater volatility of price and risk of
loss of principal and income than higher rated securities. A
debt security rated "D" by Standard & Poor's Corporation
means that the issuer is in payment default.
The Fund is classified as a "non-diversified" investment
company under the 1940 Act, which means that the Fund is not
limited by the 1940 Act in the proportion of its assets that
may be invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a
greater portion of its assets in the securities of a smaller
number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio
securities. However, the Fund intends to comply with the
diversification requirements imposed by the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. In
addition, the Board of Directors has adopted a
non-fundamental policy under which the Fund will not invest
more than 10% of its assets in the securities of any one
issuer (the Fund will treat Russian state issuers and their
corporate instrumentalities as separate issuers). See "Risk
Factors and
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7
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Special Considerations--Net Asset Value Discount; Non-
Diversification" and "Taxation--U.S. Federal Income Taxes."
The Fund's Articles of Incorporation contain certain
anti-takeover provisions that may have the effect of
inhibiting the Fund's possible conversion to open-end status
and limiting the ability of other persons to acquire control
of the Fund. In certain circumstances, these provisions may
also inhibit the ability of shareholders to sell their
Shares at a premium over prevailing market prices. The
Fund's Board of Directors has determined that these
provisions are in the best interests of shareholders
generally. See "Common Stock."
Shares of closed-end investment companies frequently trade
at a discount from net asset value. This characteristic is a
risk separate and distinct from the risk that the Fund's net
asset value will decrease as a result of its investment
activities and may be greater for investors expecting to
sell their Shares in a relatively short period following
completion of the Offering.
Investors should carefully consider their ability to assume
the foregoing risks before making an investment in the Fund.
An investment in Shares of the Fund should be considered
highly speculative. An investment in Shares of the Fund
should not be considered a complete investment program. See
"Risk Factors and Special Considerations."
Investment Manager........... Templeton Investment Management (Singapore) Pte. Ltd. will
serve as Investment Manager of the Fund. The Investment
Manager and its affiliates serve as advisers for a wide
variety of public investment companies and private clients
in many nations. The Templeton organization, originating
with earlier advisers then owned by John M. Templeton, has
been investing globally over the past 52 years and provides
investment management and advisory services to a worldwide
client base, including approximately 900,000 mutual fund
shareholders, foundations and endowments, employee benefit
plans and individuals. As of , 1995, the Templeton
organization managed approximately $ billion in assets
worldwide. The Investment Manager is an indirect wholly
owned subsidiary of Franklin Resources, Inc. ("Franklin").
As of , 1995, the Franklin Templeton organization managed
over $117 billion in assets worldwide.
Dr. J. Mark Mobius, Director of the Investment Manager, will
be the Fund's principal portfolio manager. The Investment
Manager also serves as investment manager to Templeton
Vietnam Opportunities Fund, Inc., a closed-end management
investment company registered under the 1940 Act. In
addition, an affiliate of the Investment Manager serves as
investment manager to six other U.S. investment companies
and 18 other non-U.S. public and private funds that invest
primarily in equity securities of issuers in emerging
markets, with assets totaling $ billion as of ,
1995. The six other U.S. investment companies, which are
registered under the 1940 Act, are Templeton Emerging
Markets Fund, Inc., Templeton China World Fund, Inc.,
Templeton
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Emerging Markets Appreciation Fund, Inc., and Templeton
Dragon Fund, Inc., closed-end management investment
companies, and Templeton Developing Markets Trust and the
Emerging Markets Series of Templeton Institutional Funds,
Inc., open-end management investment companies. Dr. Mobius
has lived in Asia, principally in Hong Kong, for over 30
years, focusing on investment in equity securities in
emerging market countries. In acting as principal portfolio
manager for the Fund, Dr. Mobius will be supported in the
Investment Manager's office in Singapore by two other
investment managers and a securities analyst. An affiliate
of the Investment Manager has established an office in
Moscow, which currently has a staff of two securities
analysts. The Investment Manager expects this office to
provide it with a valuable resource for research and
securities analysis with regard to securities of Russia
Companies.
For its services, the Fund will pay the Investment Manager a
monthly fee, payable in arrears in U.S. dollars, at the
annual rate of 1.25% of the Fund's average weekly net
assets. This fee is higher than that paid by most other U.S.
investment companies, primarily because of the additional
time and expense required of the Investment Manager in
pursuing the Fund's policy of investing in Russia Companies.
It is expected, however, that the Fund's investment
management fee will be comparable to those of other U.S.
closed-end investment companies of comparable size that
invest primarily in securities of emerging market issuers.
Business Manager;
Sub-Administrator.......... Templeton Global Investors, Inc. (the "Business Manager"),
an indirect wholly owned subsidiary of Franklin, will
perform or arrange for the performance of certain
administrative functions as business manager for the Fund.
For its services, the Business Manager will receive a
monthly fee, payable in arrears in U.S. dollars, at an
annual rate of .25% of the Fund's average weekly net assets.
The Business Manager and the Fund will enter into a sub-
administration agreement with Princeton Administrators, L.P.
(the "Sub-Administrator"), an affiliate of Merrill Lynch,
under which the Sub-Administrator will perform, subject to
the Business Manager's supervision, various administrative
functions. For its services and facilities, the Business
Manager will pay the Sub-Administrator a monthly fee at an
annual rate of .20% of the Fund's average weekly net assets.
See "Management of the Fund-- Business Manager;
Sub-Administrator."
Fee Reduction................ To reduce the likelihood of the Fund's Shares trading at a
discount to net asset value, the Investment Manager has
undertaken to reduce its fee by one-half during the fiscal
quarter following any of the first eight fiscal quarters of
the Fund if the average closing price of the Fund's Shares
in the preceding quarter is less than the $15.00 initial
offering price. If this fee reduction is operative, the
Investment Manager's fee will be reduced to an annual rate
of .625% of the Fund's average weekly net assets during the
relevant period. The Investment Manager believes that this
fee reduction arrangement and its potential impact on the
Fund's return should
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9
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<S> <C>
enhance interest in the Fund's Shares in the investment
community, and thereby may reduce the likelihood and/or the
extent of any market price discount. The Fund cannot predict
whether its Shares will trade at, above or below net asset
value, and there can be no assurance that the fee reduction
arrangement will serve its intended purpose. The Fund is
intended primarily for long-term investors and should not be
considered a vehicle for trading purposes.
Listing...................... Prior to this offering, there has been no public market for
the Fund's Shares. During an initial period which is not
expected to exceed three months from the date of this
Prospectus, the Fund's Shares will not be listed on any
securities exchange. During such period, the Underwriters do
not intend to make a market in the Fund's Shares.
Consequently, it is anticipated that an investment in the
Fund will be illiquid during such period. The Fund intends
to apply for listing of its Shares on the New York Stock
Exchange so that trading on such Exchange will begin no
later than three months from the date of this Prospectus.
The Fund expects that it will meet the New York Stock
Exchange standards for listing. In the event the Fund's
Shares are not approved for listing on the New York Stock
Exchange at the end of the three-month period, the Fund
intends to apply either to have the Fund's Shares listed on
the American Stock Exchange or traded on the NASDAQ National
Market System. See "Underwriting."
Dividend Policy.............. The Fund intends to distribute to shareholders, at least
annually, substantially all of its net realized capital
gains and net investment income. The Fund has established a
dividend reinvestment plan pursuant to which all dividends
and distributions from the Fund will be automatically
reinvested in additional Shares of the Fund unless a
shareholder elects to receive cash. See "Dividends and
Distributions; Dividend Reinvestment Plan."
Custodian and Transfer and
Dividend Paying Agent........ The Chase Manhattan Bank, N.A. will act as custodian for the
Fund and may employ subcustodians outside the U.S. approved
by the Directors of the Fund in accordance with regulations
of the Securities and Exchange Commission. Mellon Securities
Trust Company will act as transfer and dividend paying agent
and registrar for the Fund. See "Risk Factors and Special
Considerations" and "Custodian and Transfer and Dividend
Paying Agent."
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10
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FUND EXPENSES
The following tables are intended to assist Fund investors in understanding
the various costs and expenses associated with investing in the Fund.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)...................... %
Dividend Reinvestment Plan Fees..................................... None*
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)**
Management Fees.................................................... 1.25%
Other Expenses (audit, legal, administrative, transfer agent and
custodian)......................................................... %
-----
Total Annual Expenses................................ %***
-----
-----
--------------------------
* The Fund and the Plan Agent impose no fee for participation in
the Dividend Reinvestment Plan (the "Plan"). However, a $5.00
fee is imposed for withdrawal from participation in the Plan.
In addition, each participant in the Plan will pay a pro rata
share of brokerage commissions incurred in connection with
open-market purchases of Fund Shares under the Plan.
** See "Management of the Fund" for additional information. "Other
Expenses" have been estimated for the current fiscal year and
are based on the estimated offering size of the Fund.
Therefore, "Other Expenses" and "Total Annual Expenses" could
change depending on the size of the Fund.
*** To reduce the likelihood of the Share price declining below
net asset value, the Investment Manager will waive one-half of
its fee during the fiscal quarter following any of the first
four fiscal quarters of the Fund if the average closing price
of the Fund's Shares in the preceding quarter is less than the
$15.00 initial offering price. See "Management of the Fund"
for additional information.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------- ----------- ---------- ---------
$ $ $ $
The purpose of the above table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The above Example assumes that all dividends and other
distributions are reinvested at net asset value and that the percentage amounts
listed under Annual Expenses remain the same in the years shown. The above table
and the assumption in the Example of a 5% annual return are required by
regulations of the Securities and Exchange Commission (the "Commission")
applicable to all investment companies. The assumed 5% annual return and annual
expenses should not be considered a representation of actual or expected Fund
performance or expenses, both of which may be greater or lesser than those
shown. In addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive Shares issued at a price or value different from
net asset value. See "Dividends and Distributions; Dividend Reinvestment Plan."
For more complete descriptions of certain of the Fund's costs and expenses, see
"Management of the Fund."
11
<PAGE>
THE FUND
Templeton Russia Fund, Inc. (the "Fund"), incorporated in Maryland on
September 30, 1994, is a newly organized, non-diversified, closed-end management
investment company registered under the U.S. Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's investment objective is long-term capital
appreciation. To achieve its objective the Fund intends to invest primarily in
equity securities of Russia Companies. As used in this Prospectus, the term
"Russia Company" means a company (i) that is organized under the laws of, or
with a principal office in, Russia, (ii) for which the principal equity
securities trading market is in Russia, or (iii) that derives at least 50% of
its revenues or profits from goods produced or sold, investments made, or
services performed in Russia, or that has at least 50% of its assets situated in
Russia.
The address of the Fund is 700 Central Avenue, St. Petersburg, Florida
33701-3628. The Fund's telephone number is 813-823-8712.
USE OF PROCEEDS
The net proceeds of the Offering, after deduction of the sales load and
expenses payable by the Fund, are estimated to be $ (assuming no exercise
of the Underwriters' over-allotment option), and will be invested in accordance
with the policies set forth under "Investment Objective and Policies." The Fund
intends to invest primarily in equity securities of Russia Companies. Although
Russia has developing securities markets, as of the date of this Prospectus
there exist only a limited number of Russia Companies considered by the
Investment Manager to be suitable for investment by the Fund. Initially,
therefore, in addition to investments in Russia issuers, the Fund may invest
without percentage limitation in the securities of companies that do not qualify
as Russia Companies but which the Fund's Investment Manager believes will
experience growth in revenue or income from participation in the development of
the economy of Russia. If by April 1, 1997, however, at least 65% of the value
of the Fund's total assets are not invested in the securities of Russia issuers,
as described under "Investment Objective and Policies," the Fund's Board of
Directors will, at its next regularly scheduled meeting, consider whether it
would be in the best interests of the Fund's shareholders either to modify the
Fund's investment policies (and to change the name of the Fund) or to liquidate
the Fund's assets (i.e., convert them to cash) and distribute the proceeds,
exclusive of liabilities, to shareholders. During this initial investment period
ending April 1, 1997, (or such earlier date by which 65% of the Fund's assets
are invested in securities of Russia issuers), the Fund's Directors will, at
each quarterly meeting of the Board of Directors, monitor the Investment
Manager's progress in identifying suitable investments in Russia Companies and
consider whether continued accrual of the investment management fee at the level
provided for in the Investment Management Agreement remains appropriate. There
can be no assurance that the Fund will be able to invest at least 65% of the
value of its total assets in securities of Russia issuers by April 1, 1997.
During the Fund's initial investment period, to the extent not invested as
described above, the Fund's assets may be invested as described under
"Investment Objective and Policies--Temporary Investments."
INVESTMENT RATIONALE
The Fund's investment objective and policies reflect the Investment
Manager's opinion that attractive investment opportunities may result from the
continuing process of economic reform in Russia. Assets sold during the
beginning of Russia's privatization program, for example, were sold at a
fraction of their comparable price in Western countries, and large natural
resources, energy and telecommunications companies were sold at a fraction of
their values in the West. Furthermore, the third stage of the privatization
program, the implementation of investment tenders (a form of cash purchase which
includes the making of a non-returnable cash investment in the privatized
company) to acquire additional stakes in Russian companies, is expected to
attract much needed foreign investment
12
<PAGE>
into Russia's manufacturing and extraction industries, and to encourage Russian
managers to restructure inefficiently run plants. These investment tenders
should permit large foreign investors, such as the Fund, to acquire significant
stakes in major Russian companies. There can be no assurance that the Fund's
investments will be successful.
Political and Economic Background. Since the first free parliamentary
elections in the Russian Federation and the passage of a new constitution in
December 1993, the political environment has become more stable. President
Yeltsin has sought to strike a balance between the reformers and the centrists,
headed by Prime Minister Chernomyrdin, a moderate reformer who has sought to
continue economic reforms in a steady and pragmatic manner. The voucher
privatization program (discussed below), which was substantially completed, as
scheduled, in June 1994, resulted in the privatization of approximately 70% of
Russian enterprises. In May and June of 1994, President Yeltsin signed a package
of decrees designed to accelerate the next stage of economic reform.
Furthermore, despite pressure from strong military and agricultural lobbies, the
parliament succeeded in passing a budget for 1994 that provided for a budget
deficit of 9.9% of gross domestic product, which is generally consistent with
guidelines set by the International Monetary Fund.
Russia continues to experience economic problems, particularly inflation and
reduced industrial production. The expected high cost of industrial
restructuring and continued pressure from the military and agricultural lobbies
could maintain pressure on government finances and it is expected to take
another two to three years before inflation decreases to an annual rate of 30%
to 40%. In addition, reported unemployment remains at about 8% and is expected
to increase with the structural reforms of the Russian economy.
However, Russia has a sizeable skilled labor force, with comparatively low
wage rates, and significant natural resources. In addition, while industrial
production fell by 27% in the first six months of 1994 from the corresponding
period in 1993, the Investment Manager believes that this reduction does not
accurately reflect economic contraction, as much of the private sector activity
is excluded from measurement.
The Russian government has proposed additional budgetary measures designed
to improve economic conditions. On October 27, 1994, President Yeltsin presented
a 1995 budget to parliament which calls for a reduction in the budget deficit to
8.4%. Further, the government has targeted reductions in inflation as a high
priority and has proposed financing budgetary deficits through international
borrowings and other non-inflationary measures.
Privatization Program. In October 1992, Russia launched the largest mass
privatization program in history. Privatization vouchers were distributed at a
nominal cost to approximately 144 million eligible Russians. The vouchers
carried a face value of Rbs 10,000, which was the equivalent of approximately
$32. Voucher holders could bid for the shares of the 15,000 medium and large
companies that were being privatized or sell the vouchers in the newly developed
secondary market. The distribution of shares in these companies has involved
three stages: (i) distribution of shares to past and present employees on
preferential terms, (ii) offering shares to the public through voucher auctions,
and (iii) offering shares to the public through other methods, such as
investment tenders and commercial tenders. Prior to acquiring shares in a
voucher auction, an investor was required to acquire vouchers and bid for shares
by offering vouchers. Medium and large scale companies were obliged to offer at
least 29% of their charter capital in voucher auctions. Vouchers could also be
used by past and present employees to acquire shares on preferential terms.
Voucher prices have fluctuated from less than $5 in 1993 to $24 in June 1994.
Vouchers alternatively could be invested in new special purpose Russian Voucher
Funds, which were established to provide diversification and ongoing investment
management.
The voucher privatization program ended on June 30, 1994. It is estimated
that 139 vouchers were used to transform more than 40 million Russians into
shareholders. The remaining vouchers could be used in some selective auctions
from September 1994 until December 1994 throughout Russia and until January 1995
in Moscow.
13
<PAGE>
Most medium- and large-scale enterprises could select their preferred
privatization structure from three alternatives. Thirty-four percent of Russian
enterprises opted for the first alternative, which allowed acquisition of a
total of 40% of shares by management and past and present employees on
preferential terms. Sixty-four percent of enterprises opted for the second
alternative that allows employees to acquire 51% of the shares from the state at
1.7 times nominal value, with the remaining shares held by the state and sold to
the public. Only two percent of enterprises chose the third alternative in which
certain employees of small enterprises are entitled to acquire a total of 20% of
the shares at book value one year after implementation of a pre-approved
restructuring plan if the terms of the plan are met.
Since the inception of the program, more than 100,000 enterprises have been
privatized, with approximately 15,000 of these being medium- and large-scale
enterprises. However, most of the market value is concentrated in a very small
number of companies. As of June 1994, the ten largest companies had a total
market capitalization of approximately $6.6 billion as compared to an aggregate
market capitalization of Russian industry of less than $15 billion.
Following the conclusion of the voucher privatization program, the Russian
Federal Property Fund and the State Property Committee and their local organs
acting according to a Presidential Decree of July 24, 1994 began to accelerate
the conducting of investment tenders in which many blocks of shares remaining in
state ownership (often approximately 20% of charter capital) of Russian
privatized companies are being offered at nominal value to the bidder willing to
offer the highest non-returnable purchase price to the privatized company. The
investment tenders are intended to attract foreign investment and foreign
expertise into the Russian economy. Some companies' remaining blocks of shares
are being sold by way of commercial tender, in which the winner of the tender is
the bidder whose proposal most closely satisfies requirements specified in the
terms of the tender. Winning bidders of investment tenders sign a purchase
agreement and receive ownership rights from the appropriate property fund acting
as seller in return for a stream of payments to the company and the appropriate
property fund and property management committee. Winning bidders are required to
pay 20% of the value of their bids and the nominal value of the shares
immediately after winning the auction and to invest the remaining sum within the
consecutive three years as is specified in the company's investment program or
in the winning investment proposal. Each ordinary share is entitled to receive
one vote, and private sector foreign companies are able to participate in the
tenders with the exception of sectors that are singled out by legislation as
requiring consent to foreign investment or which have limitations on the level
of participation of foreign investors.
Because ownership of shares is normally reflected by entries in a share
register, management often can illegally exert considerable influence over the
trading of shares by the control of or influence over the share register. A
Russian enterprise having 1,000 or more shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity. In practice, however, this regulation has not always been strictly
enforced. It is expected that pressures from market forces will encourage
enterprises to entrust registration duties to commercial banks or other
independent service providers.
Immediately after the launch of the privatization program, a secondary
market for shares and vouchers emerged, with at least twelve organized exchanges
and over 100 small exchanges. Although developing rapidly, even the largest of
Russia's stock exchanges remain in a relatively primitive state compared to
Western stock exchanges. Little trading is conducted on the exchanges and the
majority of all trades are transacted on the over-the-counter market between
Russian licensed brokers. Average weekly trading volumes are estimated to be in
excess of $35 million. Currently no central clearing and settlement capabilities
exist.
Privatized companies are entitled to increase their charter capital by way
of supplementary share issues only after the appropriate property fund has
disposed of at least 90% of the company's shares and conducted the investment
tender, where applicable. The acceleration of investment tenders will allow
14
<PAGE>
more supplementary share issues, which will present new opportunities for
investors to acquire shares in privatized companies. The first such issues are
currently being organized in selected cities in Russia.
Foreign Investment. Privatization legislation generally does not limit the
extent to which foreigners are permitted to participate in the privatization
process. Participation in privatization by foreign investors in certain
enterprises (enterprises whose defense orders exceed 30% of production, the oil
and gas sector, the extraction and processing of the ore of strategic materials,
precious and semi-precious stones and precious metals, radioactive and rare
elements, and transport and communication enterprises) requires the consent of
either the Russian government or local governments of republics within the
Russian Federation. Following participation by the foreign investor,
notification must be sent to the Government of the Russian Federation and to the
Federal Counterintelligence Service, in which case the Government may decide to
prohibit an acquisition. Foreign investors may not participate in the
privatization of enterprises situated within closed territories except in cases
provided for by government edicts. Certain trade, food supply, consumer services
and small enterprises in the construction and industrial sector or
transportation sector require consent from local authorities to acquisitions by
foreign investors.
Russian foreign investment legislation contains a guarantee of the right to
repatriate currency (after conversion of rubles into freely convertible
currency) representing income from, or proceeds from the sale of investments in
Russia subject to payment of applicable taxes and duties. The Fund will in
certain cases be obliged to make investments in rubles. The Fund, or a
non-Russian resident custodian through whom it holds shares, will be obliged to
comply with currency regulation restrictions with regard to the holding of
rubles by non-Russian residents including the holding of rubles in a special "I-
type" investment account through which operations in relation to investments
must be carried out. Rubles in this account shall be exchanged for a foreign
currency, normally U.S. dollars, prior to remittance to the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. To
achieve its objective, the Fund intends to invest primarily in equity securities
of Russia Companies. As used in this Prospectus, equity securities means common
or preferred stock (including convertible preferred stock); bonds, notes or
debentures convertible into common or preferred stock; stock purchase warrants
or rights; equity interests in trusts, partnerships, joint ventures or similar
enterprises; and American or Global Depositary Receipts. The extent to which the
Fund may invest in enterprises classified under U.S. tax law as partnerships or
trusts may be limited by considerations relating to the Fund's status as a
regulated investment company. In any event, under normal market conditions, the
Fund will invest at least 65% of its total assets in securities of Russia
issuers, which will include equity securities of Russia companies (including
direct equity investments as discussed below) and may include debt securities of
Russia Companies or issued or guaranteed by Russian state entities which offer
the potential for capital appreciation. The Fund will limit its investment in
debt securities, other than temporary investments, to a maximum of 20% of its
total assets. The Fund's investment objective, its policy of investing, under
normal market conditions, at least 65% of its total assets in securities of
Russia companies, and the investment restrictions set forth below under
"Investment Restrictions" are fundamental and may not be changed without the
approval of a majority of the Fund's outstanding voting securities. All other
investment policies and practices described in this Prospectus are not
fundamental, meaning that the Board of Directors may change them without the
approval of shareholders. As used herein, a "majority of the Fund's outstanding
voting securities" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented, and
(ii) more than 50% of the outstanding shares. There is no assurance the Fund
will be able to achieve its investment objective.
The Fund may invest up to 35% of its total assets in direct equity
investments that the Investment Manager expects will provide for eventual
disposition either through listing or sale of the securities to the issuer or
another investor. As used in this Prospectus, the terms "direct investments" and
"direct
15
<PAGE>
equity investments" mean private investments in non-publicly traded equity
securities of Russia Companies. The Fund's direct investments will involve
certain high risks for invested capital. See "Risk Factors and Special
Consideration--Direct Investments."
The Fund intends to invest its assets over a broad economic spectrum of
Russia Companies including, as conditions warrant from time to time, oil and
gas, energy generation and distribution, communications, mineral extraction,
trade, financial and business services, transportation, manufacturing, real
estate, textiles, food processing and construction. The Fund is not permitted to
invest more than 25% of its assets in any one industry. In addition, the Board
of Directors has adopted a non-fundamental policy under which the Fund will not
invest more than 10% of its assets in any one issuer.
The Investment Manager's approach to selecting investments emphasizes
fundamental company-by-company analysis (rather than broader analyses of
specific industries or sectors of the economy). Although the Investment Manager
will consider historical value measures, such as price/earnings ratios,
operating profit margins and liquidation values, the primary factor in selecting
securities for investment by the Fund will be the company's current price
relative to its long-term earnings potential, or real book value, whichever is
appropriate. In addition, the Investment Manager will consider overall growth
prospects, competitive positions in export markets, technologies, research and
development, productivity, labor costs, raw material costs and sources, profit
margins, returns on investment, capital resources, state regulation, management
and other factors in comparison to other companies around the world which the
Investment Manager believes are comparable. Selection methods are subject to
change from time to time based on the Investment Manager's research and changes
in the securities markets.
The Fund's definition of Russia Company includes companies that have
characteristics and business relationships common to companies in a country or
countries other than Russia. As a result, the value of the securities of such
companies may reflect economic market forces applicable to other countries, as
well as to Russia. For example, the Fund may invest in companies organized and
located in countries other than Russia, including companies having their entire
production facilities outside of Russia, when securities of such companies meet
one or more elements of the Fund's definition of Russia Company.
The Fund is permitted to invest indirectly in securities through sponsored
or unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs") and other types of Depositary Receipts (which, together with ADRs and
GDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the
extent such Depositary Receipts become available. ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. GDRs and other types of
Depositary Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the securities underlying unsponsored Depositary Receipts are not obligated
to disclose material information in the United States and, therefore, there may
be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. For purposes of the Fund's investment policies, the Fund's investments
in Depositary Receipts will be deemed to be investments in the underlying
securities.
Under normal market conditions, assets of the Fund not invested in equity
securities of Russia Companies will be invested in (i) debt securities issued by
Russia Companies or issued or guaranteed by the Russian Government or a Russian
governmental entity, as well as debt securities of corporate and governmental
issuers outside Russia, (ii) equity securities of issuers outside Russia which
the Investment Manager believes will experience growth in revenue from
participation in the development of the economy of Russia, and (iii) short-term
and medium-term debt securities of the type described below
16
<PAGE>
under "Investment Objective and Policies--Temporary Investments." The Fund will
limit its investment in debt securities, other than temporary investments, to
20% of its total assets. The Fund may invest in debt securities when the
Investment Manager believes that, based upon factors such as relative interest
rate levels and foreign exchange rates, debt securities offer opportunities for
long-term capital appreciation. It is likely that many of the debt securities in
which the Fund will invest will be unrated and, whether or not rated, the debt
securities may have speculative characteristics. Currently, the market in debt
securities of Russia Companies, and of Russian state entities, is extremely
limited, except with respect to Vnesheconombank bonds and certain securities
issued by the Ministry of Finance.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other equity securities. Warrants do not carry with them the right
to dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than other
types of equity investments.
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the Fund's annual portfolio turnover rate normally will not
exceed 75%, although in any particular year, market conditions could necessitate
portfolio activity at a greater or lesser rate than anticipated. The portfolio
turnover rate for a year is calculated by dividing the lesser of sales or
purchases of portfolio securities during that year by the average monthly value
of the Fund's portfolio securities, excluding money market instruments. The rate
of portfolio turnover will not be a limiting factor when the Fund deems it
appropriate to purchase or sell securities for the Fund. However, the U.S.
federal tax requirement that the Fund derive less than 30% of its gross income
from the sale or disposition of securities held less than three months may limit
the Fund's ability to dispose of its securities. See "Taxation--U.S. Federal
Income Taxes."
The Fund may invest up to 35% of its total assets in direct equity
investments. Direct investments will consist of (i) the purchase from an
enterprise of an equity interest in the enterprise in the form of shares of
common stock or equity interests in trusts, partnerships, joint ventures or
similar enterprises, or (ii) the purchase of such an equity interest in an
enterprise from an investor in the enterprise. The Fund intends to make its
direct investments in such a manner as to avoid subjecting the Fund to unlimited
liability with respect to the investments. There can be no assurance that the
Fund's direct investments will become publicly traded, or that the Fund will be
able otherwise to sell any direct investment to the issuer or another investor.
Due to the absence of a trading market for the Fund's direct investments,
they will be less liquid than publicly traded securities. Although these
investments may, in some cases, be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund or less than what may be considered the fair value of such securities.
In addition, the Fund may be unable to dispose of its direct investments at
then-current market prices and may have to dispose of such securities over
extended periods of time. Further, securities in Russia, and particularly those
that are not publicly traded, are not subject to the disclosure and other
investor protection requirements that are generally accepted as necessary in
countries with developed securities laws. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration.
The extent to which the Fund may make direct investments may be limited by
considerations relating to its status as a regulated investment company.
During periods in which the Investment Manager believes changes in economic,
financial or political conditions make it advisable, the Fund may, for temporary
defensive purposes, reduce its holdings in equity securities and invest without
limit in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. The short-term and medium-term debt securities in which the Fund may
invest consist of (a) obligations of the U.S. or Russian governments, and their
respective agencies or instrumentalities; (b) bank deposits
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and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign banks denominated in any currency; (c)
floating rate securities and other instruments denominated in any currency
issued by various governments or international development agencies; (d) finance
company and corporate commercial paper and other short-term corporate debt
obligations of U.S or Russian corporations; and (e) repurchase agreements with
banks and broker-dealers with respect to such securities. The Fund intends to
invest for temporary defensive purposes only in short-term and medium-term debt
securities rated, at the time of investment, A or higher by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or, if
unrated by either rating agency, of equivalent credit quality to securities so
rated as determined by the Investment Manager. For purposes of the Fund's
investment restriction prohibiting the investment of 25% or more of the total
value of its assets in a particular industry, a foreign government (but not the
United States government) is deemed to be an "industry," and therefore
investments in the obligations of any one foreign government may not equal or
exceed 25% of the Fund's assets. In addition, supranational organizations are
deemed to comprise an industry, and therefore investments in the obligations of
such organizations may not, in the aggregate, equal or exceed 25% of the Fund's
assets. See "Investment Restrictions."
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed price
and date. Under a repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Investment Manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price including accrued interest. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of Russia Companies
involves significant risks and special considerations, including those set forth
below, which are not typically associated with investing in United States
securities markets. The specific nature of such risks may vary according to the
country in which investments are made.
POLITICAL AND ECONOMIC FACTORS
Since the breakup of the Soviet Union at the end of 1991, Russia has
experienced dramatic political and social change. The political system in Russia
is emerging from a long history of extensive state involvement in economic
affairs. The country is undergoing a rapid transition from a centrally
controlled command system to a market-oriented, democratic model. The Fund may
be affected unfavorably by political or diplomatic developments, social
instability, changes in government policies, taxation and interest rates,
currency repatriation restrictions and other political and economic developments
in the law or regulations in Russia and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes in
legislation relating to foreign ownership.
Russia experienced extreme political uncertainty during 1993 resulting from
continued clashes between the more reform-minded President Yeltsin and the more
conservative Supreme Soviet. The reform process came to a standstill, eventually
resulting in President Yeltsin issuing a decree to dissolve the Soviet. This led
to a two-week sit-in by members of the Soviet and climaxed in the bloodshed of
an attempted coup in October 1993. While the political environment has remained
relatively stable since the parliamentary elections and passage of a new
constitution in December 1993, there can be no assurances that this will
continue. Moreover, the upcoming presidential election, scheduled for mid-1996,
could result in further political and economic uncertainty. The recent civil war
in Chechnya has highlighted the political tensions that exist between the
central government in Moscow and some of the regions within the Russian
Federation. The war in Chechnya has contributed to political instability by
weakening confidence domestically and internationally in Yeltsin and the
reformist government. The
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risk exists that armed conflict in Chechnya will resume, which could deter
foreign investment and international aid and further weaken the reformist
government's control. The risk also exists that the political tensions
associated with the war in Chechnya will lead to attempts for independence on
the part of other regions within the Russian Federation.
Furthermore, the military could have a negative impact on Russia's political
and economic future. The declining stature of Russia as a world power could fuel
sentiment among military members to return to a militarily led, more autocratic
political structure. In addition, demobilization of troops, cuts in the military
budget, and the growth of significant gaps in living standards between the
military and civilian sectors could lead to further political unrest.
Moreover, it is uncertain whether Russia's privatization process will
continue with the current momentum or that it will not be curtailed or abandoned
altogether. It is also unclear whether reforms intended to liberalize prevailing
economic structures based on free market principles will be successful.
The planned economy of the former Soviet Union was run with qualitatively
different objectives and assumptions to those prevalent in a market system and
Russian businesses do not have any recent history of operating within a
market-oriented economy. In general, relative to companies operating in Western
economies, companies in Russia are characterized by a lack of (i) management
with experience of operating in a market economy, (ii) modern technology and
(iii) a sufficient capital base with which to develop and expand their
operations. It is unclear what will be the future effect on Russian companies,
if any, of Russia's continued attempts to move toward a more market-oriented
economy.
Russia has experienced an economic recession since 1990 and its economy is
currently characterized by high rates of inflation and decreasing gross domestic
product. Recent economic reforms have involved dislocation in various sectors of
the economy. Russian government officials and economic commentators have
identified a number of factors, including the following, that have contributed
to the current economic situation: continuing budget deficits and increased
levels of credit by the Russian central bank, both of which have contributed to
inflation and the instability of the ruble; high levels of inter-company debt;
and a taxation system requiring structural reforms, including reforms of
procedures for collection of tax revenues.
The increase in inter-company debt and increases in government borrowing
have caused particular economic ramifications. Inter-company debt, presently
estimated to exceed $7 billion, has led to non-payment by Russia Companies of
company obligations and delay or non-payment of workers' salaries. The Russian
government has supported a large number of Russia companies that are insolvent
from a technical perspective. Government subsidies to industry and agriculture
increased during July, August and September, 1994, which led to increased
borrowings and credit from the Russian central bank. These factors were
responsible in part for the increase in inflation in October 1994 and the 20%
drop in the ruble on October 11, 1994. Political consequences to economic and
currency developments included removal of several senior governmental officials
and the subjection of the current government to a no-confidence vote, which it
survived, on October 21, 1994.
Following these developments, the Russian government has proposed a budget
for 1995 that seeks reductions in the budget deficit to 8% of gross national
product and to eliminate further borrowings from the central bank. The budget
requires that the government obtain an additional loan of $16 billion from the
International Monetary Fund and the World Bank, which the government is
currently seeking to negotiate. There can be no assurance that the budget as
proposed will be approved by the parliament. The government is also seeking to
renegotiate its debt obligations to foreign governments and commercial banks,
which are estimated at a total of $90 billion. There can be no assurance that
the government will be able to achieve these objectives or that they will be
effective in improving economic conditions or that the transition to a
market-oriented economy will not be adversely affected by other economic
factors.
Further, Russia presently receives significant financial assistance from a
number of countries through various programs. To the extent these programs are
reduced or eliminated in the future, Russian economic development may be
adversely impacted.
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MARKET CHARACTERISTICS
The Russian securities markets are substantially smaller, less liquid and
significantly more volatile than the securities markets in the United States. In
addition, there is little historical data on these securities markets because
they are of recent origin. A substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges and
over-the-counter markets. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading value.
The Fund's holdings of equity securities of Russia Companies are expected to
represent a relatively significant portion of the total float of such securities
available for public trading and, therefore, the size of the Fund's holdings in
specific securities relative to the trading volume in those securities could
adversely affect the prices at which the securities are bought or sold and could
lengthen the time period during which buying and selling programs are effected.
Anticipation of the offering in the Russian securities markets may increase the
prices that would otherwise be paid by the Fund for certain securities and
lengthen the time period required to fully invest the proceeds of the offering
in Russian securities.
SETTLEMENT AND CUSTODY RISK
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject to significant
risks not normally associated with investments in the United States and other
more developed markets. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced by
extracts from the register or in certain limited cases by formal share
certificates. However, there is no central registration system and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision and it is possible for the Fund to lose its registration
through fraud, negligence or even mere oversight. The Fund will endeavor to
ensure that its interest continues to be appropriately recorded, either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular audits. However, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the Fund of its ownership rights.
In addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for the Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Furthermore, while a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice, this regulation has not been strictly enforced.
Because of this lack of independence, management of a company may be able to
exert considerable influence over who can purchase and sell the company's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. This practice may prevent the Fund from investing in the
securities of certain Russia Companies deemed suitable by the Investment
Manager. Further, this also could cause a delay in the sale of Russia company
securities by the Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment. Moreover, since the local
postal and banking systems may not meet the same standards as those of Western
countries, no guarantee can be given that all entitlements attaching to
securities acquired by the Fund, including those relating to dividends, can be
realized. There is the risk that payments of dividends or other distributions by
bank wire or by check sent through the mail could be delayed or lost. In
addition, there is the risk of loss in connection with the insolvency of an
issuer's bank or transfer agent, particularly because these institutions are not
guaranteed by the state.
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FOREIGN CURRENCY AND EXCHANGE RATES
The Fund's assets will be invested in securities denominated in rubles,
which are not externally convertible into other currencies outside Russia. The
value of the assets of the Fund and its income, as measured in U.S. dollars, may
be affected by fluctuations in currency rates and exchange control regulations.
The ruble has experienced significant devaluations relative to the U.S. dollar.
For example, the value of the ruble relative to the U.S. dollar declined %
during the period from January 1 to November 15, 1994. Further, such value
experienced a one-day decline of 22% on October 11, 1994. Although the Russian
Central Bank has taken steps to stabilize the value of the Ruble, including the
use of foreign currency reserves, there can be no assurance that such steps will
be taken in the future or that such steps, if taken, will be successful.
Although the ruble is internally convertible within Russia, there can be no
guarantee of the liquidity or availability of such markets. Accordingly, the
Fund may experience significant delays in converting currency in connection with
its portfolio transactions. The Fund, as a non-resident of Russia, is restricted
in the operations in which it may engage involving rubles since it may only hold
rubles in an "I-type" investment account or a "T-type" trading account within
Russia which can only be used for certain defined operations connected with
investment management.
Additional information concerning movement in foreign exchange rates can be
found in Appendix A under "Currency and Foreign Exchange Information."
The Fund may attempt to mitigate the risks associated with currency
fluctuations at times by entering into forward, futures or options contracts to
purchase or sell the ruble to the extent such instruments are available on terms
acceptable to the Fund. Currently, such instruments are generally not available.
INFLATION
Russia's economy has been characterized by high rates of inflation. The
annual rate of inflation for 1993 was %. Although the monthly rate of
inflation declined from 18% in January 1994 to 4% in August 1994, the most
recent data indicates that it has risen back to the level of 18% for January,
1995. The expected high cost of industrial restructuring and continued pressure
from the military and agricultural lobbies are expected to continue inflationary
pressure.
INVESTMENT AND REPATRIATION RESTRICTIONS
The laws and regulations affecting Western investment business continue to
evolve in an unpredictable manner. Laws and regulations, particularly those
involving taxation, foreign investment and trade, title to property or
securities, and transfer of title, applicable to the Fund's activities are
relatively new and can change quickly and unpredictably in a manner far more
volatile than in the United States or other developed market economies. Although
basic commercial laws are in place, they are often unclear or contradictory and
subject to varying interpretation, and may at any time be amended, modified,
repealed or replaced in a manner adverse to the interest of the Fund. There is
still lacking a cohesive body of law and precedents normally encountered in
business environments. Foreign investment in Russian companies is, in certain
cases, legally restricted. Sometimes these restrictions are contained in
constitutional documents of an enterprise which are not publicly available. The
Investment Manager does not believe that such investment restrictions currently
impose a material constraint on the Fund's ability to realize gains through
investments in Russia Companies. Russian foreign investment legislation
currently provides general assurances of the rights of foreign investors to
remit profits and dividends from their investments in Russia. In some cases,
however, these rights are subject to currency, tax and export restrictions and
no guarantee can be given that all profits will be capable of being remitted.
If, for any reason, the Fund were unable to distribute an amount equal to
substantially all of its investment company taxable income (as defined for U.S.
tax purposes) within applicable time periods, the Fund would not qualify for the
favorable U.S. federal income tax treatment afforded to regulated investment
companies, or, even if it did so qualify, it might become liable for income and
excise taxes on undistributed income. In addition, the ability of the Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements
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applicable to regulated investment companies and in making tax-related
computations. Thus, if the Fund were unable to obtain accurate information on a
timely basis, it might be unable to qualify as a regulated investment company or
its tax computations might be subject to revision (which could result in the
imposition of taxes, interest and penalties). See "Taxation."
Investment in Russia may require the procurement of a substantial number of
regulatory consents, certificates and approvals, including: licenses for the
Fund and Investment Manager to operate in Russia; consents to making investments
in particular companies or types of industries; certificates from tax
authorities; licenses for a Russian custodian; certificates required by banks;
approvals from the Ministry of Finance and State Anti-Monopoly Committee; and
consents required by local legislation. Although it is unlikely that all of
these documents will have been obtained by the closing of this offering, the
Investment Manager believes it will obtain all licenses, consents and approvals
necessary for the operation of the Fund as described herein. The inability to
obtain a particular license, consent or approval could adversely impact the
Fund's operations.
TAX SYSTEM
Economic commentators have noted the significant need for structural reform
of the Russian Tax System. The domestic tax burden is high and the discretion of
local authorities to create new forms of taxation has resulted in a
proliferation of taxes, in some cases imposed or interpreted retroactively. High
tax rates have led to tax evasion and corruption; tax revenues have been 70%
below the government's budget. High tax rates and the unpredictability of the
tax laws have also deterred foreign investment and the repatriation to Russia of
flight capital, depriving the government of important sources of revenue. There
is no guarantee that these reforms will be implemented.
REPORTING STANDARDS
Accounting, auditing and financial reporting standards and requirements in
Russia are less stringent and less consistent than those applicable in many
major Western countries and often cannot be relied upon. Such accounts and
reports are not normally publicly available. Historically, accounting and
auditing has been carried out solely as a function of compliance with tax
legislation and need not be carried out by independent auditors. Less
information is available to investors investing in such securities than to
investors investing in securities of companies in many major Western countries
and the historic information which is available is not necessarily comparable or
relevant. The items appearing in the financial statements of a Russian Company,
even if prepared in accordance with international accounting standards, may not
reflect its financial position or the results of operations in the way that they
would be reflected had such financial statements been prepared in accordance
with generally accepted accounting principles in the United States or other
developed countries.
PARTICIPATION IN PRIVATIZATION
The purchase of securities of recently privatized companies involves special
risks. Many recently privatized companies have gone through an internal
reorganization of management in an attempt to better enable the enterprise to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. Moreover, the loss
of government support and protection in connection with privatization and sudden
subjection to market competition from which an enterprise was previously
protected, could have a negative effect on such enterprise. Further, unreliable
reporting standards, as discussed above, make the valuation of recently
privatized companies difficult. The Investment Manager will seek to assess the
long-term earnings potential and/or real book value of recently privatized
companies in light of historical value measures such as price/earnings ratios,
operating profit margins and liquidation values. However, there can be no
assurance that accurate data in support of such assessment will be available.
Errors in valuing recently privatized companies, whether or not the result of
inaccurate or unavailable data, could result in the Fund overpaying for an
interest in such companies.
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The transformation of medium- and large-scale state enterprises into open
joint stock companies and their subsequent privatization has been carried out by
the Russian State Property Committee and Federal Property Fund and their local
organs at an unprecedented rate. In doing this, much of the responsibility for
preparation of enterprises for privatization and compliance with much of the
privatization legislation was imposed on individuals at the enterprise concerned
rather than through strict control by state authorities. This enhances the risk
that there may be illegalities in the privatization that may lead to full or
partial invalidity of the privatization of the enterprise concerned or the
imposition of sanctions on that enterprise or individuals within its
administration. Alternatively, an enterprise may not have valid or full title to
all of the assets shown on its balance sheet and may be subject to obligations
arising from a period prior to its privatization. As an investor the Fund may
consequently lose all or a part of its investments in such privatized
enterprises.
DIFFICULTIES IN PROTECTING AND ENFORCING RIGHTS
Russian courts lack experience in commercial dispute resolution and many of
the procedural remedies for enforcement and protection of legal rights typically
found in Western jurisdictions are not available in Russia. There remains
uncertainty as to the extent to which local parties and entities, including
Russian state authorities, will recognize the contractual and other rights of
the parties with which they deal. Accordingly, there will be difficulty and
uncertainty in the Fund's ability to protect and enforce its rights against
Russian state and private entities. There is also no assurance that the Russian
courts will recognize or acknowledge that the Fund has acquired title to any
property or securities in which the Fund invests, or that the Fund is the owner
of any property or security held in the name of a nominee which has acquired
such property or security on behalf of the Fund, because there is at present in
Russia no reliable system or legal framework regarding the registration of
titles. There can be no assurance that this difficulty in protecting and
enforcing rights in Russia will not have a material adverse effect on the Fund
and its operations. Difficulties are likely to be encountered enforcing
judgments of foreign courts within Russia or of Russian courts in foreign
jurisdictions due to the limited number of countries which have signed treaties
for mutual recognition of court judgments with Russia.
Rights apparently granted to the Fund by legislation may be subject to
retroactive change or may be undermined by conflicting legislation, the failure
by a legislator to comply with the proper procedure for passing such legislation
or by changes or uncertainties in the relative priority of legislation passed by
different legislative bodies.
ENVIRONMENTAL RISKS
The lack of environmental controls in Russia has led to widespread pollution
of the air, ground and water resources. In addition, there are concerns related
to the availability of equipment and funding for the disposal of nuclear waste.
Russian environmental legislation envisages the possibility of stringent
sanctions on companies that commit serious or persistent breaches, including
closure of the enterprise concerned. Although such legislation does not
currently impose liability on shareholders in a Russian company, there is the
possibility of such liability being imposed under future legislation.
Accordingly, the extent of the responsibility, if any, for the costs of
abatement of environmental hazards may not be determinable at the time the Fund
is considering an investment. Substantial liability for one or more businesses
in which the Fund invests would have a significant adverse effect on the
operations of the Fund. Where possible, the Fund will seek indemnification
against environmental risks from the enterprises in which it invests or from the
sellers of such companies. However, no assurance can be given that such
indemnities will be available or that, if obtained, they can be effectively
enforced.
CORRUPTION AND CRIME
The Russian economic system suffers from pervasive corruption, a state of
affairs that to a large extent has been carried over from the Communist era.
Many businesses, particularly in the large cities, are subject to the influence
of criminal elements although there is not a single group or confederation of
criminals that can be characterized as "organized" crime, as that term is
understood in Western Europe
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and North America. In an effort to root out crime, President Yeltsin recently
issued a series of decrees giving the security forces extreme powers to carry
out a crackdown on crime. The President has acknowledged that many provisions of
his anti-crime decrees violate the Russian constitution as well as the criminal
code and these decrees have been viewed by many as a threat to civil rights. The
social and economic difficulties resulting from the problem of corruption and
crime in Russia can adversely affect the value of the Fund's investments.
HEDGING TRANSACTIONS
The Fund may seek to protect the value of some or all of its portfolio
holdings against currency risks by engaging in hedging transactions, some or all
of which may be classified as derivatives. The Fund is authorized to enter into
forward currency exchange contracts and currency futures contracts and options
on such futures contracts, as well as to purchase put or call options on foreign
currencies, in U.S. or foreign markets, to the extent available. In order to
hedge against adverse market shifts, the Fund is permitted to purchase put and
call options on stocks, write covered call options on stocks and enter into
stock index futures contracts and related options. The Fund also is authorized
to hedge against interest rate fluctuations affecting portfolio securities by
entering into interest rate futures contracts and options thereon. For a
description of such hedging strategies, see "Additional Investment Practices"
and Appendix D to this Prospectus. Currently, there is no market in which the
Fund may engage in many of these hedging transactions; therefore, there can be
no assurance that instruments suitable for hedging currency or market or
interest rate shifts will be available at the time when the Fund wishes to use
them.
DIRECT INVESTMENTS
Direct investments in Russia Companies will involve a high degree of
business and financial risk that can result in substantial losses. Because of
the absence of any public trading market for these investments, the Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities and the prices on these sales could be less than those
originally paid by the Fund. Further, issuers whose securities are not publicly
traded may not be subject to disclosure and other investor protection
requirements applicable to publicly traded securities. Certain of the Fund's
direct investments may include investments in smaller, less-seasoned companies,
which may involve greater risks. These companies may have limited product lines,
markets or financial resources, or they may be dependent on a limited management
group.
ILLIQUID SECURITIES
The securities of Russia Companies are mostly traded over-the-counter and,
despite the large number of stock exchanges, there is still no organized public
market for such securities. This will increase the difficulty of valuing the
Fund's investments and means that until such time as the market develops further
the Fund's investments will generally be illiquid. No established secondary
markets may exist for many of the securities in which the Fund will invest.
Reduced secondary market liquidity may have an adverse effect on market price
and the Fund's ability to dispose of particular instruments when necessary to
meet its liquidity requirements or in response to specific economic events such
as a deterioration in the creditworthiness of the issuer. Reduced secondary
market liquidity for securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing its portfolio and
calculating its net asset value. Market quotations are generally available on
many emerging country securities only from a limited number of dealers and may
not necessarily represent firm bids of those dealers or prices for actual sales.
NET ASSET VALUE DISCOUNT; NON-DIVERSIFICATION
The Fund is a newly organized closed-end investment company with no prior
operating history. Prior to the Offering, there has been no public market for
the Fund's Shares. Shares of closed-end investment companies that invest
primarily in foreign countries frequently trade at a discount from net
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asset value and the initial public offering price. This characteristic of shares
of a closed-end fund is a risk separate and distinct from the risk that a fund's
net asset value will decrease. The risk of purchasing shares of a closed-end
investment company that might trade at a discount from net asset value is more
pronounced for investors who purchase shares in the initial public offering and
who wish to sell their shares in a relatively short period of time. For those
investors, realization of a gain or loss on their investment is likely to be
more dependent upon the existence of a premium or discount than upon portfolio
performance.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. Thus, the Fund may invest a greater portion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Fund,
however, intends to comply with the diversification requirements imposed by the
Code for qualification as a regulated investment company. This intention should
not be regarded as assurance that the diversification requirements will, in
fact, be met. In addition, the Board of Directors has adopted a non-fundamental
policy under which the Fund will not invest more than 10% of its assets in the
securities of any one issuer. See "Taxation--U.S. Federal Income Taxes" and
"Investment Restrictions."
DEBT SECURITIES--HIGH YIELD, HIGH RISK SECURITIES
The Fund may invest in debt securities of Russia Companies which may be low
rated or unrated. The market value of debt securities generally varies in
response to changes in interest rates and the financial conditions of the
issuer. During periods of declining interest rates, the value of debt securities
generally increases. Conversely, during periods of rising interest rates, the
value of such securities generally declines. These changes in market value will
be reflected in the Fund's net asset value.
The Fund may invest in debt securities rated below BBB by S&P and Baa by
Moody's. Such debt securities may involve greater risks of loss of income and
principal than higher-rated securities, are speculative in nature, and are
commonly known as "high yield" securities or "junk bonds." Although high risk,
low-rated debt securities and comparable unrated debt securities may offer
higher yields than do higher rated securities, they generally involve greater
volatility of price and risk of principal and income. Securities having the
lowest rating for non-subordinated debt instruments assigned by S&P and Moody's
(i.e., rated CCC by S&P or C by Moody's) are considered to have extremely poor
prospects of ever attaining any real investment standing; to be unlikely to have
the capacity to pay interest or repay principal when due in the event of adverse
business, financial or economic conditions; and/or to be in default or not
current in the payment of interest or principal. In addition, the markets in
which low rated and unrated debt securities are traded are more limited than
those in which higher-rated securities are traded. Adverse publicity and
investors' perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of low-rated debt securities, especially in a
thinly traded market. Analysis of the creditworthiness of issuers of low-rated
debt securities may be more complex than for issuers of higher-rated securities,
and the ability of the Fund to achieve its investment objective may, to the
extent of investment in low-rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher-rated securities. A debt security rated "D" by S&P means that the issuer
is in payment default.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low-rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low-rated debt securities defaults, the Fund may incur additional expenses in
seeking recovery.
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FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES
Rules adopted under the 1940 Act permit the Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Pursuant to those rules, the Fund's portfolio of
securities and cash, when invested in foreign countries, will be held by its
subcustodians who will be approved by the Board of Directors of the Fund as and
when appropriate in accordance with the rules of the Commission. Selection of
the subcustodians will be made by the Board of Directors following the
consideration of a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to capably perform custodial services for the Fund, the reputation
of the institution in its national market, the political and economic stability
of the countries in which the subcustodians will be located, and risks of
potential nationalization or expropriation of Fund assets. In addition, the 1940
Act requires that foreign subcustodians, among other things, have shareholder
equity in excess of $200,000,000, have no lien on the Fund's assets and maintain
adequate and accessible records. Certain banks in foreign countries may not be
eligible subcustodians for the Fund, in which event the Fund may be precluded
from purchasing securities in which it would otherwise invest, and other banks
that are eligible foreign subcustodians may be recently organized or otherwise
lack extensive operating experience.
ADDITIONAL INVESTMENT PRACTICES
The Fund is authorized to use various investment strategies described below,
some or all of which may be classified as derivatives, to hedge various market
risks (such as interest rates, currency exchange rates and broad or specific
market movements), although the Investment Manager has no present intention of
using them. Subject to the requirements of the 1940 Act, the Fund may hedge up
to 100% of its assets when deemed appropriate by the Investment Manager. The
Fund is also authorized to use investment strategies to manage the effective
maturity or duration of debt securities or instruments held by the Fund, or to
enhance the Fund's income or gain. Although these strategies are regularly used
by some investment companies and other institutional investors in various
markets, most of these strategies are currently unavailable in Russia and may
not become available in the future. Techniques and instruments may change over
time, however, as new instruments and strategies are developed or regulatory
changes occur.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The Fund will normally conduct foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into forward contracts
with terms of greater than one year. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers.
The Fund will generally enter into forward contracts only under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock" in
the U.S. dollar price of the security in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed to
settle the transaction. Second, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." The Fund's
forward transactions may call for the delivery of one foreign currency in
exchange for another foreign currency and may at times not involve currencies in
which its portfolio securities are then denominated. The Fund has no specific
limitation on the percentage of assets it may commit to forward contracts,
subject to its stated investment objective and policies, except that the Fund
will not enter into a forward
26
<PAGE>
contract if the amount of assets set aside to cover the contract would impede
portfolio management. Although forward contracts will be used primarily to
protect the Fund from adverse currency movements, they also involve the risk of
loss in the event that anticipated currency movements are not accurately
predicted.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in the
U.S. dollar cost of such securities to be acquired. As in the case of other
kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be written or
purchased by the Fund are traded on U.S. and foreign exchanges or
over-the-counter.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures
contracts, index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when the Fund enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See Appendix D to this Prospectus.
OPTIONS ON SECURITIES OR INDICES
The Fund may write (i.e., sell) covered put and call options and purchase
put and call options on securities or securities indices that are traded on
United States and foreign exchanges or in the over-the-counter markets. An
option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option. The Fund may write a call or put option only if the option is
"covered." This means that as long as the Fund is obligated as the writer of a
call option, it will own the underlying securities subject to the call, or hold
a call at the same exercise price, for the same exercise period, and on the same
securities as the written call. A put is covered if the Fund maintains liquid
assets with a value equal to the exercise price in a segregated account, or
holds a put on the same underlying securities at an equal or greater exercise
price. The value of the underlying securities on which options may be written at
any one time will not exceed 25% of the total assets of the Fund. The Fund will
not purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets at the time of purchase.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers portfolio securities with an aggregate
market value of up to one-third of its total assets. Such loans must be secured
by collateral (consisting of any combination of
27
<PAGE>
cash, U.S. Government securities or irrevocable letters of credit) in an amount
at least equal (on a daily marked-to-market basis) to 102% of the current market
value of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to retain any voting rights with respect to the securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase equity and debt 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. No income accrues to the purchaser of a security on a when-issued or
delayed delivery basis prior to delivery. Such securities are recorded as an
asset, and in the case of debt securities, are subject to changes in value based
upon changes in the general level of interest rates. Purchasing a security on a
when-issued or delayed delivery basis can 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. Due to
their higher volatility, this risk may be greater in the case of equity
securities purchased on a when-issued or delayed delivery basis. The Fund will
only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date if it is deemed advisable. The Fund will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal in value to the Fund's commitments to purchase securities
on a when-issued or delayed delivery basis. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
INVESTMENT COMPANIES
The Fund may invest in other investment companies, other than those for
which the Investment Manager serves as investment adviser or sponsor, which
invest principally in securities in which the Fund is authorized to invest.
These other investment companies may include investment companies, some of which
may be organized outside of the United States, whose shares are only available
to a limited number of United States investors. Under the 1940 Act, the Fund may
invest a maximum of 10% of its total assets in the securities of other
investment companies and not more than 5% of the Fund's total assets in the
securities of any one investment company, provided the investment does not
represent more than 3% of the voting stock of the acquired investment company at
the time such shares are purchased. To the extent the Fund invests in other
investment companies, the Fund's shareholders will incur certain duplicative
fees and expenses, including investment advisory fees. The Fund's investment in
certain investment companies will result in special U.S. federal income tax
consequences described below under "Taxation."
BORROWING
The Fund will not employ leverage to purchase portfolio securities. However,
the Fund may borrow money for temporary or emergency purposes (including, for
example, clearance of transactions) in an amount not exceeding 5% of the value
of the Fund's total assets (including the amount borrowed), and may borrow money
in connection with repurchases of its Shares or tender offers (see "Common
Stock") or to pay dividends or distributions required for tax purposes in an
amount up to one-third of the value of the Fund's total assets (including the
amount borrowed). The Fund will not purchase portfolio securities during any
period when borrowings exceed 5% of its total assets.
28
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund that may not
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (as defined in "Investment Objective and
Policies"). If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes will
not be considered a violation of the restriction. Also, if the Fund receives
from an issuer of securities held by the Fund subscription rights to purchase
securities of that issuer, and if the Fund exercises such subscription rights at
a time when the Fund's portfolio holdings of securities of that issuer would
otherwise exceed the limits set forth in paragraph 1 below, it will not
constitute a violation if, prior to receipt of securities upon exercise of such
rights, and after announcement of such rights, the Fund has sold at least as
many securities of the same class and value as it would receive on exercise of
such rights. As a matter of fundamental policy, the Fund may not:
(1) invest 25% or more of the total value of its assets in a particular
industry. For purposes of this restriction, a foreign government (but not
the United States government) is deemed to be an "industry," and
supranational organizations, in the aggregate, are deemed to be an
"industry";
(2) issue senior securities or borrow money, except that (a) short-term
credits necessary for settlement of securities transactions are not
considered borrowings or senior securities, and (b) the Fund may borrow up
to 5% of its total assets (including the amount borrowed) for temporary or
emergency purposes and may borrow up to 33 1/3% of its total assets
(including the amount borrowed) in connection with repurchases of its Shares
or tender offers or to pay dividends or distributions required for tax
purposes;
(3) purchase or sell commodities or commodity contracts, including
futures contracts and options thereon, except for bona-fide hedging
purposes;
(4) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit, bankers' acceptances and fixed time deposits) in
accordance with its investment objective and policies, (b) enter into
repurchase agreements with respect to portfolio securities, and (c) make
loans of portfolio securities, as described under "Additional Investment
Practices--Loans of Portfolio Securities" in this Prospectus;
(5) underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter;
(6) purchase real estate, real estate mortgage loans or real estate
limited partnership interests (other than securities secured by real estate
or interests therein or securities issued by companies that invest in real
estate or interests therein);
(7) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions); or
(8) make short sales of securities or maintain a short position.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
The Fund's investment manager is Templeton Investment Management (Singapore)
Pte. Ltd. (the "Investment Manager"). The Investment Manager is a Singapore
corporation that is registered under the U.S. Investment Advisers Act of 1940,
as amended, with offices at 20 Raffles Place, Singapore. An affiliate of the
Investment Manager has established an office in Moscow, which currently has a
staff of two securities analysts. The Investment Manager expects this office to
provide it with a valuable resource for research and securities analysis with
regard to securities of Russia Companies. Dr. J. Mark
29
<PAGE>
Mobius, Director of the Investment Manager, will be the Fund's principal
portfolio manager of the team of four investment professionals that will manage
the Fund in Singapore. The Investment Manager also serves as investment manager
to Templeton Vietnam Opportunities Fund, Inc., a closed-end management
investment company registered under the 1940 Act. In addition, an affiliate of
the Investment Manager serves as investment manager to six other U.S. investment
companies and 18 other non-U.S. public and private funds that invest primarily
in equity securities of issuers in emerging markets, with assets totaling
$ billion as of , 1995. The six other U.S. investment companies are
registered under the 1940 Act and invest primarily in equity securities of
issuers in emerging markets: Templeton Emerging Markets Fund, Inc., a
diversified closed-end management investment company, Templeton China World
Fund, Inc., a non-diversified closed-end management investment company,
Templeton Emerging Markets Appreciation Fund, Inc., a non-diversified closed-end
management investment company, Templeton Dragon Fund, Inc., a non-diversified,
closed-end management investment company, and Templeton Developing Markets Trust
and the Emerging Markets Series of Templeton Institutional Funds, Inc.,
diversified open-end management investment companies.
The Investment Manager and its affiliates serve as advisers for a wide
variety of public investment mutual funds and private clients in many nations.
The Templeton organization, originating with earlier advisers then owned by John
M. Templeton, has been investing globally over the past 52 years and provides
investment management and advisory services to a worldwide client base,
including approximately 900,000 mutual fund shareholders, foundations and
endowments, employee benefit plans and individuals. As of , 1995,
the Templeton organization managed approximately $ billion in assets
worldwide. The Investment Manager is an indirect wholly owned subsidiary of
Franklin Resources, Inc. ("Franklin"). Through its subsidiaries, Franklin is
engaged in various aspects of the financial services industry. As of
, 1995, the Franklin Templeton organization managed over $
billion in assets worldwide.
Prior to joining the Templeton organization in 1987, Dr. Mobius was
president of the International Investment Trust Company Limited (investment
manager of Taiwan R.O.C. Fund) (1986-1987) and a director of Vickers da Costa,
Hong Kong (an international securities firm) (1983-1986). Dr. Mobius began
working in Vickers da Costa's Hong Kong office in 1980 and moved to Taiwan in
1983 to open the firm's office there and to direct operations in India,
Indonesia, Thailand, the Philippines and Korea. Before joining Vickers da Costa,
Dr. Mobius operated his own consulting firm in Hong Kong from 1970 until 1980.
Prior to 1970, Dr. Mobius was a research scientist for Monsanto Overseas
Enterprises Company in Hong Kong and the American Institute for Research in
Korea and Thailand. Dr. Mobius holds bachelor's and master's degrees from Boston
University and received his Ph.D. in economics and political science in 1964
from the Massachusetts Institute of Technology. Mr. Dennis Lim, a Director and
Portfolio Manager of the Investment Manager, will also exercise significant
portfolio management responsibilities with respect to the Fund. Prior to joining
the Templeton organization in 1990, Mr. Lim was a student at the University of
Wisconsin, from which he received a master's degree in finance, and worked as an
engineering service officer for the Ministry of National Development of the
Government of Singapore.
The Fund has been advised that there is doubt as to the enforceability in
the courts of Russia of judgments against the Investment Manager predicated upon
the civil liability provisions of the federal securities laws of the United
States. The Investment Manager is advised by U.S. counsel with respect to the
federal securities laws of the United States.
Subject to applicable regulations, Shares of the Fund may be purchased by
certain discretionary accounts of the Investment Manager and its affiliates.
30
<PAGE>
THE INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Management Agreement between the Fund and the
Investment Manager (the "Management Agreement"), the Investment Manager will
manage the Fund's assets in accordance with the Fund's stated investment
objective, policies and restrictions and subject to the supervision of the
Fund's Board of Directors and will make investment decisions on behalf of the
Fund, including the selection of, and placement of orders with, brokers, dealers
and banks to execute portfolio transactions on behalf of the Fund. The
Investment Manager is not required to furnish any personnel, overhead items or
facilities for the Fund.
For its services, the Investment Manager will receive a monthly fee, payable
in arrears in U.S. dollars, at an annual rate of 1.25% of the Fund's average
weekly net assets. This fee is higher than those paid by most other U.S.
investment companies, primarily because of the additional time and expense
required of the Investment Manager in pursuing the Fund's policy of investing in
Russia Company securities. It is expected, however, that the Fund's investment
management fee will be comparable to those of other U.S. closed-end investment
companies of comparable size that invest primarily in securities of other
emerging market issuers.
The Fund will pay or cause to be paid all of its expenses, including: fees
paid to the Investment Manager and the Business Manager; organization expenses
(which include out-of-pocket expenses, but not overhead or employee costs, of
the Investment Manager); legal expenses; auditing and accounting expenses; taxes
and governmental fees; stock exchange listing fees; dues and expenses incurred
in connection with membership in investment company organizations; fees and
expenses of the Fund's custodian, subcustodians, transfer agent and registrar;
expenses of preparing share certificates and other expenses in connection with
the issuance, offering or underwriting of securities issued by the Fund;
expenses related to shareholder servicing; expenses relating to investor and
public relations; expenses of registering or qualifying securities of the Fund
for sale; freight, insurance and other charges in connection with the shipment
of the Fund's portfolio securities; brokerage commissions or other costs of
acquiring or disposing of portfolio securities of the Fund; expenses of
preparing and distributing reports, notices and dividends to shareholders; costs
of stationery; any litigation expenses, and costs of shareholders' and other
meetings.
The Management Agreement provides that the Investment Manager will select
brokers and dealers for execution of the Fund's portfolio transactions
consistent with the Fund's brokerage policies (see "Portfolio Transactions and
Brokerage"). Although the services provided by broker-dealers in accordance with
the brokerage policies incidentally may help reduce the expenses of or otherwise
benefit the Investment Manager and other investment advisory clients of the
Investment Manager and of its affiliates, as well as the Fund, the value of such
services is indeterminable and the Investment Manager's fee is not reduced by
any offset arrangement by reason thereof.
Under the Management Agreement, the Investment Manager is permitted to
provide investment advisory services to other clients, including clients that
may invest in the same types of securities as the Fund and, in providing such
services, the Investment Manager may use information furnished by others.
Conversely, information furnished by others to the Investment Manager in
providing services to other clients may be useful to the Investment Manager in
providing services to the Fund. When the Investment Manager determines to buy or
sell the same security for the Fund that the Investment Manager or one or more
of its affiliates has selected for one or more of its other clients or for
clients of its affiliates, the orders for all such security transactions are
placed for execution by methods determined by the Investment Manager, with
approval by the Fund's Board of Directors, to be impartial and fair.
The Management Agreement provides that the Investment Manager will have no
liability to the Fund or any shareholder of the Fund for any error of judgment,
mistake of law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its duties under the
Management Agreement or for any loss or damage resulting from the imposition by
any
31
<PAGE>
government of exchange control restrictions that might affect the liquidity of
the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any war or political act of any foreign government to
which such assets might be exposed, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part or reckless disregard of its duties under the
Management Agreement.
The Management Agreement by its terms continues in effect for a period of
two years from the date hereof. If not sooner terminated, it will continue in
effect for successive periods of twelve months thereafter provided each
continuance is specifically approved annually by a vote of a majority of the
members of the Board of Directors who are not interested persons of the
Investment Manager or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and by a majority vote either of the Fund's
Board of Directors or of the Fund's outstanding voting securities. The
Management Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act), and may be terminated by either party at any time
without payment of any penalty on 60 days' written notice provided that
termination by the Fund is approved by a majority of the Directors of the Fund
in office at the time or by vote of a majority of the Fund's outstanding voting
securities.
To reduce the likelihood of a market discount in the Fund's Shares, the
Investment Manager will reduce its fee by one-half during the fiscal quarter
following any of the first eight fiscal quarters of the Fund if the average
closing price of the Fund's Shares in the preceding quarter is less than the
$15.00 initial offering price. The Fund cannot predict whether its Shares will
trade at, above or below net asset value, and there can be no assurance that the
fee reduction arrangement will serve its intended purpose.
BUSINESS MANAGER; SUB-ADMINISTRATOR
Templeton Global Investors, Inc. (the "Business Manager"), 500 East Broward
Boulevard, Ft. Lauderdale, Florida 33394, will enter into a Business Management
Agreement with the Fund, under which the Business Manager will perform certain
administrative functions as business manager for the Fund, including: (i)
providing office space, telephone, office equipment and supplies for the Fund;
(ii) paying compensation of the Fund's officers; (iii) authorizing expenditures
and approving bills for payment on behalf of the Fund; (iv) supervising
preparation of periodic reports to shareholders, notices of dividends, capital
gains distributions and tax credits, and attending to correspondence and other
communications with individual shareholders; (v) pricing of the Fund's portfolio
securities and supervising publication of the net asset value of the Fund's
Shares, earnings reports and other financial data; (vi) monitoring relationships
with organizations serving the Fund, including the custodian, transfer agent,
sub-administrator and printers; (vii) providing trading desk facilities to the
Fund; (viii) supervising compliance by the Fund with recordkeeping requirements
under the 1940 Act and regulations thereunder, maintaining books and records for
the Fund (other than those maintained by the custodian and transfer agent), and
preparing and filing Fund tax reports other than the Fund's income tax returns;
and (ix) providing executive, clerical and secretarial help needed to carry out
these responsibilities.
For its services, the Business Manager will receive a monthly fee, payable
in arrears in U.S. dollars, at an annual rate of .25% of the Fund's average
weekly net assets. The Business Manager is relieved of liability to the Fund for
any act or omission in the course of its performance under the Business
Management Agreement, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties. The Business Management
Agreement may be terminated by either party at any time on 60 days' written
notice without payment of any penalty, provided that termination by the Fund is
approved by a majority of the Directors of the Fund in office at the time or by
vote of a majority of the outstanding voting securities of the Fund, and will
terminate automatically in the event of its assignment.
The Business Manager and the Fund will enter into a sub-administration
agreement with Princeton Administrators, L.P. (the "Sub-Administrator"), under
which the Sub-Administrator will perform,
32
<PAGE>
subject to the Business Manager's supervision, various administrative functions,
which may include maintaining certain of the books and records of the Fund,
calculating the net asset value of the Fund's Shares based upon prices provided
by the Investment Manager or others and providing the results of such
calculations to information services, preparing certain financial data and
reports and other documents required by the U.S. federal securities laws and
regulations, paying authorized expenses of the Fund, interacting and working
with organizations serving the Fund including the custodian, transfer agent and
printers, maintaining certain records and information and providing data for
calculations, reports and filings under federal and state tax statutes
applicable to the Fund and providing the Fund with administrative office
facilities. The Business Manager will remain legally obligated to provide all
administrative services to the Fund. For its services and facilities, the
Business Manager will pay the Sub-Administrator a monthly fee, payable in
arrears in U.S. dollars, at an annual rate of .20% of the Fund's average weekly
net assets, subject to a monthly minimum fee of $12,500.
The Sub-Administrator is an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. The principal address of the Sub-Administrator is P.O. Box
9011, Princeton, New Jersey 08543-9011.
33
<PAGE>
DIRECTORS AND OFFICERS
The names and addresses of the Directors and officers of the Fund are set
forth below, together with their positions with the Fund and their principal
occupations during the past five years, and, in the case of the Directors, their
positions with certain other organizations and publicly held companies.
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
JOHN M. TEMPLETON*............. Chairman of the board of other Templeton Funds; president
Lyford Cay of First Trust Bank, Ltd., Nassau, Bahamas; and previously
Nassau, Bahamas chairman of the board and employee of Templeton,
Chairman of the Board Galbraith & Hansberger Ltd. (prior to October 30, 1992).
HARMON E. BURNS*............... Executive vice president, secretary, and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president and
San Mateo, California director, Franklin Templeton Distributors, Inc.;
Director executive vice president, Franklin Advisers, Inc.;
director, Franklin Administrative Services, Inc.; and
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc., and officer
and/or director of various investment companies in the
Franklin Templeton Group.
MARTIN L. FLANAGAN*............ Senior vice president, treasurer, and chief financial
777 Mariners Island Blvd. officer of Franklin Resources, Inc.; director and
San Mateo, California executive vice president of Templeton Investment
Director and Vice President Counsel, Inc. and Templeton Global Investors, Inc.;
president or vice president of the Templeton Funds;
accountant, Arthur Andersen & Company (1982-1983); and
member of the International Society of Financial
Analysts and the American Institute of Certified Public
Accountants.
NICHOLAS F. BRADY*............. A director or trustee of other Templeton Funds; chairman
The Bullitt House and president of Darby Advisors, Inc. (an investment firm)
Dover & Harrison Streets since January, 1993; director of the H. J. Heinz
Easton, Maryland Company, Capital Cities/ABC, Inc. and the Christiana
Director Companies; Secretary of the United States Department of
the Treasury (1988 to January, 1993); and chairman of
the board of Dillon, Read & Co. Inc. (investment
banking) prior thereto.
HASSO-G VON DIERGARDT-NAGLO.... Farmer; president of Clairhaven Investments, Ltd. and
R.R. 3 other private investment companies; and a director or
Stouffville, Ontario trustee of other Templeton Funds.
Director
F. BRUCE CLARKE................ Retired; former credit advisor, National Bank of Canada,
19 Vista View Blvd. Toronto; and a director or trustee of other Templeton
Thornhill, Ontario Funds.
Director
BETTY P. KRAHMER............... A director or trustee of other Templeton Funds; director
2201 Kentmere Parkway or trustee of various civic associations; and former
Wilmington, Delaware economic analyst, U.S. Government.
Director
FRED R. MILLSAPS............... A director or trustee of other Templeton Funds; manager of
2665 N.E. 37th Drive personal investments (1978-present); chairman and chief
Fort Lauderdale, Florida executive officer of Landmark Banking Corporation (1969-
Director 1978); financial vice president of Florida Power and
Light (1965-1969); vice president of Federal Reserve
Bank of Atlanta (1958-1965); and director of various
business and nonprofit organizations.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
JOHN G. BENNETT, JR............ A director or trustee of other Templeton Funds; founder,
3 Radnor Corporate Center chairman of the board, and president of the Foundation
Suite 150 for New Era Philanthropy; president and chairman of the
100 Matsonford Road boards of the Evelyn M. Bennett Memorial Foundation and
Radnor, Pennsylvania NEP International Trust; chairman of the board and chief
Director executive officer of The Bennett Group International,
LTD; chairman of the boards of Human Service Systems,
Inc. and Multi-Media Communicators, Inc.; a director or
trustee of many national and international
organizations, universities, and grantmaking foundations
serving in various executive board capacities; and
member of the Public Policy Committee of the Advertising
Council.
ANDREW H. HINES, JR............ Consultant, Triangle Consulting Group; chairman of the
150 2nd Avenue N. board and chief executive officer of Florida Progress
St. Petersburg, Florida Corporation (1982-February 1990) and director of various
Director of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd
College (1991-present); director of Checkers Drive-In
Restaurants, Inc.; and a director or trustee of other
Templeton Funds.
HARRIS J. ASHTON............... Chairman of the board, president, and chief executive
Metro Center officer of General Host Corporation (nursery and craft
1 Station Place centers); director of RBC Holdings Inc. (a bank holding
Stamford, Connecticut company) and Bar-S Foods; director or trustee of other
Director Templeton Funds; and director, trustee or managing
general partner, as the case may be, for most of the
investment companies in the Franklin Group of Funds.
S. JOSEPH FORTUNATO............ Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive director of General Host Corporation; director or
Florham Park, New Jersey trustee of other Templeton Funds; and director, trustee
Director or managing general partner, as the case may be, for
most of the investment companies in the Franklin Group
of Funds.
GORDON S. MACKLIN.............. Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Infovest Corporation, FundAmerican
Bethesda, Maryland Enterprise Holdings, Inc., Martin Marietta Corporation,
Director MCI Communications Corporation and Medimmune, Inc.;
director or trustee of other Templeton Funds; director,
trustee, or managing general partner, as the case may
be, of most of the investment companies in the Franklin
Group of Funds; formerly: chairman, Hambrecht and Quist
Group; director, H&Q Healthcare Investors; and
president, National Association of Securities Dealers,
Inc.
J. MARK MOBIUS................. Director and executive vice president of Templeton,
Two Exchange Square Galbraith & Hansberger Ltd.; managing director of
Hong Kong Templeton Investment Management (Hong Kong) Limited;
President president of International Investment Trust Company
Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987); and director of Vickers de Costa, Hong Kong
(1983-1986).
CHARLES B. JOHNSON............. President, chief executive officer, and director, Franklin
777 Mariners Island Blvd. Resources, Inc.; president and director, Franklin
San Mateo, California Templeton Distributors, Inc.; chairman of the board and
Vice President director, Franklin Advisers, Inc.; director, Franklin
Administrative Services, Inc. and General Host
Corporation; director of Templeton Global Investors,
Inc.; and officer and director, trustee or managing
general partner, as the case may be, of most other
subsidiaries of Franklin and of most of the investment
companies in the Franklin Templeton Group.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
MARK G. HOLOWESKO.............. President and director of Templeton, Galbraith &
Lyford Cay Hansberger Ltd.; director of global equity research for
Nassau, Bahamas Templeton Worldwide, Inc.; president or vice president
Vice President of the Templeton Funds; and investment administrator
with Roy West Trust Corporation (Bahamas) Limited
(1984-1985).
SAMUEL J. FORESTER, JR......... President of the Templeton Global Bond Managers Division
Broward Financial Centre of Templeton Investment Counsel, Inc.; president or vice
Fort Lauderdale, Florida president of other Templeton Funds; founder and partner
Vice President of Forester, Hairston Investment Management (1989-1990);
managing director (Mid-East Region) of Merrill Lynch,
Pierce, Fenner & Smith Inc. (1987-1988); and advisor for
Saudi Arabian Monetary Agency (1982-1987).
JOHN R. KAY.................... Vice president of the Templeton Funds; vice president and
500 East Broward Blvd. treasurer of Templeton Global Investors, Inc.; assistant
Suite 1400 vice president of Franklin Templeton Distributors, Inc.;
Fort Lauderdale, Florida and formerly, vice president and controller of the
Vice President Keystone Group, Inc.
JAMES R. BAIO.................. Certified public accountant; treasurer of the Templeton
500 East Broward Blvd. Funds; senior vice president of Templeton Worldwide, Inc.,
Suite 1400 Templeton Global Investors, Inc., and Templeton Funds
Fort Lauderdale, Florida Trust Company; and formerly, senior tax manager of Ernst
Treasurer & Young (certified public accountants) (1977-1989).
THOMAS M. MISTELE.............. Senior vice president of Templeton Global Investors, Inc.;
700 Central Avenue vice president of Franklin Templeton Distributors, Inc.;
St. Petersburg, Florida secretary of the Templeton Funds; attorney, Dechert
Secretary Price & Rhoads (1985-1988) and Freehill, Hollingdale &
Page (1988); and judicial clerk, U.S. District Court
(Eastern District of Virginia) (1984-1985).
JACK L. COLLINS................ Assistant treasurer of the Templeton Funds; assistant vice
700 Central Avenue president of Franklin Templeton Investor Services, Inc.;
St. Petersburg, Florida and former partner of Grant Thornton, independent public
Assistant Treasurer accountants.
JEFFREY L. STEELE.............. Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
</TABLE>
- ------------
* Messrs. Templeton, Burns, Flanagan and Brady are Directors who are "interested
persons" of the Fund as that term is defined in the 1940 Act. Messrs. von
Diergardt-Naglo, Clarke, Millsaps, Bennett, Hines, Ashton, Fortunato and
Macklin and Mrs. Krahmer are Directors who are not "interested persons" of the
Fund.
The Fund pays each of its Directors (except Messrs. Templeton, Burns, and
Flanagan), in addition to certain out-of-pocket expenses, an annual fee of
$5,000 plus $500 for each Board of Directors or committee meeting attended.
The Fund has a standing Audit Committee presently consisting of Messrs.
Clarke, Bennett, Millsaps and Hines, all of whom are members of the Board of
Directors and non-interested persons of the Fund. The Audit Committee reviews
both the audit and other work of the Fund's independent accountants, submits a
recommendation to the Board of Directors as to the selection of independent
accountants, subject to ratification by the shareholders in each fiscal year,
and reviews generally the maintenance of the Fund's records and the safekeeping
arrangements of the Fund's custodian. The Fund has a Nominating Committee
consisting of Messrs. Millsaps, Hines and Bennett, all of whom are members of
the Board of Directors and non-interested persons of the Fund. The Nominating
Committee
36
<PAGE>
is responsible for the selection and nomination for election of candidates to
serve as Independent Directors of the Fund.
The Board of Directors is divided into three classes, each class having a
term of three years. Each year the term of one class will expire. See "Common
Stock--Anti-Takeover Provisions in the Articles of Incorporation."
The Articles of Incorporation and the Bylaws of the Fund provide that the
Fund will indemnify Directors, officers, employees or agents of the Fund against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Fund. However, nothing in the
Articles of Incorporation or Bylaws of the Fund protects or provides for the
indemnification of a Director against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
While the Fund is a Maryland corporation, the Investment Manager and certain
of the Fund's Directors and officers (Messrs. Templeton, von Diergardt-Naglo,
Clarke, Mobius and Holowesko) are non-residents of the United States and have
all, or a substantial part, of their assets located outside the United States.
None of such Directors and officers has authorized an agent for service of
process in the United States. As a result, it may be difficult for U.S.
investors to effect service of process upon such Directors and officers within
the U.S. or effectively to enforce judgements of courts of the United States
predicated upon civil liabilities of such officers under the federal securities
laws of the United States.
37
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Manager is responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers being
hereinafter referred to as "brokers") for the execution of the Fund's portfolio
transactions and, when applicable, the negotiation of commissions in connection
therewith.
Purchase and sale orders are usually placed with brokers who are selected by
the Investment Manager as being able to achieve "best execution" of such orders.
"Best execution" means prompt and reliable execution at the most favorable
securities price, taking into account the other considerations as hereinafter
set forth. The determination of what may constitute best execution and price in
the execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
the availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Investment
Manager in determining the overall reasonableness of brokerage commissions.
The Investment Manager is authorized to allocate brokerage business to
brokers who have provided brokerage and research services, including brokerage
and research services regarding direct investments, as such services are defined
in Section 28(e) of the U.S. Securities Exchange Act of 1934, as amended (the
"1934 Act"), for the Fund and/or other accounts, if any, for which the
Investment Manager exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act). Commission rates in foreign countries, which are
sometimes fixed rather than negotiable as in the United States, are likely to be
higher than rates in the United States. With respect to transactions as to which
fixed minimum commission rates are not applicable, the Investment Manager is
authorized to cause the Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would have charged for
effecting the transaction, if the Investment Manager in making the selection in
question determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or of the
Investment Manager's overall responsibilities with respect to the Fund and the
other accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Manager is not required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith, the
Investment Manager must be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-making responsibilities;
and that the commissions paid were within a reasonable range. The determination
that commissions were within a reasonable range will be based on any available
information as to the level of commissions known to be charged by other brokers
on comparable transactions, but there will be taken into account (i) the Fund's
policy that obtaining a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that usually it is more
beneficial to the Fund to obtain a favorable price than to pay the lowest
commission, and (ii) the quality, comprehensiveness and frequency of research
studies which are provided for the Investment Manager and are useful to the
Investment Manager in performing advisory services under the Management
Agreement. Research services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services required to be
performed by the Investment Manager under such Agreement.
38
<PAGE>
NET ASSET VALUE
Net asset value will be calculated no less frequently than the close of
business on the last business day of each week, by dividing the value of the
Fund's securities plus any cash and other assets (including accrued interest and
dividends receivable) less all liabilities (including accrued expenses) by the
number of shares outstanding, the result being adjusted to the nearest whole
cent. A security listed or traded on a recognized stock exchange or NASDAQ is
valued at its last sale price on the principal exchange on which the security is
traded unless management believes, in the case of a particular security, that
the over-the-counter market represents the principal market for such security.
The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded, or as of 4:00
p.m., New York time, if that is earlier, and that value is then converted into
its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the mean between the last current bid and asked
price will be used. Occasionally, events which affect the value of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange, and will therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at fair value as determined by the management
and approved in good faith by the Board of Directors. All other securities for
which over-the-counter market quotations are readily available are valued at the
mean between the last current bid and asked price. Securities for which market
quotations are not readily available and other assets are valued at fair value
as determined by the management and approved in good faith by the Board of
Directors. The Fund's direct investments will be valued at cost unless the Board
of Directors, based on advice from the Investment Manager, concludes that there
has been a material change of a long-term nature in the value of such investment
and that the Investment Manager has sufficient reliable information available to
it to revalue these investments. The Investment Manager will monitor corporate
events, including subsequent financings by the issuer, as well as any economic
and market factors directly affecting the issuer, in assessing the continuing
appropriateness of cost valuation for direct investments.
Shares of closed-end investment companies frequently trade at a discount
from net asset value, but in certain instances have traded above net asset
value. The Fund cannot predict whether its Shares will trade above or below net
asset value.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its net investment income and net realized capital gains.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose Fund Shares are registered in his own name will have all
distributions reinvested automatically in additional Shares of the Fund by
Mellon Securities Trust Company (the "Plan Agent") as agent under the Plan
unless the shareholder elects to have distributions in cash. Shareholders whose
Shares are held by a broker or nominee that does not provide a dividend
reinvestment program may be required to have their Shares registered in their
own name to participate in the Plan. Investors who own Shares of the Fund
registered in street name should contact their broker or nominee for details.
All distributions to investors who do not participate in the Plan will be paid
by check mailed directly to the record holder (or, if the Shares are held in
street or other nominee name, then to such nominee) by Mellon Securities Trust
Company as dividend paying agent. The terms and conditions of the Plan are
contained in Appendix C.
The Plan Agent serves as agent for the shareholders in administering the
Plan. When the Fund declares a dividend or capital gains distribution,
participants in the Plan will receive Shares of the Fund, as outlined below,
with the number of Shares determined as of the time of purchase (generally, the
39
<PAGE>
payable date of the dividend) or at such other date as the Board of Directors
may determine. Whenever market price is equal to or exceeds net asset value at
the time Shares are valued for the purpose of determining the number of Shares
to be received, participants will be issued Shares of the Fund at a price equal
to net asset value but not less than 95% of the then-current market price of the
Fund's Shares. The Fund will not issue Shares under the Plan at a price below
net asset value. If net asset value determined as at the time of purchase
exceeds the market price of Fund Shares at such time, or if the Fund should
declare a dividend or other distribution payable only in cash (i.e., if the
Board of Directors should preclude reinvestment at net asset value), the Plan
Agent will, as agent for the participants, buy Fund Shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' accounts. If,
before the Plan Agent has completed its purchases, the market price exceeds the
net asset value of a Fund Share, the average per Share purchase price paid by
the Plan Agent may exceed the net asset value of the Fund's Shares, resulting in
the acquisition of fewer Shares than if the dividend or distribution had been
paid in Shares issued by the Fund valued at net asset value.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncertificated form in
the name of the participant, and each shareholder's proxy will include those
Shares purchased pursuant to the Plan.
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
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. A $5.00 fee will be
imposed for withdrawal from participation in the Plan. There will be no
brokerage charges with respect to Shares issued directly by the Fund as a result
of dividends or capital gains distributions payable either in Shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. income tax that may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes thereto may be
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan as applied to any dividend or distribution paid (i) subsequent to notice of
the change sent to all shareholders of the Fund at least 90 days before the
record date for such dividend or distribution or (ii) otherwise in accordance
with the terms of the Plan. The Plan also may be amended or terminated by the
Plan Agent by at least 90 days' prior written notice to all shareholders of the
Fund. All correspondence concerning the Plan should be directed to the Plan
Agent at Mellon Securities Trust Company, Dividend Reinvestment Services, P.O.
Box 750, Pittsburgh, PA 15230.
40
<PAGE>
TAXATION
U.S. FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under the
Code. To so qualify, the Fund must, with respect to each taxable year, among
other things: (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, and other income
(including gains from options, futures contracts, and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities, or
currencies; (b) derive less than 30% of its gross income from the sale or other
disposition of the following assets held for less than three months: (i) stock
and securities, (ii) options, futures, and forward contracts (other than
options, futures, and forward contracts on foreign currencies), and (iii)
foreign currencies (and options, futures, and forward contracts on foreign
currencies) which are not directly related to the Fund's principal business of
investing in stocks and securities (or options and futures with respect to stock
or securities); and (c) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the value of the Fund's total
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities, with
such other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the Fund's total assets and to not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's total assets is invested in the securities (other than
U.S. Government securities or securities of other regulated investment
companies) of any one issuer or of any two or more issuers that the Fund
controls and that are determined to be engaged in the same business or similar
or related businesses.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income that it
distributes to its shareholders, provided that at least 90% of its investment
company taxable income for the taxable year is distributed; however, even if the
Fund qualifies as a regulated investment company, it will be subject to tax on
the income and gains which it does not distribute in a timely manner. See also
the discussion of passive foreign investment companies below. Investment company
taxable income includes dividends, interest, and net short-term capital gains in
excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. The Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income. The Fund may borrow money or liquidate assets to make
such distributions.
If the Fund fails to satisfy the 90% distribution requirement or otherwise
fails to qualify as a regulated investment company in any taxable year, it will
be subject to tax in such year on all of its taxable income, regardless of
whether the Fund makes any distributions to its shareholders. In addition, in
that case, all of the Fund's distributions to its shareholders will be
characterized as ordinary income (to the extent of the Fund's current and
accumulated earnings and profits) and shareholders will not be entitled to treat
foreign income taxes paid by the Fund as having been paid by them in computing
their own federal income tax liability. In contrast, as explained below, if the
Fund qualifies as a regulated investment company, a portion of its distributions
may be characterized as long-term capital gain in the hands of shareholders, and
if the Fund meets certain requirements and so elects, shareholders may be
treated as having paid the foreign income taxes paid by the Fund.
Dividend distributions of investment company taxable income are taxable to a
U.S. shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in Fund shares.
Dividends paid by the Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received from U.S. corporations, may
qualify for the dividends received deduction. However, the revised alternative
minimum tax applicable to corporations may reduce the value of the dividends
received deduction.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its net capital gain (net long-term capital gains in
excess of net short-term capital losses and capital loss
41
<PAGE>
carryovers from the prior eight taxable years, if any) that it designates as a
"capital gain dividend" and distributes in a timely manner to its shareholders.
Capital gain dividends are taxable to shareholders as long-term capital gains
whether paid in cash or in shares and regardless of length of time the
shareholder has held the Fund's shares. Such distributions are not eligible for
the dividends received deduction. Under current rates, net long-term capital
gains are taxed at a rate no greater than 28% for individuals and 35% for
corporations. No later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the amounts
of ordinary income dividends and capital gain dividends.
If the Fund retains all or a portion of its net capital gain, it will be
subject to a tax at current rates of up to 35% of the amount retained. The Board
of Directors of the Fund will determine at least once a year whether to
distribute any net capital gain. The Fund expects to designate any amounts
retained as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income taxation on long-term capital gains, (a) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their respective shares of the undistributed amount, and (b) will
be entitled to credit against their U.S. federal income tax liabilities their
respective shares of the tax paid by the Fund on the undistributed amount and to
claim refunds to the extent that their credits exceed their liabilities. For
U.S. federal income tax purposes, if the Fund designates amounts as
undistributed capital gains, the basis of shares owned by a shareholder of the
Fund will be increased by an amount equal to 65% of the amount of undistributed
capital gains included in the shareholder's income. Shareholders will be
notified annually as to the U.S. federal income tax status of their dividends
and distributions.
Any dividend declared by the Fund in October, November or December of any
year and payable to shareholders of record on a specified date in such a month
shall be deemed to have been paid by the Fund and received by each shareholder
on December 31, provided that such dividend is actually paid by the Fund during
January of the following year.
If the value of Fund shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, the distribution will be taxable even
though it, in effect, represents a return of invested capital. Investors
considering buying shares just prior to a dividend or capital gain distribution
payment date should be aware that, although the price of shares purchased at
that time may reflect the amount of the forthcoming distribution, those who
purchase just prior to the record date for a distribution may receive a
distribution which will be taxable to them.
If the Fund is the holder of record of corporate stock on the record date
for any dividends payable with respect to such stock, such dividends must be
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends), or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Certain types of debt securities that the Fund may acquire may be considered
as having original issue discount or market discount. Original issue discount is
included in the Fund's taxable income (which generally must be is distributed to
shareholders) over the period during which the Fund holds the debt security,
even though no periodic payments representing the original issue discount are
received by the Fund. Generally, unless the Fund makes certain elections, market
discount is not included in the Fund's taxable income before actual payments on
a market discount debt security are received. Original issue discount and market
discount are characterized as ordinary income.
Under the Code, the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute or be
deemed under Code rules to have distributed annually at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year and at least 98% of its capital gain net income for the 12-month
period ending, as a
42
<PAGE>
general rule, on October 31 of the calendar year. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any under distribution or over distribution,
as the case may be, in the previous year. For a distribution to qualify under
the foregoing test, the distribution generally must be declared and paid during
the year. However, as noted above, a special provision applies to certain
distributions paid during January.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore, in turn,
affect the character, amount, and timing of distributions to shareholders. These
provisions also may require the Fund to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if they were closed out), which
may cause the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy its distribution requirements for
relief from income and excise taxes. The Fund will monitor its transactions and
may make such tax elections as Fund management deems appropriate with respect to
foreign currency, options, futures contracts, forward contracts, or hedged
investments. The Fund's status as a regulated investment company may limit its
transactions involving foreign currency, futures, options, and forward
contracts.
Effect of Foreign Currencies; "Section 988" Gains or Losses. The Fund will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of the Fund's investments will be maintained
and income therefrom calculated by reference to certain foreign currencies
(including Russian Rubles) and such calculations will not necessarily correspond
to the Fund's distributable income and capital gains for U.S. federal income tax
purposes as a result of fluctuations in currency exchange rates. Furthermore,
exchange control regulations may restrict the ability of the Fund to repatriate
investment income or the proceeds of sales of securities. These restrictions and
limitations may limit the Fund's ability to make sufficient distributions to
satisfy the 90% distribution requirement for qualification as a regulated
investment company. Even if the Fund so qualified, these restrictions could
inhibit its ability to distribute all of its income in order to be fully
relieved of tax liability.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities
denominated in a foreign currency and certain forward contracts, futures, and
options, gains or losses attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the security or other
instrument and the date of disposition also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders or, in some cases, as
capital gain, rather than as an ordinary dividend.
Passive Foreign Investment Companies. The Fund may invest in shares of
foreign corporations which may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income is investment-type income. If the Fund
receives a so-called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess distribution, whether
or not the corresponding income is distributed by the Fund to
43
<PAGE>
shareholders. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the Fund
held the PFIC shares. The Fund itself will be subject to tax on the portion, if
any, of an excess distribution that is so allocated to prior Fund taxable years
and an interest factor will be added to the tax, as if the tax had been payable
in such prior taxable years. Certain distributions from a PFIC as well as gain
from the sale of PFIC shares are treated as excess distributions. Excess
distributions are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains would be treated as though they were realized.
If this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Foreign Taxes. The Fund may be subject to certain taxes imposed by the
countries in which it invests or operates. See the discussion below for a
summary of certain Russian taxes. If the Fund qualifies as a regulated
investment company and if more than 50% of the value of the Fund's total assets
at the close of any taxable year consists of stocks or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
any foreign taxes paid by the Fund that qualify as income or similar taxes under
United States income tax principles as having been paid by the Fund's
shareholders. For any year for which the Fund makes such an election, each
shareholder will be required to include in its gross income an amount equal to
its allocable share of such taxes paid by the Fund and the shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their U.S. federal income tax liability, if any, or to deduct
their portions from their U.S. taxable income, if any. No deduction for foreign
taxes may be claimed by individuals who do not itemize deductions. In any year
in which it elects to "pass through" foreign taxes to shareholders, the Fund
will notify shareholders within 60 days after the close of the Fund's taxable
year of the amount of such taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities may have to be treated as derived from U.S. sources
and certain currency fluctuation gains, including Section 988 gains, may have to
be treated as derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, including foreign
source passive income received from the Fund. Shareholders may be unable to
claim a credit for the full amount of their proportionate share of the foreign
taxes paid by the Fund. The foreign tax credit can be applied to offset no more
than 90% of the alternative minimum tax imposed on corporations and individuals.
44
<PAGE>
The foregoing is only a general description of the foreign tax credit.
Because application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advisers.
Shareholder Dispositions of Fund Shares. Upon the sale or exchange of Fund
Shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and its basis in the Shares. Such gain or loss will be treated
as capital gain or loss if the Shares are capital assets in the shareholder's
hands, and will be long-term if the shareholder's holding period for the Shares
is more than one year and otherwise will be short-term. Any loss realized on a
sale or exchange will be disallowed to the extent that the shares disposed of
are replaced (including replacement through the reinvesting of dividends and
capital gain distributions in the Fund) within a period of 61 days beginning 30
days before and ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of Fund shares
held by the shareholder for six months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such shares.
An amount received by a shareholder from the Fund in exchange for Shares of
the Fund (pursuant to a repurchase of shares or otherwise) generally will be
treated as a payment in exchange for the shares tendered, which may result in
taxable gain or loss as described above. However, if the amount received by a
shareholder exceeds the fair market value of the shares tendered, or if a
shareholder does not tender all of the shares of the Fund owned or deemed under
the Code to be owned by the shareholder, all or a portion of the amount received
may be treated as a dividend taxable as ordinary income or as a return of
capital. In addition, if a tender offer is made, any shareholders who do not
tender their shares could be deemed, under certain circumstances, to have
received a taxable distribution of shares of the Fund as a result of their
increased proportionate interest in the Fund.
Backup Withholding. The Fund may be required to withhold 31% of reportable
payments (which may include dividends, capital gain distributions, and
redemption proceeds, if any) to certain shareholders. A shareholder generally
may avoid becoming subject to this requirement by filing an appropriate form
certifying under penalties of perjury that such shareholder's taxpayer
identification number is correct and that he is not subject to backup
withholding, or is exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liability. Additional tax withholding
requirements that apply with respect to foreign shareholders are discussed
below.
Foreign Shareholders. U.S. taxation of a shareholder who, as to the United
States, is a non-resident alien individual, a foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder"), depends on whether
the income from the Fund is "effectively connected" with a U.S. trade or
business carried on by such shareholder. Ordinarily, income from the Fund will
not be treated as so "effectively connected."
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld
from such distributions. Furthermore, foreign shareholders may be subject to
U.S. tax at the rate of 30% (or lower treaty rate) of the income resulting from
the Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but will not be able to claim a credit or deduction for the
foreign taxes treated as having been paid by them.
Distributions of capital gain dividends to a non-resident alien who is
present in the United States for fewer than one hundred eighty-three days during
the taxable year will not be subject to the 30% U.S. withholding tax. A
non-resident alien who is physically present in the United States for more than
one hundred eighty-two days during the taxable year generally is treated as a
resident for U.S. federal income tax purposes, in which case he or she will be
subject to U.S. federal income tax on his or her
45
<PAGE>
worldwide income including ordinary income and capital gain dividends at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S.
withholding tax. In the case of a foreign shareholder who is a non-resident
alien individual, the Fund may be required to withhold U.S. federal income tax
at a rate of 31% of distributions of capital gain dividends under the backup
withholding system unless the foreign shareholder makes required certifications
to the Fund on a properly completed U.S. Internal Revenue Service Form W-8. The
amount so withheld could be applied as a credit against any U.S. tax due from
the shareholder or, if no tax is due, refunded pursuant to a claim therefor
properly filed on an income tax return.
Income Effectively Connected. If the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of net investment income and net capital gains, and any gains
realized upon the sale of Shares of the Fund, will be subject to U.S. federal
income tax at the graduated rates applicable to U.S. citizens, residents and
domestic corporations. Such shareholders may also be subject to the 30% branch
profits tax.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.
Notices. Shareholders will be notified annually by the Fund of the
dividends, distributions and deemed distributions made by the Fund to its
shareholders. Furthermore, shareholders will be sent, if appropriate, various
written notices after the close of the Fund's taxable year regarding certain
dividends, distributions and deemed distributions that were paid (or that were
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
OTHER TAXATION
Distributions also may be subject to additional state, local and foreign
taxes depending on each shareholder's particular situation.
RUSSIAN TAXATION
The following is based on the advice of [Russian tax advisor].
The Fund intends to qualify for benefits under the Income Tax Convention
between the Russian Federation and the United States (the "Treaty"). Under the
Treaty, a Russian withholding tax at a maximum rate of 10% will be imposed upon
dividends paid by a Russian company to the Fund. Interest received by the Fund
from sources within Russia and capital gains of the Fund arising from its
investments in Russia, other than investments in real estate, will, under the
Treaty, be exempt from income tax imposed by Russia.
Complete assurance cannot be given that the Fund's intention to qualify for
Treaty benefits will be realized. Generally, if the Fund does not qualify for
such benefits, dividends and interest received from Russian sources will be
subject to Russian withholding tax of 15% and capital gains may be subject to
Russian withholding tax of 20%.
The Fund will be subject to a Russian tax on the transfer of securities at
effective rates between 0.1% and 0.6% of the transfer value.
The companies in which the Fund invests may be subject to Russian taxes.
Currently, net income of Russian corporations is taxed at rates up to 43%, but
certain businesses are taxed at higher rates. In addition, for Russian tax
purposes, some expenses incurred are not deductible in computing net income
subject to tax. There are a number of special fees, royalties, export taxes and
excise taxes that apply to the oil and gas, and mining industries, the structure
and rates of which change frequently. The Fund's manager may, but is not
obligated to, take taxes into account in making investment decisions.
46
<PAGE>
Shareholders not otherwise subject to taxation by Russia will not be subject
to Russian income or withholding taxes on distributions from the Fund or on
dispositions of Fund Shares, or to Russian estate taxes.
The tax environment in Russia is evolving rapidly, which could result in the
imposition of taxes which differ from, or are in addition to, those described
herein. In addition, new taxes or new interpretations of existing tax
legislation may be applied on a retroactive basis.
THE TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
EACH SHAREHOLDER IS ADVISED TO CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES TO IT OF PARTICIPATION IN THE FUND, INCLUDING THE
EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 Shares of Common
Stock ($0.01 par value). Shares of the Fund, when issued, will be fully paid and
non-assessable and will have no conversion, preemptive or other subscription
rights. Holders of Common Stock are entitled to one vote per Share on all
matters to be voted upon by shareholders and will not be able to cumulate their
votes in the election of Directors. Thus, holders of more than 50% of the Shares
voting for the election of Directors have the power to elect 100% of the
Directors. Under rules of the New York Stock Exchange, the Fund is required to
hold annual meetings of shareholders. All Shares are equal as to assets,
earnings and the receipt of dividends, if any, as may be declared by the Board
of Directors out of funds available therefor. In the event of liquidation,
dissolution or winding up of the Fund, each Share of Common Stock is entitled to
receive its proportion of the Fund's assets remaining after payment of all debts
and expenses.
The Fund does not presently intend to offer additional Shares of Common
Stock, except that additional Shares may be issued under the Plan. Other
offerings of the Fund will require approval of the Fund's Board of Directors and
may require shareholder approval. Any such additional offerings would also be
subject to the requirements of the 1940 Act, including the requirement that
Shares may not be sold at a price below the then-current net asset value
(exclusive of underwriting discounts and commissions) except in connection with
an offering to existing shareholders or with the consent of a majority of the
Fund's outstanding voting securities.
The Fund is a closed-end investment company, and as such its shareholders
will not have the right to cause the Fund to redeem their Shares of Common
Stock. The Fund, however, may repurchase Shares of Common Stock from time to
time in the open market or in private transactions when it can do so at prices
at or below the current net asset value per Share on terms that represent a
favorable investment opportunity. Subject to its investment limitations, the
Fund may borrow to finance the repurchase of Shares. However, the payment of
interest on such borrowings will increase the Fund's expenses. In addition, the
Fund is required under the 1940 Act to maintain "asset coverage" of not less
than 300% of its "senior securities representing indebtedness" as such terms are
defined in the 1940 Act.
The Fund's Shares of Common Stock will trade in the open market at a price
which will be a function of several factors, including their net asset value.
The shares of closed-end investment companies frequently sell at a discount
from, but sometimes at a premium over, their net asset values. The risk of the
Shares trading at a discount may be greater for investors selling their Shares
in a relatively short period following completion of the Offering. See "Risk
Factors and Special Considerations." No assurance can be given that it will be
possible for investors to resell Shares of the Fund at or above the initial
public offering price or that the market price of the Fund's Shares will equal
or exceed net asset value. Because the Fund may repurchase its Shares at prices
below their net asset value or
47
<PAGE>
make a tender offer for its Shares, the net asset value of those Shares that
remain outstanding will be increased. Although Share repurchases and tender
offers generally would have a favorable effect on the market price of the Fund's
Shares, it should be recognized that the acquisition of Shares by the Fund will
decrease its total assets and therefore may increase the Fund's expense ratio.
In addition, the sale of portfolio securities to finance the acquisition of
Shares would increase the Fund's portfolio turnover rate. Except for the limited
circumstances described below, the Fund has not established any policy with
respect to tender offers or Share repurchases, has not established any program
for tender offers or Share repurchases, and has not established a schedule for
considering the adoption of such a program. No assurance can be given that the
Board of Directors will decide to undertake any tender offers or Share
repurchases in the future, or if undertaken that they will reduce any market
discount. To reduce the likelihood of the Share price declining below the Fund's
net asset value per Share, the Investment Manager will reduce its fee by
one-half during the fiscal quarter following any of the first eight fiscal
quarters of the Fund if the average closing price of the Fund's Shares in the
preceding quarter is less than the $15.00 initial offering price. There can be
no assurance that the fee reduction arrangement will serve its intended purpose.
Currently, the Directors intend not to accept tenders or effect repurchases
if (i) such transactions, if consummated, would (a) result in the delisting of
the Fund's Shares from the New York Stock Exchange, (b) impair the Fund's status
as a regulated investment company under the Code, or (c) result in a failure to
comply with applicable asset coverage requirements; (ii) the Fund would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Fund's investment objective and policies in order to repurchase Shares; or
(iii) there is, in the judgment of the Directors, any material event or
condition which would have an adverse effect on the Fund or its shareholders if
Shares were repurchased. The Directors may modify these conditions in light of
experience.
Beginning two years after the date of this Prospectus, the Board of
Directors of the Fund will consider at its regularly scheduled quarterly
meetings any average discount (calculated on the basis of the closing price as
of the last day of trading each week during the fiscal quarters) from the net
asset value at which Shares of the Fund's common stock have traded during the
previous three fiscal quarters. If any such discount, in light of prevailing
market conditions at that time, is deemed to be substantial, then the Board will
consider whether or not any actions to address such discount should be
undertaken. If it is determined that action should be taken, alternatives to
address such discount may include but will not be limited to the repurchase of
Shares in any existing secondary trading market for the Shares or repurchase
offers to all shareholders or tender offers to purchase Shares from all
shareholders at a price equal to the net asset value of the Fund.
Any tender offer by the Fund will be made at a price based upon the net
asset value as of the close of business on the last day of the tender offer. No
open market purchases of Shares will be made by the Fund during a tender offer.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act, and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. Persons
tendering Shares may be required to pay a service charge to help defray certain
costs of the transfer agent. Any such service charges will not be deducted from
the consideration paid for the tendered Shares. During the period of a tender
offer, the Fund's shareholders will be able to determine the Fund's current net
asset value (which will be calculated on each day the New York Stock Exchange is
open) by use of a toll-free telephone number. Any offer to repurchase Shares
directly from shareholders, other than a tender offer, could, under applicable
rules under the 1940 Act, be made no more frequently than once every two years,
unless more frequent repurchase offers were approved by shareholders.
ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund. Commencing with the first annual meeting of shareholders, the Board
of Directors will be divided into three classes, each having a term of
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<PAGE>
three years. At the annual meeting of shareholders in each year thereafter, the
term of one class will expire. This provision could delay for up to two years
the replacement of a majority of the Board of Directors. A Director may be
removed from office only by vote of the holders of at least two-thirds of the
Shares of the Fund entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least two-thirds of the Shares of the Fund then entitled to be
voted to approve, adopt or authorize the following:
(i) a conversion of the Fund to an open-end investment company;
(ii) a merger or consolidation of the Fund with another corporation;
(iii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities); or
(iv) a liquidation or dissolution of the Fund, unless such action has
been approved, adopted or authorized by the affirmative vote of two-thirds
of the total number of Directors fixed in accordance with the Bylaws, in
which case the affirmative vote of a majority of the outstanding Shares is
required.
The Board of Directors has determined that the two-thirds voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Commission for the full text of these provisions, which could have the
effect of depriving shareholders of an opportunity to sell their Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Fund has agreed to sell to each of the Underwriters
named below, and each of the Underwriters, for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc., Nomura Securities
International, Inc. and Prudential Securities Incorporated are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Fund the number of Common Shares set forth opposite its name below. The
several Underwriters are committed to purchase all of such Common Shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................................
A.G. Edwards & Sons, Inc. .......................................................
Nomura Securities International, Inc. ...........................................
Prudential Securities Incorporated...............................................
Total.................................................................
---------
---------
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Shares being
sold pursuant to such Agreement if any of the Shares being sold pursuant to such
Agreement are purchased. Under certain circumstances, the commitments of
non-defaulting Underwriters may be increased. In the event of a failure to
close, any funds debited from any investor's account maintained with any
underwriter will be credited to such account and any funds received by any
underwriter by check or money order from any investor will be returned to such
investor by check.
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The Representatives of the Underwriters have advised the Fund that they
propose initially to offer the Shares to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $. per Share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per
Share to certain other dealers. The Investment Manager has agreed to pay Merrill
Lynch a fee for acting as lead managing underwriter in an amount equal to .30%
of the value of the Shares sold by such firm. After the initial public offering,
the public offering price, concession and discount may be changed. Investors
must pay for any Shares purchased in the initial public offering on or before
, 199 . The sales load of $ is equal to % of the initial
offering price.
The Fund has granted to the Underwriters an option, exercisable for 45 days
after the date hereof, to purchase up to an aggregate of 600,000 additional
Shares to cover over-allotments, if any, at the initial public offering price
less the sales load. To the extent the Underwriters exercise such option, each
of the Underwriters will have a firm commitment, subject to certain conditions,
to purchase a number of option Shares proportionate to the initial commitment of
such Underwriters.
Prior to the offering, there has been no public market for the Shares of the
Fund. During an initial period which is not expected to exceed three months from
the date of this Prospectus, the Fund's Shares will not be listed on any
securities exchange. Additionally, during such period, the Underwriters do not
intend to make a market in the Fund's Shares, although a limited market may
develop. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. The Fund intends to apply for listing of its Shares
on the New York Stock Exchange so that trading on such Exchange will begin no
later than three months from the date of this Prospectus. The Fund expects that
it will meet the New York Stock Exchange standards for listing. In the event the
Fund's Shares are not approved for listing on the New York Stock Exchange at the
end of the three-month period, the Fund intends to apply either to have the
Fund's Shares listed on the American Stock Exchange or traded on the NASDAQ
National Market System.
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
The Fund has agreed to pay the Underwriters $250,000 in partial
reimbursement of their expenses.
The Fund anticipates that the Representatives and certain of the
Underwriters may from time to time act as brokers or dealers in connection with
the execution of the Fund's portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as brokers while they
are Underwriters.
The Purchase Agreement contains covenants of indemnity and contribution
between the Underwriters, the Fund and the Investment Manager with respect to
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
Princeton Administrators, L.P., an affiliate of Merrill Lynch, will provide
administrative services to the Fund pursuant to a sub-administration agreement
with the Fund and the Business Manager. The Business Manager will pay a monthly
fee for such services at an annual rate of .20% of the Fund's average weekly net
assets, subject to a monthly minimum fee of $12,500.
CUSTODIAN AND TRANSFER AND DIVIDEND PAYING AGENT
The Chase Manhattan Bank, N.A. is the custodian of the Fund's assets. Its
address is MetroTech Center, Brooklyn, New York 11245. The custodian may employ
subcustodians outside the U.S. approved by the Board of Directors in accordance
with regulations under the 1940 Act. Mellon Securities Trust Company is the
transfer and dividend paying agent and registrar for the Fund. Its address is
P.O. Box 750, Pittsburgh, PA 15230.
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EXPERTS
The statement of assets and liabilities included in this Prospectus has been
examined by McGladrey & Pullen, independent certified public accountants, 555
Fifth Avenue, New York, New York 10017, as indicated in their report with
respect thereto, and has been included herein in reliance upon the authority of
said firm as experts in giving said report.
LEGAL MATTERS
Legal matters in connection with this offering will be passed on for the
Fund by Dechert Price & Rhoads, Washington, D.C. and for the Underwriters by
Brown & Wood, New York, New York. Counsel will rely on the opinion of Piper &
Marbury, Baltimore, Maryland, as to certain matters of Maryland law. Matters of
Russian law will be passed on for the Fund and the Underwriters by Linklaters &
Paines, Moscow, Russia.
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the U.S. Securities Act of 1933, as
amended, relating to the Shares of its Common Stock offered hereby. For further
information with respect to the Fund and its Common Stock, reference is made to
such Registration Statement and the exhibits filed with it.
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
[to be provided]
52
<PAGE>
APPENDIX A
THE RUSSIAN FEDERATION
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and its Board of Directors make no
representation as to the accuracy of the information, nor has the Fund or its
Board of Directors attempted to verify it; furthermore, no representation is
made that any correlation exists between Russia, or its economy in general, and
the Fund.
GENERAL INFORMATION
GEOGRAPHY AND POPULATION
Russia covers an area of over 6.6 square million miles, almost twice the
size of the United States. It is the largest country in the world, covering
one-eighth of the world's land surface, and spans eleven time zones. Russia is
divided into the following administrative units: 66 provinces, two metropolitan
cities (Moscow and St. Petersburg), 21 ethnic republics with their own
independent governments, and ten national regions.
Russia has a population of approximately 148.4 million. There are over 120
nationalities and ethnic groups in the territory of the Russian Federation, but
82% of the native population is ethnic Russian. The largest non-Russian
minorities are Tartars (3.8% of the total in 1991), Ukrainians (3%), Belarusians
(0.8%), and Germans (0.6%). As a result of industrialization, a high percentage
of the population in Russia (74% as of 1992) lives in cities. The largest
cities, as of 1993, were Moscow (8.6 million inhabitants), St. Petersburg (4.3
million), Novosibirsk (1.4 million), Nizhny Novgorod (1.4 million), and
Ekaterinburg (1.3 million).
Russia has a sizable, well-educated intelligentsia and skilled labor force.
As of 1992, there were 535 educational establishments holding higher-education
status with 2.6 million students, as well as 52 universities with 382,300
students. The following chart shows the distribution of the employed population
by level of education, from a sampled survey performed in October, 1992:
<TABLE>
<S> <C>
Higher Education................................................... 17.9%
General or Special Secondary Education............................. 63.6%
Secondary Education Not Completed.................................. 18.5%
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
POLITICAL BACKGROUND AND GOVERNMENT
In the early 1900's, poor economic conditions caused revolutionary movements
to develop in the Russian empire, which led to the fall of the Romanov dynasty
in March 1917. On November 7, 1917, the Bolsheviks took power and created the
communist state of the Russian Soviet Federative Socialist Republic (the Russian
Federation). In 1922, the Union of Soviet Socialist Republics (U.S.S.R.) was
formed.
The U.S.S.R. was a centralized communist system consisting, after World War
II, of fifteen republics. The Russian Federation was the largest and most
dominant republic in the U.S.S.R. The Russian Federation accounted for over 60%
of Soviet gross national product and comprised over half of the total population
of the U.S.S.R. Russians also dominated the Soviet military, the Communist
Party, and the KGB. In the 1980's, the U.S.S.R. began to collapse, caused by the
republics' demands for independence and economic reforms which undermined the
centralized communist system. In August 1991, hardliners in the army and
Communist Party attempted a military coup. The coup failed, and it was the
downfall of communist power in the U.S.S.R. The republics each declared
independence from
A-1
<PAGE>
the U.S.S.R., and the Communist Party was suspended. By the end of 1991, Soviet
President Mikhail Gorbachev lost his position as president and the U.S.S.R. was
disbanded.
After the collapse of the Soviet Union, Russia was politically unstable. The
government, which launched radical economic reforms and policies attempting
stabilization, was opposed by conservatives, represented by the Congress of
People's Deputies (the CPD), and the Supreme Soviet. Much of the political
instability arose from the issue of whether the president of Russia or the CPD
held ultimate constitutional power. Boris Yeltsin was elected president of
Russia in June 1991, in the first fully free presidential election in Russia.
However, in December 1992, the CPD and the Supreme Soviet caused Egor Gaidar,
the acting prime minister, to be replaced with Viktor Chernomyrdin, who was
thought to be more conservative. In April 1993, President Yeltsin forced a
referendum to be held to ascertain the level of the electorate's confidence in
his government. The referendum results showed that there was strong support for
Mr. Yeltsin and his reforms.
In September 1993, President Yeltsin dissolved the CPD and the Supreme
Soviet. Opponents of President Yeltsin in the CPD refused to comply and
nominated an alternative government and president. On October 3, 1993,
opposition supporters led an armed insurrection, which failed. President Yeltsin
then ordered the military to take over the parliament building in Moscow,
resulting in further fighting. Since the failed coup, the political situation
has become more stable although elections for the newly created State Duma
showed sweeping gains for the right wing Liberal Democrat party led by the
nationalist Vladimir Zhirinovsky.
The Russian constitution was approved by a referendum in December 1993. The
legislature was changed to create a Federation Council (which would have two
representatives from each of Russia's 89 ethnic republics and other regional
units) and a State Duma (with 450 representatives). Under the constitution, the
president has considerable powers, including heading the armed forces and
Security Council, and nominating the highest state officials. The president also
has authority, under certain circumstances, to dissolve the State Duma.
INTERNATIONAL RELATIONS
After the collapse of the U.S.S.R. in 1991, Russia succeeded to the
diplomatic network and military power of the U.S.S.R. Russia is in the process
of gradually reconciling with the West and opening up economically. In 1992,
eleven of the fifteen former Soviet republics, including Russia, formed the
Commonwealth of Independent States (CIS), which was intended to function as a
vehicle for mutual cooperation. The CIS has failed to evolve into a strong
union.
Russia inherited much of the U.S.S.R.'s military/industrial complex. Members
of the CIS considered creating a joint CIS command of the former Soviet army,
but this was opposed by some CIS countries. Most of the states of the former
Soviet Union, including Russia, have now built their own armed forces. As of
June 1992, the Russian army had 2,700,000 soldiers, including 1,500,000
conscripts.
INTERNATIONAL ORGANIZATIONS
Russia is a member of various international organizations, including the
United Nations, of which Russia is a permanent member of its Security Council,
the International Monetary Fund, the World Bank, the International Finance
Corporation, and the European Bank for Reconstruction and Development. Russia
inherited observer status in the General Agreement on Tariffs and Trade (GATT)
from the former U.S.S.R. in 1991.
A-2
<PAGE>
THE ECONOMY
GENERAL INFORMATION
Under communism, the Soviet Union had a centrally planned economic system.
The state owned all of the means of production and the State Planning Committee
(GosPlan) planned all aspects of the economic system, including what and how
much each enterprise produced, from where supplies were to be obtained, and
where output was to go. All prices were controlled by the state.
The result of the centrally planned system was inefficiency. Attempts were
made to reform the system beginning in the 1960's. In the late 1980's and in
1990, under Soviet President Gorbachev, radical reforms were begun; however,
such reforms were abandoned under pressure from conservatives in industry and
the military. In 1991, the financial crisis became full-fledged. Output
decreased, inflation increased, and the budget deficit grew. After the attempted
coup by communist hardliners in 1991, as Soviet President Gorbachev lost power,
Russian President Yeltsin encouraged economic reform for the Russian Federation.
Yeltsin supported a stabilization program, which was to consist of liberalizing
prices, reducing centralized budget expenditures, and privatizing state
monopolies. After implementation of the program, the financial crisis continued
to worsen. Under pressure from conservatives, the government was forced
temporarily to give up some elements of reform in 1992. The political struggle
for economic reform continued in 1993. The reformists gained some strength as
Boris Fyodorov, a reformist, became finance minister. He was, however,
subsequently dismissed.
NATIONAL BUDGET
During the Soviet era, the budget of the Russian Federation was simply a
unit of the larger Soviet budget. During 1991, the Soviet budget collapsed, as
many of the Soviet republics continued to receive government funds but failed to
contribute to the Soviet budget. As of 1991, the budget deficit for the U.S.S.R.
was approximately 20% of gross national product. After the break-up of the
U.S.S.R., the Russian Federation cut spending in an attempt to balance its first
budget. The budget in 1992 had an official deficit of 3.6% of gross domestic
product, although it is believed that, due to differences between Russian and
Western accounting procedures, the actual deficit was higher. For example, the
deficit as calculated by the International Monetary Fund was 22% of gross
domestic product. The budget in 1993 had an official deficit of 9.8% of gross
domestic product.
A-3
<PAGE>
The following chart shows information relating to revenues and expenditures
of the Russian Federation in recent years.
RUSSIAN NATIONAL BUDGET
(BILLIONS OF RUBLES)
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991 1992 1993 JAN.-JUNE, 1994
----- ----- ------- --------- ---------------
<S> <C> <C> <C> <C> <C>
TOTAL INCOME............................... 159.5 310.0 5,327.6 41,771.1 48,000
Includes:
Income Tax................................. N/A 91.9 1,566.8 16,773.5 14,600
VAT........................................ N/A N/A 1,998.9 11,271.2 9,800
Personal Income Tax........................ N/A 41.1 431.3 4,383.2 4,600
Excise Tax................................. N/A N/A 211.5 1,776.6 1,700
Foreign Activity Income.................... N/A 7.8 467.4 2,346.7 6,300
Underground and Natural Resources Use
Royalties.................................. N/A N/A 104.7 1,153.7 N/A
Geologic Reserve Depletion Tax(1).......... N/A N/A 73.4 N/A N/A
Land Taxes................................. N/A N/A 71.0 314.5 N/A
Privatization Income....................... N/A N/A 62.3 318.9 N/A
TOTAL EXPENSES............................. 151.0 347.6 5,969.5 57,319.0 59,000
Includes:
Economic Projects.......................... N/A 129.9 2,038.7 16,134.7 15,700
Social and Cultural Projects............... N/A 103.1 1,383.1 14,297.0 15,700
Defense.................................... N/A N/A 855.3 7,210.0 7,900
Foreign Economic Operations................ N/A N/A 416.7 2,764.3 1,500
Law Enforcement and Government
Administration Organs...................... N/A 13.3 301.1 4,100.1 5,300
Difference between Revenue and Expenses.... 8.5 (37.6) (641.9) (13,869.9) (16,700)
As Percentage of Gross Domestic Product.... 1.3 2.9 3.6 9.8 8.8
</TABLE>
- ------------
(1) This tax generates funds for new exploration.
N/A = Information not available.
Sources: Goskomstat, Russian Federation in 1992--Statistical Yearbook;
Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Russian Socioeconomic Conditions, January-September, 1994 (Preprint).
Traditionally, a net material product (NMP) system was used in Russian and
Soviet statistics. The NMP system was developed in the U.S.S.R. to meet the
needs of a planned economy. NMP is the sum of gross output minus intermediate
inputs and depreciation for six branches of material production: (1) industry,
(2) agriculture, (3) construction, (4) transport and communications, (5) trade,
supply, and procurement, and (6) services for material production. NMP differs
from gross domestic product (GDP) primarily in that it excludes depreciation and
value added of non-material service sectors. The difference between GDP and NMP
is estimated to be approximately 40%. It is anticipated that Russia will convert
at some point to the U.N. System of National Accounts. GDP is estimated by the
State Committee on Statistics (Goskomstat) by beginning with NMP, adding
depreciation, adding value added produced by the non-material production
sectors, and subtracting value added by non-material services within material
production sectors (to prevent double-counting).
A-4
<PAGE>
The following chart sets forth the GDP of Russia and the percentage change
from the prior year's GDP.
GROSS DOMESTIC PRODUCT
(IN ACTUAL BILLIONS OF RUBLES)
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
JAN.-JUNE
1990 1991 1992 1993 1994
----- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
GDP*......................................... 644.0 1,300.1 18,063.0 162,311.3 245,000
Percentage change from prior year**.......... -- 87 81 88 --
Goods*....................................... 473.3 1,055.8 10,518.3 79,157.2 104,125
Percentage change from prior year**.......... -- -- 79 87 --
Services*.................................... 126.1 193.2 5,886.2 68,532.1 123,725
Percentage change from prior year**.......... -- -- 84 91 --
</TABLE>
- ------------
* In actual prices (billion rubles).
** In comparable constant prices (rubles).
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993; Goskomstat, Russia's Social and
Economic Position: January-June, 1994.
The following table sets forth Russia's net material product by sector.
PRODUCTION OF NET MATERIAL PRODUCT BY SECTOR
(IN ACTUAL PRICES, IN BILLIONS OF RUBLES)
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991
---------------------- ----------------------
IN BILLIONS IN IN BILLIONS IN
OF RUBLES PERCENT OF RUBLES PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Net Material Product................................... 444.6 100.0 1,050.8 100.0
Industry............................................. 187.7 42.2 451.1 42.9
Agriculture.......................................... 88.5 19.9 145.6 13.9
Construction......................................... 56.6 12.7 112.1 10.7
Other (Transportation, Communications, Trade,
Technical Supplies, Harvesting, etc.).................. 111.8 25.1 342.0 32.5
</TABLE>
<TABLE>
<CAPTION>
1992 1993
---------------------- ----------------------
IN BILLIONS IN IN BILLIONS IN
OF RUBLES PERCENT OF RUBLES PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Net Material Product................................... 14,652.0 100.0 119,844.2 100.0
Industry............................................. 7,594.9 51.8 53,356.3 44.5
Agriculture.......................................... 1,428.6 9.8 12,015.4 10.0
Construction......................................... 1,242.0 8.5 13,748.1 11.5
Other (Transportation, Communications, Trade,
Technical Supplies, Harvesting, etc.).................. 4,386.5 29.9 40,724.4 34.0
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
A-5
<PAGE>
CURRENCY AND FOREIGN EXCHANGE INFORMATION
As part of the Soviet centrally planned system, an artificial "official"
exchange rate was used. This rate changed only slightly from Rbs. 0.84: $1 in
1985 to Rbs. 0.62: $1 in 1992. In practice, however, there were multiple
exchange rates. In 1991, there were three main exchange rates for the ruble
against convertible currencies: the commercial rate, tourist rate, and interbank
market rate. The commercial rate was pegged to a basket of five convertible
currencies (U.S. dollar, Japanese yen, Deutsche mark, French franc, and pound
sterling). The commercial rate applied to foreign exchange surrendered by
enterprises to the government, imports financed through centralized foreign
exchange funds, and all capital flows. For Soviet citizens traveling abroad,
commercial banks were free to determine the tourist rate which depreciated from
Rbs. 5.5 in early 1991 to Rbs. 108 per U.S. dollar by the end of 1991. Finally,
the interbank market rate was established at foreign exchange auctions conducted
by the Vneshekonombank from January to April 1991 and under the auspices of
Gosbank beginning April 9, 1991. Beginning in 1992, the exchange system was
liberalized, and an effort was made to unify the multiple foreign exchange
arrangements. Nevertheless, for a period of time, several exchange rates
prevailed. As part of the market reform of 1992, the government moved to the use
in July 1992 of a single exchange rate determined freely by the market.
The following table sets forth the exchange rates of the ruble to the U.S.
dollar as of the following dates.
EXCHANGE RATE OF THE RUBLE
<TABLE>
<CAPTION>
EXCHANGE RATE
RUBLES: U.S. DOLLARS
--------------------
<S> <C>
December 30, 1991......................................... Rbs. 1.7: $1
December 30, 1992......................................... Rbs. 415: $1
December 30, 1993......................................... Rbs. 1,247: $1
March 31, 1994............................................ Rbs. 1,753: $1
June 30, 1994............................................. Rbs. 1,989: $1
September 30, 1994........................................ Rbs. 2,633: $1
</TABLE>
- ------------
Sources: European Bank for Reconstruction and Development, Transition Report,
October, 1994; Izvestia, April 1, 1994 and July 1, 1994; and Kommersant
Weekly, September 30, 1994.
The official exchange rate has been set by reference to the Moscow Interbank
Currency Exchange rate since 1992. The Moscow Interbank Currency Exchange is the
largest currency exchange in Russia. The Central Bank of Russia utilizes its
rates to determine its ruble exchange rate. Currency exchanges are also active
in a number of other cities. Prior to 1992, the official exchange rate was set
at 66 kopecks (of which there are 100 in one ruble) to the U.S. dollar. This
rate has deteriorated since the beginning of economic reform. Following a period
of relative stability, beginning in September 1994, the exchange rate has again
entered a period of high volatility. During the period September 1, 1994 to
December 13, 1994, the exchange rate has ranged from a low of Rbs. 2,156: $1 to
a high of Rbs. 3,926: $1.
BANKING AND FINANCE
Under communism, the financial sector was highly centralized. The State Bank
of the Soviet Union (Gosbank) effectively controlled all financial aspects of
the centrally planned system. The decentralization of banking carried out in the
Soviet Union under the Gorbachev regime led to the creation of more than 1,500
commercial banks in Russia. Resolution No. 821 of the Central Committee and the
Council of Ministers of July 17, 1987 provided for the creation of six state
banks: Gosbank, Promstroybank, Vneshekonombank, Agroprombank, Zhilsotsbank, and
Sberbank. Letter No. 206 of Gosbank of May 24, 1989 effectively provided for the
conversion of certain U.S.S.R. banks to the principle of profit and
A-6
<PAGE>
loss accounting and self-financing, thereby making those banks independent. The
Law "On the Central Bank of the RSFSR" passed in December, 1990 decreed the
creation of the Russian Central Bank (RCB). The Resolution of the Supreme Soviet
which brought the Law on the Central Bank into force provided for the renaming
of Gosbank as the Central Bank of the RSFSR (Bank of Russia). Vneshekonombank
remained the channel for the management of Russian foreign debt.
In November 1993 the Russian President imposed limits on the participation
of foreign banks in the country, including restricting most foreign banks from
handling accounts of Russian citizens and businesses, including joint ventures,
until after January 1, 1996. This was demanded by Russian banks, fearful that
their foreign competitors would attract most of the hard currency deposits held
by Russian enterprises. Only 12 foreign banks have so far been given licenses to
operate in Russia. In June 1994, President Yeltsin restored the rights of some
foreign banks to do business in Russia, although the decree excluded U.S. and
Turkish banks on the grounds that the U.S. and Turkey had not ratified Bilateral
Investment Treaties with Russia.
EMPLOYMENT
Under communism, unemployment technically did not exist. Unemployment,
however, began to rise sharply following economic reforms introduced in 1992.
The following chart lists the number of officially registered unemployed persons
and lists the number of unemployed as a percentage of the national workforce as
of the end of each year indicated.
<TABLE>
<CAPTION>
1991 1992 1993
---- ----- -----
<S> <C> <C> <C>
Amount of People Officially Registered as Unemployed (in thousands).... 61.9 577.7 835.5
As Percentage of National Workforce.................................... 0.1 0.8 1.1
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
Not all unemployed individuals, however, register with Russian employment
offices as being unemployed. As of January 1, 1994, the number of unemployed
persons, as classified according to the methodology of the International Labor
Organization, stood at 4.2 million, or 5.5% of the national workforce. At June
30, 1994, this number had increased to 4.5 million persons, or 6% of the
national workforce. In addition, persons such as part-time workers and those on
leave without payment or with partial payment are not included in the definition
of unemployed. Including such persons, total unemployment, as of June 30, 1994,
was 9 million persons or 12% of the national workforce. In July 1994, Prime
Minister Chernomyrdin signed a federal program for dealing with unemployment,
which assumes that 12 million people will be unemployed by late 1994 and an
additional 5-6 million will be partially laid off, which would result in
unemployment affecting over 20% of the labor force.
The following chart sets forth average monthly wages in rubles for the
periods indicated.
AVERAGE MONTHLY WAGES
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991 1992 1993 MAY 1994
----- ----- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Wages (in rubles).................................. 296.8 552.0 6,126 38,700 183,500
</TABLE>
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993; Russian Federal Government Center
of Economic Conjuncture, Russia 1994--Economic Conjuncture (Issue 1).
A-7
<PAGE>
INFLATION
Under the centrally-planned system, inflation was suppressed by the
government by means of administratively determined prices. Although the official
retail price annual inflation was 1-2%, actual inflation was higher. Inflation
rose significantly in 1991. The consumer price index rose by 160% from December
1990 to December 1991, and rose at an average of approximately 40% per month in
1992. During 1993, inflation increased at approximately 20% to 25% per month,
although it decreased to 16% in November and 13% in December. During 1994,
inflation has fallen, to 8.1% in the month of May and 4.8% in the month of June.
Inflation fell to a low of 4% in the month of August. Inflation has increased,
however, in recent months, by 8% in the month of September, 15.1% in the month
of October, and 10.8% in the first three weeks of November.
The following chart shows selected inflation indices in recent years as a
percentage of 1985 prices.
<TABLE>
<CAPTION>
1985 1990 1991 1992 1993
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Consumer Price Index(1)...................................... 100 115 190 1,560 940
Wholesale Industrial Price Index(1).......................... 100 103 240 2,050 990
Wholesale Agricultural Price Index(1)........................ 100 141 160 930 840
</TABLE>
- ------------
(1) Average for year, as a percentage of the previous year.
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993.
AGRICULTURE
Agriculture in Russia was collectivized in the 1930's into collective farms
and state farms. This collectivization promoted inefficiency. The agricultural
system has been unable to provide sufficient food, requiring grain and animal
feeds to be imported since the 1970's.
Since the end of communism, agricultural reform has been important. The
government has permitted the prices of agricultural products to rise, providing
farms with an incentive to increase production. The government has also begun to
privatize the collective and state farms. Further, a presidential decree of
October 1993 has permitted private farmers to purchase land. In spite of these
changes, market reforms have been slow; most farms are still obligated to
deliver produce to the state, and may only sell the remainder in free markets.
In general, agricultural production has declined over the past few years.
The following chart shows annual agricultural production as a percentage of the
previous year for the years through 1990 through 1993.
AGRICULTURAL INDICES
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993
----- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Total Agriculture(1)...................................... 100.0 96.4 95.5 90.6 96.0
Crops(1).................................................. 100.0 92.4 100.4 94.6 96.0
Animal Products(1)........................................ 100.0 98.8 92.7 88.1 96.0
</TABLE>
- ------------
(1) Indices calculated on gross production in 1983 prices.
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, ]1993.
A-8
<PAGE>
The following chart shows agricultural production in Russia for the years
1990 through 1993.
AGRICULTURAL PRODUCTION
(IN MILLIONS OF TONNES)
<TABLE>
<CAPTION>
1990 1991 1992 1993
-------- ------- ----- -------
<S> <C> <C> <C> <C>
CROPS
Grain................................................. 116.7 89.1 106.9 99.1
Sugar beets........................................... 32.3 24.3 25.5 25.5
Sunflower............................................. 3.4 2.9 3.1 2.8
Potatoes.............................................. 30.8 34.3 38.3 37.7
Vegetables............................................ 10.3 10.4 10.0 9.8
Fruits, berries, grapes............................... 3.0 2.7 3.4 3.2
ANIMAL PRODUCTS
Meat (including fowl) thousand tonnes................. 10,112 9,375 8,300 7,500
Milk, million tonnes.................................. 55.7 52.0 47.2 46.5
Eggs, billion......................................... 47.5 46.9 42.9 40.3
Wool, thousand tonnes................................. 227 204 179 158
</TABLE>
- ------------
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, 1993.
ENERGY
The former Soviet Union was the world's leading producer of all fuels. The
majority of the former Soviet Union's resources are located in the Russian
Federation. Oil and gas were the main earner of hard currency for the Soviet
Union and continue to be the main earner of hard currency for Russia. Natural
gas accounts for the largest percentage of energy output and final consumption.
Gas output increased until 1991, and has decreased only slightly since then. Oil
output and export from Russia have fallen in the past decade, and have fallen
further in 1993. It is believed that the Russian government is committed to
increasing the output of oil by allowing foreign investment in the oil industry
and increasing the price of oil in Russia. As of 1993, over 30 Russian-Western
joint ventures were actively producing oil, and accounted for 4% of production.
It is not expected that the fall in production will be reversed until the late
1990's.
OIL AND NATURAL GAS DRILLING IN THE RUSSIAN FEDERATION
<TABLE>
<CAPTION>
JAN.-JUNE
1990 1991 1992 1993 1994
---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Oil Drilling (including gas condensates)(1)................ 516 462 399 354 150
Natural Gas(2)............................................. 641 643 641 619 312
</TABLE>
- ------------
(1) Millions of tonnes (metric tons)
(2) Billions of cubic meters
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, 1993; Goskomstat, Russian
Socioeconomic Conditions, January-September, 1994 (preprint).
A-9
<PAGE>
MANUFACTURING
Under communist rule, industrial development focused on heavy industry,
especially defense. Nearly 15% of Russia's industries are defense-related.
Consumer-goods industries have traditionally been underdeveloped. In 1992,
industrial enterprises accounted for 30% of total employment in Russia; however,
consumer-oriented industries comprised only a quarter of total industry output
as of 1991. Russia is the second largest steel producer in the world. Other
important industries in Russia are chemicals, timber and wood products, paper,
and non-ferrous materials. Industrial production, which was slow in the 1980's,
fell during the 1990's, by 7.8% in 1991, 19% in 1992, and 16% in 1993.
FOREIGN TRADE
In the late 1980's, Russia had a trade surplus with other countries in the
former Soviet Union and a trade deficit with countries outside the former Soviet
Union. In the early 1990's, both imports and exports fell dramatically. In 1993,
Russia imported approximately $27 billion of goods, which represents a decrease
of 27% from 1992, but exported $44 billion of goods, which represents an
increase from 1992. Russia maintained a strong positive balance of trade with
foreign countries of $17 billion. The following chart shows the total dollar
amount of exports and imports of Russia for the years indicated.
DOLLAR AMOUNT OF EXPORTS AND IMPORTS OF RUSSIA
(IN MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1992 1993 1994 (JAN.-JUNE)
------ ------ ----------------
<S> <C> <C> <C>
Exports..................................... 42,391 44,297 21,300
Imports..................................... 36,990 26,807 13,200
</TABLE>
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Russia's Social and Economic Position: January-June, 1994.
Russia's trade outside the former Soviet Union is mainly with Germany,
Italy, Great Britain, China, Hungary, Japan, and the United States. The
following chart shows Russia's trade outside the former U.S.S.R. with major
partners.
A-10
<PAGE>
RUSSIA'S FOREIGN TRADE WITH MAJOR TRADING PARTNERS
Total, in actual figures, in millions of U.S. dollars (1) and the share of
each country as a percentage of the total (2).
<TABLE>
<CAPTION>
1994
1992 1993 (JAN.-JUNE)
------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(1) (2) (1) (2) (1) (2)
----- ---- ----- ---- ----- ----
EXPORTS TO:
Germany............................... 5,935 14.0 5,094 11.5 2,492 11.7
Britain............................... 2,798 6.6 3,367 7.6 2,024 9.5
China................................. 2,798 6.6 3,056 6.9 1,342 6.3
Italy................................. 2,967 7.0 2,614 5.9 1,491 7.0
Hungary............................... 1,526 3.6 2,082 4.7 596 2.8
USA................................... 763 1.8 1,993 4.5 1,385 6.5
Japan................................. 1,738 4.1 1,993 4.5 831 3.9
Netherlands........................... 2,332 5.5 975 2.2 575 2.7
Finland............................... 1,568 3.7 1,373 3.1 767 3.6
France................................ 1,992 4.7 1,550 3.5 554 2.6
IMPORTS FROM:
Germany............................... 6,954 18.8 5,147 19.2 2,244 17.0
Britain............................... 592 1.6 643 2.4 422 3.2
China................................. 1,850 5.0 2,332 8.7 515 3.9
Italy................................. 3,144 8.5 1,099 4.1 634 4.8
Hungary............................... 1,110 3.0 617 2.3 436 3.3
USA................................... 3,033 8.2 2,305 8.6 1,241 9.4
Japan................................. 1,739 4.7 1,367 5.1 607 4.6
Netherlands........................... 407 1.1 429 1.6 766 5.8
Finland............................... 1,295 3.5 724 2.7 752 5.7
France................................ 1,332 3.6 911 3.4 515 3.9
</TABLE>
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Russia's Social and Economic Position: January-June, 1994.
A-11
<PAGE>
The majority of Russian exports are fuel and raw materials. In the first
half of 1994, more than 50% of the volume of exported goods were fuel and energy
goods, 25% were metals and diamonds, and 5% were machines and equipment. In the
first half of 1994, imports of machines and equipment were 31% of total imports,
foodstuffs and agricultural produce were 31%, and clothing and footwear were
10%. Trade with former Soviet republics consists mainly of industrial products.
The following chart shows the composition of trade with countries outside the
former Soviet Union.
EXPORTS AND IMPORTS OF RUSSIA BY PRODUCT
Russian exports and imports in actual prices, in billions of U.S. dollars
(1) and as a percentage of total volume (2).
<TABLE>
<CAPTION>
1990 1991 1992 1993
----------- ----------- ----------- -----------
(1) (2) (1) (2) (1) (2) (1) (2)
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXPORTS............................ 71.1 100 50.9 100 42.4 100 44.3 100
Machines and equipment........... 12.5 17.6 5.2 10.2 3.7 8.7 2.9 6.5
Minerals......................... 32.3 45.4 26.3 51.7 21.7 51.2 20.7 46.7
Metals & precious stones......... 9.2 12.9 7.3 14.3 8.5 20.0 10.3 23.2
Chemicals........................ 3.3 4.6 3.4 6.6 2.5 5.9 2.6 6.0
Timber & cellulose............... 3.1 4.4 2.4 4.7 1.5 3.6 1.9 4.2
Textiles......................... 0.7 1.0 0.5 0.9 0.3 0.7 0.2 0.4
Furs & leathers.................. 0.1 0.2 0.1 0.3 0.1 0.2 0.1 0.2
Foodstuffs & raw produce......... 1.5 2.1 1.3 2.6 1.5 3.5 1.6 3.8
Other............................ 8.4 11.8 4.4 8.7 2.6 6.2 4.0 9.0
IMPORTS............................ 81.8 100 44.5 100 37.0 100 26.8 100
Machines & equipment............. 36.3 44.3 15.8 35.6 13.9 37.6 9.1 33.8
Minerals......................... 2.4 2.9 1.3 2.9 1.0 2.7 1.1 4.0
Metals & precious stones......... 4.4 5.4 2.8 6.2 1.2 3.2 0.9 3.5
Chemicals........................ 8.9 10.9 5.5 12.4 3.5 9.5 1.7 6.2
Timber & cellulose............... 0.9 1.1 0.5 1.1 0.5 1.3 0.1 0.5
Textiles......................... 7.6 9.3 4.4 9.9 4.2 11.4 3.7 13.9
Furs & leathers.................. 0.8 1.0 0.5 1.1 0.7 1.9 0.7 2.6
Foodstuffs & raw produce......... 16.6 20.3 12.4 27.9 9.6 25.9 5.9 22.2
Other............................ 3.9 4.8 1.3 2.9 2.4 6.5 3.6 13.3
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
BALANCE OF PAYMENTS
The State Committee on Statistics (Goskomstat) estimates that Russia's trade
balance, excluding transactions with states of the former Soviet Union, has
increased from $7.4 billion in 1992 to $9.5 billion in 1993, while its services
balance has decreased from -$1.2 billion to -$2.7 billion. Other sources,
however, estimate that the trade balance has declined, from $5.9 billion in 1991
to $3.1 billion in 1992, and the service balance has declined from -$6.3 billion
in 1991 to -$8.5 billion in 1992.
The following table sets forth Russia's balance of payments for 1992 and
1993, as provided by the State Committee on Statistics. The table excludes
information on the balance of payments with states of the former Soviet Union.
A-12
<PAGE>
BALANCE OF PAYMENTS OF THE RUSSIAN FEDERATION
(EXCLUDING TRANSACTIONS WITH STATES OF THE FORMER SOVIET UNION)
(IN BILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1990 1991 1992 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Trade Balance................................................... 7.4 9.5
Goods exports................................................. 42.4 43.7
Goods imports................................................. -35.0 -27.0
Humanitarian and technical aid................................ -- -1.0
Corrections to imports........................................ -- -7.2
Services Balance................................................ -1.2 -2.7
Services exports.............................................. 3.3 6.4
Services imports.............................................. -5.0 -9.1
Income (percent by credits)..................................... -2.0 -2.9
Receivables................................................... 3.5 2.5
Payables...................................................... -5.5 -5.4
Transfers....................................................... -- 2.3
into Russia................................................... -- 2.8
from Russia................................................... -- -0.5
Current Operating Accounts...................................... 4.2 6.2
Direct Investment............................................... -0.1 0.7
into Russia................................................... 1.4 1.4
from Russia................................................... -1.5 -0.7
Portfolio Investment............................................ -1.5 -1.0
into Russia................................................... 0.2 0.4
from Russia................................................... -1.7 -1.4
Other Investments (credits)..................................... 6.7 -7.8
Attraction of credits......................................... 13.3 6.5
Regular principal debt payments............................... -12.3 -15.6
Granting of credits........................................... -0.8 -2.1
Regular return on principal debt.............................. 10.7 10.6
Other capital (assets and liabilities of commercial banks).... -4.2 -7.2
Delays and postponements of payments on interest and principal
debt............................................................ 14.1 17.1
Delays and postponements of receivables on interest and
principal debt................................................ -12.1 -11.5
Capital and financial operating accounts........................ 7.1 -2.5
Reserves........................................................ -0.2 -3.3
Coining of gold................................................. -- 0.4
Corrections to international reserves........................... -- 1.5
Omissions and errors............................................ -11.5 -2.3
Total Balance................................................... 0.0 0.0
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
EXTERNAL DEBT
As of January 1, 1994, foreign debt of Russia, including debt of the former
U.S.S.R., totaled more than $80 billion. Of this amount, $26 billion was owed to
commercial banks belonging to the London Club, $36 billion was owned to Paris
Club countries, and more than $18 billion was owned to commercial export firms.
It is estimated that payments due on the external debt during 1994 will total
$32.5 billion. The State Duma has imposed a limit of $4.1 billion on the
repayment of external debt during 1994.
A-13
<PAGE>
FOREIGN INVESTMENT
Foreign direct investment in Russia is regulated by the foreign investment
law approved in July 1991. A more progressive edition of the law is being
prepared, which could improve the climate for foreign investment by reducing
risks connected with the instability of the legislation and by more precisely
specifying the sectors subject to limitations for foreign investment.
Repatriation of interest, dividends and capital is permitted under existing
legislation, as is 100% foreign ownership of most types of businesses.
As of January 1, 1994, 12,173 enterprises with foreign investment were
registered with the Russia State Registry. The total amount of foreign capital
invested in Russia since the beginning of 1992 is estimated at $8 billion. In
1992, direct investment was $1.4 billion with portfolio investment at $0.2
billion. In 1993, direct investment in Russia was again $1.4 billion with
portfolio investment rising to $0.4 billion. For the first half of 1994, U.S.
$278 million and Rbs. 14 billion were invested in Russia.
Limited information is available on the distribution of the foreign
investment by sectors and country of origin. The top sectors which attracted
foreign investment in 1993 were machine-building/metal working, fuels, trade and
food service, and construction. Recently, the bulk of investment has been in the
fuel industry which, in the first half of 1994, received 42% of all investment;
trade and consumer services received 12%. The United States is the leading
foreign investor in Russia. Other prominent investors include France, South
Korea, Germany, Great Britain, and Italy. The following chart provides data on
foreign investment in Russia by region during the first half of 1994.
FOREIGN INVESTMENT IN RUSSIA BY REGION
(IN MILLIONS OF U.S. DOLLARS)
REGION JAN.-JUNE, 1994
- ------------------------------------------------------------- ---------------
City of Moscow............................................... 42.0
Arkhangelsk Region........................................... 41.0
Tomsk Region................................................. 16.3
Novosibirsk Region........................................... 5.0
Moscow Region................................................ 4.2
Irkutsk Region............................................... 3.3
St. Petersburg............................................... 3.1
Sakhalin Region.............................................. 2.6
Karellia..................................................... 2.15
Vladimir Region.............................................. 2.13
- ------------
Source: Kommersant Weekly, November 12, 1994.
LEGAL SYSTEM
The supreme law in the Russian Federation is the constitution, which
provides for a federal state and separation of executive, legislative and
judicial power. The executive and legislative branches of the federal state have
the power to enact legislation in various forms.
The Russian Federation operates on a civil legal system. The first of the
two parts of the new Civil Code will become effective on January 1, 1995. This
section of the Civil Code deals with general provisions, legal entities
(including commercial organizations), rights, ownership, general issues of law
of contracts, agency, secured transactions and some other questions of a general
character. (The Chapter dealing with legal entities already became effective on
December 8, 1994). The second part of the Code is still to be adopted and may
come into force later in 1995.
A-14
<PAGE>
Since 1987 and particularly for the last three years there have been a
number of laws passed to address the movement toward a market economy and the
subsequent development of the private sector.
The Russian judicial system is represented by three branches of courts:
courts of general jurisdiction, a system of arbitration courts for the
resolution of economic disputes, and the constitutional court. The courts
hearing general practice cases consist of the Supreme Court of the Russian
Federation, regional courts and district courts. Economic disputes (commercial
matters) are heard by courts of the arbitration court system headed by the High
Arbitration Court of the Russian Federation. Parties to a particular contract,
however, might provide for private arbitration (not to be confused with the
arbitration court) to be the forum for resolution of their disputes.
As successor of the U.S.S.R., Russia is a signatory to the 1958 New York
Convention of the Recognition and Enforcement of Foreign Arbitral Awards.
Russian courts therefore should recognize and enforce arbitral awards made in
other jurisdictions which are also signatories to that Convention. Foreign
arbitral awards may be enforced in Russia in accordance with the Civil Procedure
Code and the Code of Arbitration Procedure which recognize such arbitral awards.
There are a number of grounds, however, on which recognition and enforcement of
a foreign arbitral award may be refused, which are listed in the law "On
International Commercial Arbitration of 7 July 1993."
The Laws of the Russian Federation on International Commercial Arbitration
reproduces similar provisions contained in the UNCITRAL Model Law. Under this
law the arbitration is entitled to apply the law which the parties have chosen
as applicable. Another important provision is that an arbitral award
irrespective of the country where it was made, is recognized and enforced
subject to a written application to a competent court.
The International Commercial Arbitration Court is established under the
Chamber of Trade and Industry of the Russian Federation and may hear cases
arising from any relations where one of the parties is located abroad or where
one of the parties (if it is an enterprise) has foreign participation.
A-15
<PAGE>
APPENDIX B
SECURITIES MARKETS OF RUSSIA
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and its Board of Directors make no
representation as to the accuracy of the information, nor has the Fund or its
Board of Directors attempted to verify it; furthermore, no representation is
made that any correlation exists between the Russian Federation, or its economy
in general, and the performance of the Fund.
PRIVATIZATION AND VOUCHER PROGRAM
In October 1992, Russia launched the largest mass privatization program
ever. Nearly 150 million privatization vouchers were distributed at a nominal
cost to approximately 144 million eligible Russians. The vouchers carried a face
value of Rbs. 10,000, which was the equivalent of approximately $32. The
vouchers were freely transferable bearer securities that could be used to bid
for the shares of the 15,000 medium and large companies that were being
privatized, exchanged for shares in voucher investment funds, which were
established to provide diversification and ongoing investment management, or
sold for cash in the newly developed secondary market. Under the privatization
program, foreign investors were permitted to purchase vouchers and obtain shares
of privatized companies. The voucher program ended in June 1994, when vouchers
ceased to be valid.
To begin the privatization process, firms were incorporated and assigned to
State Property Funds at appropriate levels of government--small firms to
municipalities and other local governments, regional firms to regional
governments, and companies with activities on a national scale to the federal
government. State Property Committees at each level were given responsibility
for organizing auction schedules.
Medium- and large-scale enterprises were obligated to transform themselves
into "open type" joint stock companies in 1992, and workers would select from
one of three types of privatization options that allow employees and former
employees at the enterprise opportunities to acquire different levels of
ownership at, in certain cases, preferential prices. Such distribution to the
employees was called a "closed subscription." Together with the State Property
Committee, a privatization plan would be worked out for each enterprise to
define the methods of distributing the company's remaining shares. In some
cases, employees would have the right to acquire 5%-10% of the shares, or at
least to pay for their entitlements in the closed subscription, through an
employee shareholding fund (referred to as a "FARP"), which represented certain
past profits of the state enterprise set aside for this purpose. According to
Presidential decree, such companies were obligated to offer at least 29% of
their shares to the general public by way of voucher auction, although in
practice this decree was not always strictly enforced.
The remaining shares would be allocated to one of the remaining permitted
privatization methods through, for medium and large enterprises transformed into
joint stock companies of the open type, "investment tender," "commercial
tender," "auction" or "specialized auction for the sale of shares." An
investment tender generally involves the acquisition of a defined percentage of
shares through a tender in which the investor must submit a "sealed" proposal as
to the amount of investment that the investor is willing to make, subject to any
minimum set out in the company's investment program. The person making the
highest proposal on the day bids are revealed is awarded the tender and has the
right to acquire the shares for payment of only a nominal value to the
appropriate property fund acting as seller. In addition, the winner must pay the
amount of the investment directly to the company. Although characterized as an
"investment," it may not be recovered and does not afford the investor any
rights other than the right to acquire the shares at a nominal value.
B-1
<PAGE>
A commercial tender is a tender in which the winner of the tender is
required to fulfill certain conditions in relation to the privatized company.
The winner of the tender is the bidder whose proposal most fully satisfies the
requirements of the tender and who offers the highest price.
Regulations detailing the procedure for the sale of shares through an
auction or a specialized auction for the sale of shares have not, to date, been
adopted. According to the Fundamental Provisions of the State Program of
Privatization of State and Municipal Enterprises in the Russian Federation after
July 1, 1994, specialized auctions for the sale of shares will be open offers in
which investors will participate by submitting an application specifying the
total sum to be paid and the number of shares to be acquired. All winners will
receive shares at the same price.
The following tables indicate the rate of privatization by activity and
region during 1992.
NUMBER OF ENTERPRISES PRIVATIZED BY ACTIVITY, 1992
<TABLE>
<CAPTION>
JAN.-JUNE(1) JULY-SEPT. OCT.-DEC. 1992
------------ ---------- --------- ------
<S> <C> <C> <C> <C>
Light industry....................................... 190 143 419 752
Food Industry........................................ 195 331 981 1,507
Construction......................................... 364 462 1,352 2,178
Construction materials............................... 211 136 414 761
Agriculture.......................................... 151 334 972 1,457
Automobile and repair................................ 125 263 542 930
Retail trade......................................... 3,331 5,725 9,331 18,387
Wholesale trade...................................... 140 161 263 564
Public catering...................................... 852 1,489 2,032 4,373
Consumer services.................................... 2,498 3,064 5,098 10,660
Unfinished construction sites........................ 147 184 333 664
Others............................................... 729 1,347 2,506 4,582
Total.............................................. 8,933 13,639 24,243 46,815
</TABLE>
- ------------
(1) Data not available by quarter.
Source: International Monetary Fund
NUMBER OF ENTERPRISES PRIVATIZED BY REGION, 1992
<TABLE>
<CAPTION>
JAN.-MAR. APR.-JUNE JULY-SEPT. OCT.-DEC.
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Central Black-Earth................................... 109 772 1,274 1,530
Northwestern.......................................... 278 779 1,116 1,649
Volga-Vyatsk.......................................... 81 198 650 1,107
Western Siberia....................................... 46 483 1,185 2,350
Volga................................................. 122 552 1,277 1,769
Central............................................... 639 943 3,478 5,598
Far East.............................................. 69 509 349 1,078
Eastern Siberia....................................... 68 409 811 1,256
North Caucasus........................................ 267 801 1,132 3,290
Urals................................................. 149 1,379 1,803 3,626
Kaliningrad........................................... 18 19 75 204
Northern.............................................. 37 206 489 786
Total............................................... 1,883 7,050 13,639 24,243
</TABLE>
- ------------
Source: International Monetary Fund
B-2
<PAGE>
The following table provides information for voucher auctions concluded as
of June 24, 1994.
<TABLE>
<CAPTION>
AVERAGE CAPITAL AT AVERAGE
CAPITAL SALE BLOCK OF % OF TOTAL
NUMBER OF (MILLION (MILLION SHARES SHARES
SECTOR COMPANIES RBS.) RBS.) (%) REDEEMED
- --------------------------------------------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Machinery and equipment...................... 1,661 69 23,945 20.8 11.4
Metallurgy................................... 382 273 23,007 22.1 11.1
Chemicals.................................... 1,281 72 18,337 20.0 10.5
Oil and gas exploration...................... 22 3,945 13,427 15.5 9.1
Oil refining................................. 58 1,575 9,438 10.3 8.9
Electricity.................................. 65 1,807 14,223 12.1 8.1
Postal service and communications............ 49 129 1,377 21.8 5.8
Building..................................... 163 316 14,853 29.2 5.0
Food industry................................ 899 21 4,086 21.8 4.7
Construction................................. 2,041 17 7,755 22.3 3.2
Timber....................................... 841 27 5,049 22.1 3.0
</TABLE>
- ------------
Source: Kommersant Weekly, No. 25, 1994.
The following table provides information on the twenty-five largest
companies in Russia by market capitalization as of October 1994.
<TABLE>
<CAPTION>
SHARES SHARE TOTAL
COMPANY OUTSTANDING PRICE ($) CAPITALIZATION ($)
----------------------------------------------- -------------- --------- ------------------
<C> <S> <C> <C> <C>
1. Gazprom........................................ 23,673,512,900 .15 3,551,026,935
2. LUK-Oil Holding................................ 95,073,624 33.80 3,213,488,491
3. Unified Energy System.......................... 139,989,946 20.27 2,837,596,205
4. Norilsk Nickel................................. 125,999,916 13.77 1,735,018,843
5. Surgutneftegaz (Surgut Petroleum).............. 5,384,347,600 .23 1,238,399,948
6. Yuginskneftegaz (Yuginsk Petroleum)............ 53,366,690 21.00 1,120,700,490
7. Rostelekom..................................... 186,750,080 4.75 887,062,880
8. Noyabrskneftegaz (Noyabrsk Petroleum).......... 78,545,000 9.40 738,323,000
9. LUK-Oil Kogalym................................ 14,649,934 46.30 678,291,944
10. Purneftegaz (Pur Petroleum).................... 111,365,000 5.53 615,848,450
11. Megionneftegaz (Megion Petroleum).............. 132,209,120 3.80 502,394,656
12. Kondpetroleum.................................. 50,509,000 8.90 449,530,100
13. Nizhnevartovskneftegaz (Nizhnevartovsk
Petroleum)..................................... 18,217,283 19.42 353,779,636
14. Tomskneft (Tomsk Oil).......................... 45,032,112 7.85 353,502,079
15. Komineft (Komi Oil)............................ 33,971,200 9.60 326,123,520
16. Mosenergo (Moscow Power)....................... 2,560,000,000 .10 256,000,000
17. LUK-Oil Langepas............................... 28,479,308 8.90 253,456,841
18. St. Petersburg Telephone....................... 15,550,000 14.90 231,695,000
19. Varyeganneftegaz (Varyegan Petroleum).......... 23,022,610 9.70 223,319,317
20. Sakhalinmorneftegaz (Sakhalin Sea Petroleum)... 81,241,175 2.18 177,105,762
21. KamAZ (Kama Autoworks)......................... 60,000,000 2.82 169,200,000
22. Chernogorneft (Chernogor Oil).................. 2,677,100 57.40 153,665,540
23. Krasnoyarsk Aluminum........................... 13,478,400 10.18 137,210,112
24. AvtoVAZ (Vaz Autoworks)........................ 21,416,643 5.86 125,501,528
25. Kirishi Oil Refinery........................... 35,180,190 3.35 117,853,637
</TABLE>
- ------------
Source: Financovaya Gazeta, Issue No. 44, October 26, 1994.
B-3
<PAGE>
Since the inception of the program, more than 100,000 enterprises have been
privatized, with approximately 15,000 of these being medium- and large-scale
enterprises. These 15,000 enterprises have a total market value of approximately
$ billion. However, most of the market value is concentrated in a very
small number of companies. As of October 1994, the ten largest companies in
Russia had a total market capitalization of approximately $16.5 billion as
compared to an aggregate market capitalization of Russian industry of less than
$ billion. Certain key enterprises, such as oil and gas, telecommunications
and military enterprises, are either excluded from privatization or privatized
according to separate procedures set forth in special legislation applicable to
the industry or companies concerned.
SECONDARY SECURITIES MARKET TRADING
Immediately after the launch of the privatization program, a secondary
market for shares and vouchers emerged. There are at least twelve organized
exchanges and a number of small exchanges. At the beginning of 1994, the Russian
Ministry of Finance had issued licenses to 72 exchanges and of these 62 were in
operation. Several regional exchanges trade up to 200 stocks in small volumes.
Among the largest Russian stock exchanges are the Central Russian Universal
Exchange, the Moscow Central Stock Exchange, the Moscow International Stock
Exchange, and the Russian Commodity and Raw Material Exchange (stock
department).
The following table sets forth basic information regarding Russian
securities market activity for the years 1991 through 1993:
<TABLE>
<CAPTION>
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Number of markets (end of year)....................................... 182 238 180
Trades carried out (in thousands)..................................... 4.9 20.2 16.3
Completed transactions (in thousands)................................. 106.3 195.7 329.6
Market volume (billions of rubles).................................... 69.9 346.8 1,593
Market Volume by Sector:
Consumer goods.................................................... 23.6 107.9 215.5
Industrial and technical production............................... 45.0 227.0 656.6
Securities........................................................ 1.2 6.0 480.0
Money resources................................................... 0.1 5.7 234.6
Other goods and services.......................................... 0.05 0.2 6.3
</TABLE>
- ------------
Source: The Russian Federation in Figures, 1993, Goskomstat Russia, Republic
Information-Publishing Center, Moscow (1994).
B-4
<PAGE>
The following table provides a breakdown of capital markets activity in 1993
(in billions of rubles).
<TABLE>
<CAPTION>
FIRST
FIRST THREE FIRST SIX NINE
MONTHS OF MONTHS OF MONTHS OF ALL
1993 1993 1993 OF 1993
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Total sales volume.................................. 8.9 211.4 1,560.8 2,046.6
includes:
securities.......................................... 4.6 32.3 141.3 595.1
of which:
stocks............................................ 0.1 1.3 15.7 37.3
government obligations............................ -- 3.3 31.7 283.1
certificates...................................... -- -- 0.2 0.4
bills of exchange................................. -- -- 0.5 0.6
options........................................... -- 0.3 1.2 2.4
futures........................................... -- -- -- 0.2
privatization vouchers............................ 4.5 27.3 91.9 270.4
other............................................. -- 0.1 0.1 0.7
monetary resources.................................. 4.2 178.0 1,418.2 1,445.63
of which:
deposits.......................................... 0.2 4.5 8.4 13.2
interbank loans................................... 3.9 172.8 1,407.9 1,429.6
commercial loans.................................. 0.1 0.7 1.9 2.5
currency (in conversion to rubles)................ 0.1 1.1 1.3 6.2
</TABLE>
- ------------
Source: The Russian Federation in Figures, 1993, Goskomstat Russia, Republic
Information-- Publishing Center, Moscow (1994).
Regulation No. 78 authorizes the Ministry of Finance to establish minimum
listing criteria for Russian stock exchanges. Article 5 of the program for the
control of the activity of stock exchanges, approved by Letter No. 5166 of the
Ministry of Finance on November 13, 1992, sets forth certain general criteria
for listing, including registration of the securities with the State and
publication of certain information about the securities. Beyond these
conditions, exchanges are permitted to establish their own listing requirements.
For example, an issuer may be authorized to list an issuance of securities on
the Russian Exchange of Goods and Raw Materials only if there are more than 250
investors, the issuance is more than 50 million rubles, and the issuer earned a
profit in its last fiscal year of 10% or more.
Although evolving rapidly, even the largest of Russia's stock exchanges are
not well developed compared to Western stock exchanges. Listing procedures are
primitive and vary from one exchange to another. By the end of 1993, more than
40 stock and commodity exchanges were open for trading more than twice a week
and the total securities traded in 1993 amounted to Rbs. 736 billion, or about
.045% of gross national product. However, the actual volume of exchange-based
trading in Russia is low and active trading generally occurs only in the shares
of a few private companies. Further, to the extent that secondary market trading
of equity securities occurs, it is generally done through over-the-counter
trading facilitated by a growing number of licensed brokers. Shares are traded
on the over-the-counter market primarily by the management of enterprises,
investment funds and short-term speculators, with foreign investors becoming
increasingly active. Average weekly trading volumes in the over-the-counter
market are estimated to be in excess of $35 million.
B-5
<PAGE>
CUSTODY AND CLEARING SERVICES
Although Russian corporate law envisions joint stock companies issuing share
certificates, as a practical matter, share certificates are frequently not used
and equity shares generally are maintained in book-entry form only. Ownership of
equity shares is reflected by entries in a company's share register and extracts
from the register are normally issued to shareholders. Transfer of title takes
place only when appropriate changes are made in the register or when a transfer
is made on the books of a depository holding shares on behalf of an owner.
Russian companies with 1,000 or more shareholders are required by law to enter
into a contractual arrangement with a third party to maintain the company's
share register or when a transfer is made on the books of a depository holding
shares on behalf of an owner. These registrars perform services similar to those
provided by a transfer agent. It is estimated that share registration services
are provided by approximately 3,000 registrars. Entities that serve as
registrars include Russian commercial banks, brokerage firms, the issuer (if
less than 1,000 shareholders), and wholly owned subsidiaries of the issuer.
Registrars, which are generally located near the company whose registers
they maintain, are located throughout Russia. While a Russian public enterprise
with more than 1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity that meets
certain statutory criteria, in practice this regulation has not always been
strictly enforced. A company's share register generally is maintained by only
one registrar.
The State Property Committee, the Commission on Securities and Stock
Exchanges under the President of the Russian Federation (which recently has been
replaced by the Federal Commission on Securities and Stock Exchanges) and the
President have issued detailed regulations applicable to registrars and the
share registration system, although registrars are not subject to active
government supervision. Under the applicable regulations, registrars are liable
for damages in the event they violate the terms of the agreement with the
issuer, commit mistakes in making entries in the register, or unlawfully refuse
to make entries. Furthermore, the regulations state that a mistake made by a
registrar with respect to a good-faith acquiror of shares shall always be
treated in favor of the good faith purchaser. The extent to which these
provisions as a practical matter would be enforceable against a share registrar
or third party, however, remains unclear, especially given that the system for
resolving commercial disputes in Russia is still developing.
After purchasing shares, it is common for investors to obtain an extract of
the share register to provide evidence of their interest in a company, and to
conduct regular audits of these share registers (and obtain additional extracts)
to ensure that their interest continues to be appropriately recorded. Further,
management of a company often is able illegally to exert considerable influence
over the trading of the company's shares by their control or influence of the
share register. There is, therefore, a risk that the management of certain
enterprises may instruct the registrar not to record the names of investors into
the company's register. This could affect the ability of foreign investors, such
as the Fund, to make investments in companies that they believe present
appropriate growth prospects.
A number of initiatives are underway to support the development of the
Russian securities market. In addition to creating a computer-linked,
over-the-counter trading system, several groups are attempting to establish
central clearing and settlement systems. These central settlement and clearing
systems supplement rather than replace the current share registration system.
DEBT SECURITIES MARKETS
Although securities regulations in Russia permit a joint stock company to
issue publicly traded debt securities, few Russian corporations have issued
conventional debt securities in the public markets
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<PAGE>
to date. This is attributed mainly to fears of inflation, the lack of a reliable
indicator of government risk and capacity constraints on emerging equity-focused
public exchanges.
The near-term outlook for Russian debt and issuers in the international
capital markets is bleak. Russia has no sovereign debt rating and loans of the
Vnesheconombank trade at over a 50% discount to face value in the international
markets. Moreover, Russian corporate borrowers currently have limited access to
foreign bank lenders. This is due in part to the fact that the regulatory regime
under which foreign banks operate in Russia includes restrictions on the
establishment of Russian banking subsidiaries of foreign entities.
In 1993, Russia issued $7.8 billion of dollar-denominated bonds through the
Ministry of Finance. The bonds were issued in five series, with varying
maturities. The Russian Ministry of Finance also currently has approximately
$390 million of three- and six-month Treasury bills outstanding. Although a
small sum, the revenue from the Treasury bills is psychologically significant in
the prevailing conditions of a rudimentary capital market and an unstable
economy.
CORPORATE AND SECURITIES MARKET REGULATION
Overview of Russian Legal System. [TO BE PROVIDED]
Regulation of Joint Stock Companies. [TO BE PROVIDED]
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<PAGE>
Securities Laws. Russian securities markets are primarily subject to
regulation pursuant to Regulation No. 78 on the Issue and Circulation of
Securities and on Stock Exchanges in Russia, enacted on December 28, 1991. The
Regulation describes the types of securities and the different activities of
"investment institutions" (brokers, investment consultants, investment
companies, investment funds); sets forth the requirement that investment
institutions obtain a license to act in that capacity; and provides other basic
rules relating to the securities markets. The Regulation also governs securities
issuances, both for private placements (defined as up to 100 investors and 50
million rubles), and public offerings, which require publication and
registration of a prospectus. The Regulation also contains rules on circulation
of securities and basic requirements for stock exchanges. Among other things,
the Regulation requires notification to the Ministry of Finance if a person or
group of persons acquires more than 15% of the shares of an issuer. Further, the
prior consent of the State Anti-Monopoly Committee must be obtained if a person
or group acquires 35% or more of the shares that provide for more than 50% of
voting authority over that issuer. With the creation of the new Federal
Commission on Securities and Stock Exchanges (see "Regulatory Agencies" below),
a new procedure for licensing professional activities in the securities market
and for qualification of all financial instruments is expected to be issued in
the near future.
Apart from Regulation No. 78, a large number of Instructions and Letters
issued by the Ministry of Finance, the Central Bank, the State Anti-Monopoly
Committee and other bodies regulate in some way the securities markets.
Recently, more comprehensive drafts of securities legislation have been prepared
and are being circulated to interested parties, although the time table for
enactment is unclear.
B-8
<PAGE>
Regulation of Russian Investment Funds. Regulation No. 78 also sets forth
the regulatory requirements regarding Russian investment funds. Like all
"investment institutions," investment funds must be licensed by the Ministry of
Finance and there are detailed regulations specifying the licensing procedure.
Among other requirements, the investment fund must have at least one
"specialist" possessing a qualification certificate issued by the Ministry of
Finance. While Regulation No. 78 appears to be intended to address investment
funds organized in Russia, given the undeveloped state of securities regulation
in Russia, it is possible that Regulation No. 78 may be held to apply to the
Fund. The Fund will take certain steps in an attempt to avoid requiring that the
Fund be licensed in Russia, including not offering or selling any of the Fund's
Shares in Russia.
Regulatory Agencies. There are a number of regulatory agencies that in some
way are involved in the regulation of joint stock companies and securities
markets.
Federal Commission on Securities and Stock Markets. Decree No. 2063 of
the President of the Russian Federation on measures for state regulation of the
securities market in the Russian Federation of November 4, 1994 adopted the
Regulations on the Federal Commission on the Securities and Stock Exchanges
under the Government of the Russian Federation. This Federal Commission, which
was formed within the government of the Russian Federation, replaces the former
Russian Commission on Securities and Stock Exchanges, had been located within
the office of the President of the Russian Federation. The Federal Commission
consists of a Chairman, First Deputy Prime Minister A.B. Chubays, and ten
commission members from various other Russian agencies. In addition, a
representative of each chamber of the Federal Assembly will serve on the Federal
Commission for coordination purposes.
Decree No. 2063 directs the Federal Commission to act in the following
areas:
. develop the main principles regarding the evolvement of the securities
markets and coordinate with the activities of state authorities on the
regulation of the securities markets;
. adopt standards governing prospectus disclosure requirements;
. carry out the licensing of the various investment professionals;
. carry out the state registration of stock exchanges and their
associations; and
. determine standards for the activity of investment funds and private
pension funds.
Decree 2063 also recommends that regional securities and stock market
commissions be formed to implement the Federal Commission's regulations and to
adopt regulations governing the local markets. The Decree states that
regulations of the regional commissions will have to be confirmed by the
chairman of the Federal Commission. The Federal Commission also will appoint and
remove from office the chairman of the regional commissions. In addition, the
Federal Commission will carry out the management of the activities of the
regional commissions.
Ministry of Finance. Resolution No. 984 of the Government of the Russian
Federation of August 19, 1994 and Regulations of the Ministry of Finance provide
the Russian Ministry of Finance with authority over the securities markets.
Article 7 of these Regulations provides that in the area of securities markets
the Ministry of Finance carries out the following activities:
. developing improvements in the functioning of financial markets;
. implementing the regulation of the securities markets;
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<PAGE>
. issuing licenses for investment institutions and stock exchanges in
accordance with applicable legislation;
. overseeing the registration of securities issuances;
. maintaining the Unified State Register of Securities Registered in
Russia and the Unified Register of Investment Funds;
. issuing licenses for the manufacture of securities certificates; and
. monitoring compliance rules for the production, storage and accounting
of such certificates.
Under Presidential Decree No. 2063, some of these responsibilities are to be
taken over by the Federal Commission.
The State Property Management Committee. The State Property Management
Committee of the Russian Federation acts on the basis of the Regulations of the
State Committee of the Russian Federation for the management of state property,
adopted by the Decree No. 35 of the Council of Ministers of the Russian
Federation of January 21, 1991. The State Property Management Committee:
. holds shares owned by the State;
. makes decisions on the reorganization of State enterprises and their
privatization;
. determines the amount to be held by a State controlling shareholder in
the reorganization of State enterprises;
. creates funds and joint stock companies to hold shares owned by the
State;
. leases State enterprises; and
. monitors the effectiveness of federal property use and maintenance.
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<PAGE>
APPENDIX C
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1. Each holder of shares (a "Shareholder") in Templeton Russia Fund, Inc.
(the "Fund") whose Fund shares are registered in his or her own name will
automatically be a participant ("Participant") in the Dividend Reinvestment Plan
(the "Plan"), unless any such Shareholder specifically elects to receive all
dividends and capital gains in cash, paid by check, mailed directly to the
Shareholder. A Shareholder whose shares are registered in the name of a
broker-dealer or other nominee (the "Nominee") will be a Participant if (a) such
a service is provided by the Nominee and (b) the Nominee makes an election on
behalf of the Shareholder to participate in the Plan. Those Underwriters (as
defined in the Fund's Prospectus dated , 1995) which have the capacity to
allow participation intend to make such an election on behalf of Shareholders
whose shares are registered in their names, as Nominee, unless a Shareholder
specifically instructs his or her Nominee to pay dividends and capital gains in
cash. Mellon Securities Trust Company (the "Plan Agent") will act as agent for
Participants and will open an account under the Plan for each Participant in the
same name as such Participant's shares are registered on the books and records
of the transfer agent for the shares.
2. Whenever the Fund declares a capital gains distribution or an income
dividend payable in shares or cash, Participants will receive such distribution
or dividend in the manner described in paragraph 3 below as determined on the
date such distribution or dividend becomes payable.
3. Whenever the market price of the Fund's shares is equal to or exceeds the
net asset value price per share at the time shares are valued for the purpose of
determining the number of shares equivalent to the cash dividend or capital
gains distribution, Participants will be issued shares valued at the greater of
(i) net asset value per share or (ii) 95% of the then-current market price.
Participants will receive any such distribution or dividend entirely in shares
and the Plan Agent shall automatically receive such shares, including fractions,
for all Participants' accounts. If the net asset value per share of the Fund's
shares at the time of valuation exceeds the market price of the Fund's shares at
such time, or if the Fund should declare a dividend or capital gains
distribution payable only in cash, the Plan Agent will, as purchasing agent for
the Participants, buy shares in the open market, on the New York Stock Exchange
(the "Exchange") or elsewhere, for each Participant's account. The valuation
date will be the payable date for such distribution or dividend. If, before the
Plan Agent has completed its purchases, the market price exceeds the net asset
value per share, the average per share purchase price paid by the Plan Agent may
exceed the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the dividend or capital gains distribution had been paid in
shares issued by the Fund at net asset value per share. The Plan Agent will
apply all cash received as a dividend or capital gains distribution to purchase
shares on the open market as soon as practicable after the payment date of such
dividend or capital gains distribution, but in no event later than 30 days after
such date, except where necessary to comply with applicable provisions of the
federal securities laws.
4. For all purposes of the Plan: (a) the market price of the Fund's shares
on a particular date shall be the last sale price on the Exchange on that date
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such shares on the Exchange on such date
and (b) net asset value per share on a particular date shall be as determined by
or on behalf of the Fund.
5. The open-market purchases provided for above may be made on any
securities exchange where the shares of the Fund are traded, in the
over-the-counter market or in negotiated transactions, and may be on such terms
as to price, delivery and otherwise as the Plan Agent shall determine. Funds
held by the Plan Agent uninvested will not bear interest, and it is understood
that, in any event, the Plan Agent shall have no liability in connection with
any inability to purchase shares within 30 days after the
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<PAGE>
payment date of a dividend or capital gains distribution as herein provided, or
with the timing of any purchases effected. The Plan Agent shall have no
responsibility as to the value of the shares of the Fund acquired for any
Participant's account.
6. The Plan Agent will hold shares acquired pursuant to the Plan in
non-certificated form in the Plan Agent's name or that of its Nominee. The Plan
Agent will forward to each Participant any proxy solicitation material and will
vote any shares so held for each Participant only in accordance with the proxy
returned by any such Participant to the Fund. Upon any Participant's written
request, the Plan Agent will deliver to her or him, without charge, a
certificate or certificates for the full shares.
7. The Plan Agent will confirm to each Participant acquisitions made for its
account as soon as practicable but not later than 60 days after the date
thereof. Although a Participant may from time to time have an undivided
fractional interest (computed to four decimal places) in a share of the Fund, no
certificates for a fractional share will be issued. However, dividends and
distributions on fractional shares will be credited to the Participant's
account.
8. Any stock dividends or split shares distributed by the Fund on shares
held by the Plan Agent for any Participant will be credited to such
Participant's account. In the event that the Fund makes available to
Participants transferrable rights to purchase additional shares of other
securities, the Plan Agent will sell such rights and apply the proceeds of the
sale to the purchase of additional shares of the Fund for the account of
Participants.
9. The Plan Agent's service fee for handling capital gains distributions or
income dividends will be paid by the Fund. Participants will be charged a pro
rata share of brokerage commissions on all open market purchases.
10. Any Participant may withdraw shares from such Participant's account or
terminate such Participant's account under the Plan by notifying the Plan Agent
in writing. Such withdrawal or termination will be effective immediately if
notice is received by the Plan Agent not less than 10 days prior to any dividend
or distribution record date; otherwise such withdrawal or termination will be
effective, with respect to any subsequent dividend or distribution, on the first
trading day after the dividends paid for such record date have been credited to
the Participant's account. The Plan may be terminated by the Plan Agent or the
Fund upon notice in writing mailed to each Participant at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any withdrawal or termination, the Plan Agent will cause to be delivered to
each Participant a certificate or certificates for the appropriate number of
full shares and a cash adjustment for any fractional share (valued at the market
value of the shares at the time of withdrawal or termination); provided,
however, that any Participant may elect by notice to the Plan Agent in writing
in advance of such termination to have the Plan Agent sell part or all of the
shares in question and remit the proceeds to such Participant, net of any
brokerage commissions. A $5.00 fee will be charged by the Plan Agent upon any
cash withdrawal or termination, and the Plan Agent is authorized to sell a
sufficient number of the Participant's shares to cover such fee and any
brokerage commission on such sale.
11. These terms and conditions may be amended or supplemented by the Plan
Agent or the Fund at any time or times, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, with respect to any such Participant, prior to the effective
date thereof, the Plan Agent receives written notice of the termination of that
Participant's account under the Plan. Any such amendment may include an
appointment by the Plan Agent in its place and stead of a successor plan agent
under these terms and conditions, with full power and authority to perform all
or any of the acts to be performed by the Plan Agent under these terms and
conditions. Upon any such appointment of a plan agent for the purpose of
receiving dividends and distributions, the Fund will be authorized to pay to
such successor plan agent,
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<PAGE>
for Participants' accounts, all dividends and distributions payable on the
shares held in each Participant's name or under the Plan for retention or
application by such successor plan agent as provided in these terms and
conditions.
12. The Plan Agent shall at all times act in good faith and agree to use its
best efforts within reasonable limits to ensure the accuracy of all services
performed under this Plan and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by its or its employees' negligence, bad faith or willful
misconduct.
13. The Participant shall have no right to draw checks or drafts against
such Participant's account or to give instructions to the Plan Agent in respect
of any shares or cash held therein except as expressly provided herein.
14. The Participant agrees to notify the Plan Agent promptly in writing of
any change of address. Notices to the Participant may be given by the Plan Agent
by letter addressed to the Participant as shown on the records of the Plan
Agent.
15. This Plan and the account established hereunder for the Participant
shall be governed by and construed in accordance with the laws of the State of
New York and the rules and regulations of the Securities and Exchange
Commission, as they may be changed or amended from time to time.
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<PAGE>
APPENDIX D
DESCRIPTION OF FUTURES CONTRACTS, OPTIONS ON SECURITIES
AND INDICES AND FOREIGN CURRENCY HEDGING TRANSACTIONS
Futures Contracts. The Fund may purchase and sell financial futures
contracts. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Fund may also buy and sell index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
At the time the Fund purchases a futures contract, an amount of cash, U.S.
Government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the Fund's Custodian. When writing a futures contract, the Fund will
maintain with its Custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's Custodian).
Options on Securities or Indices. The Fund may write (i.e., sell) covered
put and call options and purchase put and call options on securities or
securities indices that are traded on United States and foreign exchanges or in
the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
The Fund may write a call or put option only if the option is "covered." A
call option on a security written by the Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or high grade U.S. Government
securities in a segregated account with its Custodian. A put option on a
security written by the Fund is "covered" if the Fund maintains cash or
fixed-income securities with a value equal to the exercise price in a segregated
account with its Custodian, or else holds a put on the same
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<PAGE>
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written.
The Fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the Investment Manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the Fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the Fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The Fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rule of the exchange on which the
option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
accuracy of the correlation between the changes in value of the underlying
security or index and the changes in value of the Fund's security holdings being
hedged.
The Fund may purchase call options on individual securities to hedge against
an increase in the price of securities that the Fund anticipates purchasing in
the future. Similarly, the Fund may purchase call options on a securities index
to attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options,
the Fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
No assurance can be given that a liquid market will exist when the Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of either
buyers or sellers, or the options exchange could suspend trading after the price
has risen or fallen more than the maximum specified by the exchange. Although
the Fund may be able to offset to some extent any adverse effects of being
unable to liquidate an option position, the Fund may experience losses in some
cases as a result of such inability.
Foreign Currency Hedging Transactions. In order to hedge against foreign
currency exchange rate risks, the Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Fund may also
conduct its foreign currency exchange transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
D-2
<PAGE>
The Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. The Fund may enter into a
forward contract, for example, when it enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security. In addition, for example, when the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, the Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, the Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for the Fund than if it
had not engaged in such contracts.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the Fund will be traded on
U.S. and foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the purchase or sale
for future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the Fund's Investment
Manager to forecast currency exchange rate movements correctly. Should exchange
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of foreign currency futures or may realize losses.
D-3
<PAGE>
- ------------------------------------------- ----------------------------------
- ------------------------------------------- ----------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE
INVESTMENT MANAGER, OR ANY UNDERWRITER. 4,000,000 SHARES
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF TEMPLETON
THE FUND SINCE THE DATE HEREOF OR THAT RUSSIA
THE INFORMATION CONTAINED HEREIN IS FUND, INC.
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE. HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED
BY LAW TO BE DELIVERED, THIS PROSPECTUS
WILL BE SUPPLEMENTED OR AMENDED
ACCORDINGLY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION IN
SUCH JURISDICTION.
-------------------
TABLE OF CONTENTS COMMON STOCK
PAGE
----
PROSPECTUS SUMMARY.................... 3
FUND EXPENSES......................... 11
THE FUND.............................. 12
USE OF PROCEEDS....................... 12
INVESTMENT RATIONALE.................. 12
INVESTMENT OBJECTIVE AND POLICIES..... 15
RISK FACTORS AND SPECIAL
CONSIDERATIONS........................ 18
ADDITIONAL INVESTMENT ------------
PRACTICES............................ 26 PROSPECTUS
INVESTMENT RESTRICTIONS............... 29 ------------
MANAGEMENT OF THE FUND................ 29
DIRECTORS AND OFFICERS................ 34
PORTFOLIO TRANSACTIONS AND
BROKERAGE............................. 38
NET ASSET VALUE....................... 39
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT PLAN..................... 39
TAXATION.............................. 41 MERRILL LYNCH & CO.
COMMON STOCK.......................... 47
UNDERWRITING.......................... 49 A.G. EDWARDS & SONS, INC.
CUSTODIAN AND TRANSFER AND
DIVIDEND PAYING AGENT................ 50 NOMURA SECURITIES INTERNATIONAL,
EXPERTS............................... 51 INC.
LEGAL MATTERS......................... 51
PRUDENTIAL SECURITIES INCORPORATED
ADDITIONAL INFORMATION................ 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS........................... 52
APPENDIX A............................ A-1
APPENDIX B............................ B-1
APPENDIX C............................ C-1
APPENDIX D............................ D-1
UNTIL , 1995 (25 DAYS AFTER THE
COMMENCEMENT OF THIS OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE , 1995
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------- ----------------------------------
- ------------------------------------------- ----------------------------------
<PAGE>
PART B
NOT APPLICABLE
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(1) Financial Statements
Contained in Part A:
-- Report of Independent Accountants
-- Statement of Assets and Liabilities
Contained in Part B:
-- Not Applicable
Contained in Part C:
-- None
(2) Exhibits
(a) -- Articles of Incorporation*
(b) -- Bylaws*
(c) -- Not Applicable
(d) -- Specimen certificate for Common Stock**
(e) -- Dividend Reinvestment Plan**
(f) -- Not Applicable
(g) -- Form of Investment Management Agreement**
(h)(i) -- Form of U.S. Purchase Agreement**
(h)(ii) -- Form of International Purchase Agreement**
(h)(iii) -- Standard Dealer Agreement**
(i) -- Not Applicable
(j) -- Form of Custodian Agreement**
(k)(i) -- Form of Agreement For Stock Transfer Services**
(k)(ii) -- Form of Business Management Agreement**
(k)(iii) -- Form of Sub-Administration Agreement**
(l) -- Opinion and Consent of Dechert Price & Rhoads**
(m) -- Not Applicable
(n) -- Consent of Independent Accountants**
(o) -- Not Applicable
(p) -- Form of Investment Letter**
(q) -- Not Applicable
(r)(i) -- Powers of Attorney
(r)(ii) -- Assistant Secretary's Certificate Pursuant to
Rule 483(b)
_______________________
* Previously filed.
** To be filed by amendment.
C-1
<PAGE>
ITEM 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
ITEM 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to
be incurred in connection with the offering described in this
Registration Statement:
SEC Registration fees............................. $ *
NASD fees and fees and expenses of qualification
under state securities laws
(including fees of counsel)..................... *
New York Stock Exchange listing fee............... *
Printing (other than stock certificates).......... *
Engraving and printing stock certificates......... *
Legal fees and expenses........................... *
Underwriters' expense allowance................... *
Miscellaneous..................................... *
------
Total.......................................
-----------------------
* To be completed by amendment
ITEM 27. Persons Controlled by or under Common Control with Registrant
Upon conclusion of the initial public offering of the
Registrant's shares of Common Stock, it is anticipated that no person
will control or be controlled by or under common control with the
Registrant.
ITEM 28. Number of Holders of Securities
Common Stock, par value $.01 per share, one record holder as of
the effective date of this Registration Statement.
ITEM 29. Indemnification
Section 2-418 of the General Corporation Law of the State of
Maryland, Article TENTH of the Fund's Articles of Incorporation,
Article V of the Fund's Bylaws, the Investment Management Agreement
filed as Exhibit 2(g), and the Purchase Agreement filed as Exhibit
2(h)(i) provide for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of the Fund, pursuant to
the foregoing provisions or otherwise, the Fund has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in the successful defense of any
action, suit or proceeding) is asserted by such a director, officer or
controlling person in connection with the securities being registered,
the Fund will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 30. Business and Other Connections of the Investment Manager
Information as to the directors and officers of the Investment
Manager, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in
by the directors and officers of the Investment Manager in the last
two years, is included in its application for registration as an
investment adviser on Form ADV (File No. 801-46997) filed under the
Investment Advisers Act of 1940 (the "Advisers Act") and is
incorporated herein by reference thereto.
C-2
<PAGE>
ITEM 31. Location of Accounts and Records
All accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are maintained at the offices of the (a)
Registrant, (b) Templeton Global Investors, Inc., (c) Registrant's
administrator, (d) its custodians and (e) its transfer agent. The
address of each is as follows:
(a) Templeton Russia Fund, Inc.
700 Central Avenue
St. Petersburg, Florida 33701
(b) Templeton Global Investors, Inc.
500 East Broward Boulevard
Ft. Lauderdale, Florida 33394
(c) Princeton Administrators, L.P.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(d) The Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, New York 10036
(e) Mellon Securities Trust Company
Dividend Reinvestment Services
P.O. Box 750
Pittsburgh, PA 15230
ITEM 32. Management Services
None.
ITEM 33. Undertakings
(1) Registrant undertakes to suspend offering of the Common
Stock covered hereby until it amends its Prospectus contained herein
if (i) subsequent to the effective date of this Registration
Statement, its net asset value declines more than 10 percent from its
net asset value as of the effective date of this Registration
Statement, or (ii) its net asset value increases to an amount greater
than its net proceeds as stated in the Prospectus contained herein.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) Registrant undertakes that:
(a) For the purpose of determining any liability under the
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall
be deemed to be part of this Registration Statement as of the
time it was declared effective.
(b) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(6) Not applicable
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended,
Registrant has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Washington, D.C. on the 6th day of
March, 1995.
TEMPLETON RUSSIA FUND, INC.
By: /s/ J. Mark Mobius
------------------------------
J. Mark Mobius*
President
* By: /s/ William J. Kotapish
------------------------------
William J. Kotapish
as attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, as
amended, this amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ J. Mark Mobius President (Principal March 6, 1995
---------------------- Executive Officer)
J. Mark Mobius*
/s/ James R. Baio Treasurer (Principal March 6, 1995
---------------------- Financial and
James R. Baio* Accounting Officer
/s/ John M. Templeton Director March 6, 1995
----------------------
John M. Templeton*
/s/ Harmon E. Burns Director March 6, 1995
----------------------
Harmon E. Burns*
/s/ Martin L. Flanagan Director March 6, 1995
-----------------------
Martin L. Flanagan*
/s/ Hasso-G von Diergardt- Director March 6, 1995
Naglo
-------------------------
Hasso-G von Diergardt-
Naglo*
/s/ F. Bruce Clarke Director March 6, 1995
------------------------
F. Bruce Clarke*
7
<PAGE>
/s/ Andrew H. Hines, Jr. Director March 6, 1995
------------------------
Andrew H. Hines, Jr.*
/s/ Betty P. Krahmer Director March 6, 1995
------------------------
Betty P. Krahmer*
/s/ Fred R. Millsaps Director March 6, 1995
------------------------
Fred R. Millsaps*
/s/ John G. Bennett, Jr. Director March 6, 1995
------------------------
John G. Bennett, Jr.*
/s/ Harris J. Ashton Director March 6, 1995
------------------------
Harris J. Ashton*
/s/ S. Joseph Fortunato Director March 6, 1995
------------------------
S . Joseph Fortunato*
/s/ Gordon S. Macklin Director March 6, 1995
------------------------
Gordon S. Macklin*
/s/ Nicholas F. Brady Director March 6, 1995
------------------------
Nicholas F. Brady*
* By: /s/ William J. Kotapish
--------------------------------------------
William J. Kotapish
as attorney-in-fact**
** Powers of Attorney are filed herewith
- 8 -
Exhibit (2)(r)(i)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the
undersigned constitutes and appoints Allan S. Mostoff, Jeffrey L.
Steele, William J. Kotapish and Thomas M. Mistele, and each of
them, his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign the
registration statement of Templeton Russia Fund, Inc. (the
"Fund") and any and all amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all
that said attorneys-in-fact and agents, or any of them, or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Signature: Date:
/s/ J. Mark Mobius November 4, 1994
/s/ James R. Baio November 7, 1994
/s/ John M. Templeton November 4, 1994
/s/ Harmon E. Burns November 4, 1994
/s/ Martin L. Flanagan November 4, 1994
/s/ Hasso-G von Diergardt-Naglo November 14, 1994
/s/ F. Bruce Clarke November 4, 1994
/s/ Andrew H. Hines, Jr. November 4, 1994
/s/ Betty P. Krahmer November 4, 1994
/s/ Fred R. Millsaps November 4, 1994
/s/ John G. Bennett, Jr. November 4, 1994
/s/ Harris J. Ashton November 4, 1994
/s/ S. Joseph Fortunato November 4, 1994
/s/ Gordon S. Macklin November 4, 1994
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned,
being a duly elected Director of Templeton Russia Fund, Inc. (the
"Fund"), constitutes and appoints Allan S. Mostoff, Jeffrey L.
Steele, William J. Kotapish and Thomas M. Mistele, and each of
them, his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign the Fund's
registration statement and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying
and conforming all that said attorneys-in-fact and agents, or any
of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated: January 11, 1995 /s/ Nicholas F. Brady
Exhibit (2)(r)(ii)
TEMPLETON RUSSIA FUND, INC.
ASSISTANT SECRETARY'S CERTIFICATE
The undersigned, being the duly elected Assistant Secretary of
Templeton Russia Fund, Inc., a Maryland corporation (the "Fund"), hereby
certifies that the following resolution has been duly adopted by the Fund's
Board of Directors, and that said resolution remains in effect as of the date
hereof.
RESOLVED, that the officers and directors of the Fund be,
and they hereby are, authorized in the name and on behalf of
the Fund to execute, or grant power of attorney to counsel to
execute, a Notification of Registration on Form N-8A under the
Investment Company Act of 1940, a Registration Statement on Form
8-A under the Securities Exchange Act of 1934 and a Registration
Statement on Form N-2 under the Securities Act of 1933 and the
Investment Company Act of 1940, to offer and sell up to
100,000,000 shares of the common stock of the Fund; to execute, or
grant power of attorney to counsel to execute, any amendments
thereto in such form as may be approved by counsel; to file or
authorize the filing of such documents with the Securities and
Exchange Commission; and to designate agents for service of
process.
Dated: March 3, 1995 /s/ Jeffrey L. Steele
Assistant Secretary
