PROSPECTUS
4,600,000 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 and domicile 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. THESE ARE HIGHLY SPECULATIVE SECURITIES. AN
INVESTMENT IN THE FUND INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY CREATES CERTAIN RISKS OF
LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER SECURITIES
MARKETS. THESE RISKS ARE DISCUSSED MORE FULLY ON PAGE 22 OF THIS PROSPECTUS, AND
INVESTORS SHOULD READ THIS SECTION IN DETAIL.
(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.
[CAPTION]
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MAXIMUM MAXIMUM PROCEEDS TO
PRICE TO PUBLIC(1) SALES LOAD(1)(2)(3) THE FUND(4)
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Per Share............ $15.00 $.90 $14.10
Total(5)............. $69,000,000 $4,140,000 $64,860,000
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(footnotes on following page)
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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 June 21, 1995.
-------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
C.J. LAWRENCE/DEUTSCHE BANK
SECURITIES CORPORATION
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
-------------------
The date of this Prospectus is June 15, 1995.
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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.
Templeton Investment Management (Singapore) Pte. Ltd. will serve as
investment manager to the Fund.
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 Maximum Price to Public per Share will be reduced to $14.55 and $14.40,
respectively, for purchases in single transactions (as defined herein under
"Underwriting") of between 66,667 and 333,333 Shares, inclusive, and for
purchases in single transactions of 333,334 or more Shares of Common Stock.
See "Underwriting."
(2) 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."
(3) The Investment Manager has agreed to pay Merrill Lynch, Pierce, Fenner &
Smith Incorporated additional amounts. See "Underwriting."
(4) Before deducting expenses payable by the Fund, estimated to be approximately
$460,000, which includes $250,000 to be paid to the Underwriters in partial
reimbursement of their expenses.
(5) The Underwriters have been granted an option, exercisable within 45 days of
the date of this Prospectus, to purchase up to 690,000 additional Shares to
cover over-allotments, if any. If all Shares are purchased, the total
Maximum Price to Public, Maximum Sales Load and Proceeds to the Fund will be
$79,350,000, $4,761,000 and $74,589,000, 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 June 14, 1995, the price on the
Moscow Interbank Currency Exchange for Rubles against the U.S. Dollar was Rbs.
4,881 = U.S. $1.00 as reported in the New York Times on June 15, 1995. The Ruble
has experienced significant depreciation against the U.S. Dollar. For example,
on September 30, 1994, such rate of exchange was Rbs. 2,633= U.S. $1.00.
IN ADDITION TO THE RISKS DESCRIBED ABOVE, THE INVESTMENT POLICIES OF THE
FUND AUTHORIZE CERTAIN INVESTMENT PRACTICES NOT GENERALLY PERMITTED UNDER THE
SECURITIES LAWS OF CERTAIN STATES, INCLUDING ARKANSAS, MINNESOTA AND SOUTH
DAKOTA. IN PARTICULAR, THE FUND IS AUTHORIZED TO INVEST IN MORE THAN TEN PERCENT
OF THE EQUITY SECURITIES OF ANY ONE ISSUER, TO INVEST OVER FIVE PERCENT OF ITS
TOTAL ASSETS IN ANY ONE ISSUER AND TO INVEST OVER FIVE PERCENT OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES.
INVESTMENT IN THE FUND IS SUITABLE ONLY FOR INVESTORS WHO CAN ASSUME THE
RISKS DESCRIBED HEREIN. IN ADDITION, RESIDENTS OF ARKANSAS, MINNESOTA, NEW
MEXICO, OHIO, SOUTH DAKOTA AND WISCONSIN MUST SATISFY THE CONDITIONS SET FORTH
UNDER "CERTAIN INVESTOR SUITABILITY STANDARDS" ON PAGES 54 AND 55.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
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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 and domicile
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 4,600,000 shares of Common Stock
("Shares"), par value $0.01 per Share, at a maximum offering
price of $15.00 per Share. The price will be reduced to
$14.55 and $14.40, respectively, for purchases in single
transactions of between 66,667 and 333,333 Shares,
inclusive, and for purchases in single transactions of
333,334 or more Shares. The Shares are being offered by
underwriters (the "Underwriters") represented by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), A.G. Edwards & Sons, Inc., C.J. Lawrence/Deutsche
Bank Securities Corporation, 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 690,000 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
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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 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 regional conflict and the risk of
war); (c) delays in settling portfolio transactions and risk
of loss arising out of Russia's system of share registration
and custody; (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) the use of derivative instruments, which
may include: forward foreign currency exchange contracts,
currency futures contracts and options thereon, put and call
options on securities, indices and foreign currencies, stock
index futures contracts and options thereon and interest
rate futures contracts and options thereon; (j) higher rates
of inflation (including the risk of social unrest associated
with periods of hyperinflation); (k) controls on foreign
investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits
and dividends, and on the Fund's ability to exchange local
currencies for U.S. dollars; (l) the
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4
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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; (m) the financial condition of Russia
Companies, including large amounts of inter-company debt
which has created a payments crisis on a national scale and
the fact that Russia Companies may be smaller, less seasoned
and newly organized companies; (n) the risk that dividends
will be withheld at the source; (o) dependency on exports
and the corresponding importance of international trade; (p)
the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of
material information about issuers, particularly in Russia;
(q) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or
exorbitant taxation; (r) 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; (s) less extensive
regulation of the securities markets; (t) the risks
associated with the difficulties that may occur in pricing
the Fund's portfolio securities; (u) possible difficulty in
identifying a purchaser of securities held by the Fund due
to the underdeveloped nature of the securities markets; and
(v) the risk of lawsuits arising from restrictive
regulations and practices with respect to foreign investment
in particular industries.
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, including
foreign 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."
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5
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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; (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
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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 rights or improperly dilute its interests. 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 options and futures
transactions with respect to securities and indices, some or
all of which are commonly known as derivatives, and which
may involve the risk of loss in the event of adverse
movements in the value of the underlying instruments.
However, 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 D to this Prospectus.
The Fund may invest up to 20% of its total assets in unrated
debt securities as well as debt securities that are rated in
any category by recognized statistical rating organizations
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. Unrated debt securities in
which the Fund may invest generally involve risks equivalent
to those of lower-rated debt securities. A debt security
rated "D" by Standard & Poor's Corporation means that the
issuer is in payment default.
The operating expense ratio of the Fund can be expected to
be higher than that of investment companies investing in
more established securities markets since the expenses of
the Fund, including management and custodian fees, will
generally be higher than the expenses of such other funds.
See "Fund Expenses."
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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 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. THE FUND IS INTENDED FOR LONG-TERM
INVESTORS AND SHOULD NOT BE CONSIDERED A VEHICLE FOR TRADING
PURPOSES. AN INVESTMENT IN SHARES OF THE FUND SHOULD NOT BE
CONSIDERED A COMPLETE INVESTMENT PROGRAM AND WOULD NOT BE AN
APPROPRIATE INVESTMENT FOR ALL INVESTORS. 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 March 31, 1995, the Templeton
organization managed approximately $43.5 billion in
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assets worldwide. The Investment Manager is an indirect
wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"). As of March 31, 1995, the Franklin Templeton
organization managed over $118 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 $6 billion as of March 31,
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 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. In the event that any of the portfolio managers
of the Investment Manager dies, resigns or otherwise becomes
unable to act on behalf of the Investment Manager, the
Investment Manager believes that it has adequate resources
and personnel to manage the Fund in accordance with its
investment objective and policies.
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
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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................ 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.
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. Chemical Mellon
Shareholder Services, Inc. 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."
</TABLE>
10
<PAGE>
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)...................... 6.0%
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)......................................................... 1.66%
-----
Total Annual Expenses................................ 2.91%***
-----
-----
--------------------------
* 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.
*** The Investment Manager's fee will be reduced 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. 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
- --------- ----------- ---------- ---------
$87 $ 144 $203 $ 361
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 does not reflect offering costs in connection
with the public offering, estimated to be approximately $460,000, which will be
charged against the proceeds of the offering. The 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 and domicile 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 $64,400,000 (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 June 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 so that the Fund would no longer be investing
primarily in the securities of Russia Companies and could potentially invest
anywhere in the world (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. A change in the investment policies
of the Fund would require the approval of a majority of the Fund's outstanding
voting securities. See "Investment Objective and Policies." A liquidation could
only be accomplished by the affirmative vote of two-thirds of the shareholders
unless accompanied by an affirmative vote of two-thirds of the total number of
Directors, in which case the affirmative vote of a majority of the outstanding
Shares would be required. INVESTORS WHO DO NOT WISH TO MAINTAIN THEIR INVESTMENT
IN THE FUND UNDER THE FUND'S CHANGED INVESTMENT POLICIES WOULD ONLY BE ABLE TO
WITHDRAW FROM SUCH INVESTMENT BY SELLING THEIR SHARES ON THE OPEN MARKET. THE
PROCEEDS OF SUCH SALE MAY BE LESS THAN THE NET ASSET VALUE OF THE SHARES AND/OR
THE SHAREHOLDER'S INITIAL INVESTMENT, CAUSING THE SHAREHOLDER TO SUFFER A LOSS.
IF THE DECISION WERE MADE TO LIQUIDATE THE FUND UNDER THE ABOVE-DESCRIBED
CIRCUMSTANCES, THE PROCEEDS TO INVESTORS MAY BE LESS THAN THEIR INITIAL
INVESTMENT, DEPENDING ON NET ASSET VALUE AT THE TIME OF THE LIQUIDATION. During
this initial investment period ending June 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 June 1, 1997.
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<PAGE>
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 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 less volatile. 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, the parliament succeeded early in the year in passing a 1995
budget, which provides for a decreased budget deficit and financing of the
deficit through non-inflationary means, such as borrowing from 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%. Inflation for 1994 is estimated to have been approximately 320%. The
monthly inflation rates for December, 1994 and January, 1995 were 16.4% and
17.8%, respectively. The monthly rates have dropped, however, and were 8.5% and
7.9%, respectively, in April and May, 1995. Estimates of inflation rates for
1995 and 1996 vary widely. In addition, reported unemployment at the end of 1994
has risen to 13.5% by International Labor Organization criteria, and is expected
to increase further 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 21% in real terms in 1994 in comparison with 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.
Privatization Program. In October 1992, Russia launched the largest mass
privatization program in history. Privatization vouchers were distributed to
approximately 148 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
13
<PAGE>
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, notably investment tenders, commercial tenders, cash auctions and
specialized auctions for the sale of shares. During the first phase, 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 Russian enterprises opted for the second alternative,
which allowed 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 Russian enterprises chose the third alternative, in
which certain employees of small enterprises were 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 were met. The sale of shares by
means of closed subscriptions to employees were performed by most medium- and
large- scale enterprises shortly after the transformation of those enterprises
into open joint stock companies.
According to a Presidential Decree dated July 1, 1992, this transformation
to open joint stock companies took place by October 1, 1992. Subsequent to the
closed subscriptions, the second phase of privatization commenced and 29% of the
remaining shares of each of these enterprises were sold by voucher auctions to
the public. Foreign investors were able to participate by purchasing vouchers
and bidding at the auctions. Shares were distributed after each auction
proportionately based on the number of vouchers offered. Vouchers could also
have been used by past and present employees to acquire shares on preferential
terms, or to invest in new special purpose Russian Voucher Funds established to
provide diversification and on-going investment management. Voucher prices
fluctuated from less than $5 in 1993 to $24 in June 1994. The voucher
privatization program, and consequently the voucher auctions, ended on June 30,
1994. It is estimated that 144.5 million vouchers were used to transform more
than 40 million Russians into shareholders.
The third phase of privatization, which has not yet been completed, consists
of investment tenders, commercial tenders, specialized auctions for the sale of
shares, and cash auctions. Following a Presidential Decree dated July 22, 1994,
the State Property Management Committee and Federal Property Fund began to
conduct investment tenders throughout Russia. The investment tenders are partly
intended to attract foreign investment and foreign expertise into the Russian
economy. An investment tender gives a single investor an opportunity to acquire
a package of shares. The investor must submit a "sealed" proposal as to the
amount of investment the investor is willing to make, subject to a minimum set
forth in the company's investment program, which is part of its privatization
plan. The person making the highest bid on the day bids are revealed is awarded
the tender and has the right to acquire the shares. Private sector foreign
companies are able to participate in both tenders and auctions 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 by
foreign investors.
A commercial tender is a tender in which the winner 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 sale of shares at cash auctions have not to date
been adopted. Regulations governing the procedure for holding specialized
auctions for the sale of shares on the other hand were adopted by the State
Property Management Committee on October 6, 1994. Also, on April 28, 1995, the
Russian government passed Resolution No. 438 governing the holding of
interregional and all-Russian specialized auctions. Specialized auctions for the
sale of shares are open offers in which
14
<PAGE>
investors participate by submitting an application specifying the total sum to
be paid and the number of shares to be acquired.
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 and specialized
auctions will allow more supplementary share issues, which will present new
opportunities for investors to acquire shares in privatized companies for cash.
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 October, 1994, the ten largest companies had a total
market capitalization of approximately $16.5 billion.
Immediately after the launch of the privatization program, a secondary
market for shares and vouchers emerged. Since the vouchers ceased to be valid on
June 30, 1994, the secondary market has focused on trading shares and bonds.
Although developing rapidly, even the largest of Russia's stock exchanges remain
in a relatively undeveloped 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.
Currently no central clearing and settlement capabilities exist although
attempts are currently being made to establish the first of such systems.
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.
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.
Rubles may not be exported from Russia and holdings of Rubles in bank
accounts in Russia by non-Russian residents are restricted. For the purposes of
making investments and receiving income on investments, a foreign investor is
only entitled to make payments through a type of Ruble account known as an
I-type account. The types of payments which may be credited to and the use of
Rubles already held in such accounts are heavily restricted. In opening an
I-type Ruble account, a non-resident is required to register with the Russian
tax authorities. This provides a mechanism for the tax authorities to use the
I-type account in order to withhold taxes and other duties payable by the I-type
account holder. Sums converted into foreign currency from an I-type account may
be repatriated out of
15
<PAGE>
Russia in the circumstances specified in applicable law. See "Risk Factors and
Special Considerations--Investment and Repatriation Restrictions."
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 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
16
<PAGE>
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 investments will include investments in companies which, while
falling within the definition of Russia Companies, as stated above, 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 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 comparatively limited,
except with respect to Vnesheconombank bonds and certain securities issued by
the Ministry of Finance.
Included among the issuers of Russian debt securities in which the Fund may
invest are entities organized and operated solely for the purpose of
restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments and the
issuance by that entity of one or more classes of securities ("Structured
Investments") backed by, or representing interests in, the underlying
instruments. The cash flow on the
17
<PAGE>
underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions. The
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying instruments. Because Structured
Investments of the type in which the Fund anticipates investing typically
involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments. Although the Fund's
purchase of subordinated Structured Investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leverage for purposes of the limitations placed on the
extent of the Fund's assets that may be used for borrowing activities. See
"Additional Investment Practices--Borrowing."
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investment in
these Structured Investments may be limited by the restrictions contained in the
1940 Act described below under "Additional Investment Practices-- Investment
Companies." Structured Investments are typically sold in private placement
transactions. There currently is no active trading market for Structured
Investments.
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
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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 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. The Fund is authorized to engage in
certain transactions involving derivative instruments which may involve special
risks. See "Hedging Transactions and Use of Derivative Instruments" and "Debt
Securities--High Yield, High Risk Securities" below.
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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 become
less volatile since the parliamentary elections and passage of a new
constitution in December 1993, there can be no assurances that the political
situation will not deteriorate. 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 risk exists that armed conflict in
Chechnya will continue, 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,
particularly in terms of foreign ownership of Russian companies. In this regard,
certain Russian banks have recently instituted an initiative to curtail sales of
state-owned companies by the government to foreign investors at prices below
their fair values.
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
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central bank at lower than the market interest rates, 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 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 technically insolvent due to such non-payment and as a
result of working capital deficits. 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
27% drop in the ruble on October 11, 1994. Political consequences of 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 adopted a budget
for 1995 that calls for a reduction of the budget deficit. The budget requires
that the government finance the deficit through non-inflationary means, such as
borrowing from the International Monetary Fund ("IMF"). In this regard, on April
11, 1995, the IMF approved a $6.8 billion standby loan to Russia which provides
for monthly disbursements subject to certain conditions. 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 obtain
disbursements under the IMF loan, that these measures 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, such as the
expense of rebuilding Russia's infrastructure.
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.
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 large 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.
Because of the current limited opportunities for investment in Russian
securities by the Fund as described above, there can be no assurance that the
Fund will have 65% of its assets invested in the securities of Russia Companies
by June 1, 1997. See "Use of Proceeds."
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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 always been followed by
these enterprises. Because of this lack of independence of registrars,
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.
In light of the risks described above, the Board of Directors of the Fund
has approved certain procedures concerning the Fund's investments. Among these
procedures is a requirement that the Fund will not invest in the securities of a
Russia Company unless that issuer's registrar has entered into a contract with
the Fund's sub-custodian containing certain protective conditions, including,
among other things, the sub-custodian's right to conduct regular share
confirmations on behalf of the Fund. This requirement will likely have the
effect of precluding investments in certain Russia Companies that the Fund would
otherwise make. In accordance with procedures adopted by the Fund, the Fund's
Russian sub-custodian has undertaken to provide certain information on a
periodic basis to the Board of Directors concerning the share registration and
custody arrangements in Russia. If the Board of Directors determines that, over
the long term, investment in the securities of Russia Companies is no longer
consistent with the best interests of the Fund's shareholders, the Fund intends
to call a shareholder meeting for the purposes of considering whether to modify
the Fund's investment policies or to liquidate the Fund's assets and distribute
the proceeds to shareholders.
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
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measured in U.S. dollars, may suffer significant declines due to disruptions in
the ruble market, or be otherwise adversely affected by exchange control
regulations. The ruble has experienced significant devaluations relative to the
U.S. dollar. For example, during the period September 1, 1994 to June 13, 1995,
the exchange rate ranged from a low of Rbs. 2,156: $1 to a high of Rbs. 5,130:
$1. Further, such value experienced a one-day decline of 27% 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."
Currency devaluations may occur without warning and are beyond the control
of the Investment Manager. To the extent such instruments are available on terms
acceptable to the Fund, 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. 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 1994 was estimated at 320%. The monthly inflation
rates for December, 1994 and January, 1995 were 16.4% and 17.8%, respectively.
The monthly rates have dropped, however, and were 8.5% and 7.9% respectively, in
April and May, 1995. Estimates of inflation rates for 1995 and 1996 vary widely.
Nevertheless, 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 guarantees the right of foreign investors to transfer abroad income
received on investments such as profits, dividends and interest payments. This
right is subject to settlement of all applicable taxes and duties. However, more
recent legislation governing currency regulation and control guarantees the
right to export interest, dividends and other income on investments, but does
not expressly permit the repatriation of capital from the realization of
investments. Current practice is to
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recognize the right to repatriation of capital. Authorities currently do not
attempt to restrict repatriation beyond the extent of the earlier law. No
guarantee can be made, however, that amounts representing realization of capital
or income 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 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. Due
to taxes paid in advance in the context of high inflation, effective tax rates
are significantly higher than statutory rates. 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.
HEDGING TRANSACTIONS AND USE OF DERIVATIVE INSTRUMENTS
The Fund is authorized to engage in certain transactions involving the use
of derivative instruments, including forward foreign currency exchange
contracts, currency futures contracts and options thereon, put and call options
on securities, indices and foreign currencies, stock index futures contracts and
options thereon and interest rate futures contracts and options thereon.
The Fund may seek to protect the value of some or all of its portfolio
holdings against currency risks by engaging in hedging transactions. 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
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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.
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 improve their competitive position
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 fair market 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.
The transformation of medium- and large-scale state enterprises into open
joint stock companies (i.e., corporatization) 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 delegated to
individuals at the enterprise concerned rather than being strictly controlled 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.
The privatization process has also resulted in certain disputes between
management and shareholders, particularly foreign shareholders, of recently
privatized companies. For example, management of certain companies has resisted
recognizing purchases of equity interests by foreign investors. In
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addition, incidents have been reported where foreign shareholders' ownership
interests have been diluted by management through the issuance of new securities
to limited groups of existing shareholders.
LIABILITY OF INVESTORS IN JOINT STOCK COMPANIES
The new Russian Civil Code generally provides that shareholders in a Russian
joint stock company are not liable for the obligations of the joint stock
company, and only bear the risk of loss of their investment. However, the Civil
Code provides that where one company has the opportunity to determine decisions
taken by another company (a "subsidiary"), whether as a result of its ownership
interest, under the terms of a contract between the companies, or in any other
way, then, if the first company gives obligatory directions to the second
company, it bears joint responsibility for transactions concluded by the latter
in fulfilling such directions. In addition, where a subsidiary becomes insolvent
or bankrupt as a result of the fault of the parent company then the parent
company is liable for the subsidiary's debts in so far as the subsidiary does
not have enough funds to cover the debts.
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. For example, certain regulations of the State
Property Management Committee concerning depositories and shareholder registers,
which are generally applied as a matter of practice in Russia, were not properly
registered with the Ministry of Justice which as a matter of law should render
them invalid.
Legislation in Russia is in a state of development and is subject to
frequent amendment. Change is anticipated in securities regulation in the near
future due to adoption by the State Duma of a new law regulating the securities
market, which is yet to be approved by the Federation Council (the upper chamber
of the Russian Parliament) and the President. Other important legislation,
including a draft law on joint stock companies and a draft of Part II of the new
Civil Code, are scheduled for consideration by the State Duma in the course of
this year. New subordinate regulations on the securities market are also
anticipated.
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ENVIRONMENTAL RISKS
The lack of environmental controls in Russia has led to widespread pollution
of the air, ground and water resources. Also contributing to environmental
pollution are industrial infrastructure problems, particularly oil and gas
pipeline leaks. 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. The extent of the cost, if any, for the abatement of environmental
hazards by an issuer will not be determinable at the time the Fund is
considering an investment.
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 and North America. In an effort to root out crime,
President Yeltsin has 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.
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. Under certain circumstances, this lack of liquidity
may impede the Fund's ability to achieve its investment objective of long-term
capital appreciation. 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.
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OPERATING EXPENSES
The operating expense ratio of the Fund can be expected to be higher than
that of investment companies investing in more established securities markets
since the expenses of the Fund, including management and custodian fees, will
generally be higher than the expenses of such other funds. See "Fund Expenses."
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 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
unrated or low-rated. 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. 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 low-rated 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." The unrated
debt securities in which the Fund may invest will generally involve risks
equivalent to those of low-rated debt securities. 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
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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 unrated and low-rated 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 unrated or low-rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of unrated or 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 unrated or 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 and comparable unrated 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 and unrated
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 or unrated 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 or unrated
debt securities defaults, the Fund may incur additional expenses in seeking
recovery.
The Fund may also invest in Structured Investments which involve certain
risks. See "Investment Objective and Policies." In addition to the credit risk
of the issuer of the underlying security and the normal risks of price changes
in response to underlying interest rates, the redemption amount of a Structured
Investment may decrease as a result of changes in the price of the underlying
instrument. Further, in the case of certain Structured Investments, the coupon
and/or dividend may be reduced to zero, and any further declines in the value of
the underlying instrument may then reduce the redemption amount payable on
maturity. Finally, the price of Structured Investments may be more volatile than
the price of the underlying instrument. The Fund is permitted to invest in
classes of Structured Investments which are subordinated to the right of payment
of another class, which typically present greater risks than unsubordinated
Structured Investments. Structured Investments are typically sold in private
placement transactions and currently have no active trading market.
BORROWING
The Fund may borrow for temporary purposes and in connection with
repurchases of its Shares or tender offers or to pay dividends or distributions
required for tax purposes. See "Additional Investment Practices--Borrowing."
Money borrowed will be subject to interest and other costs, which may include
commitment fees and/or the cost of maintaining minimum balances.
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
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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 the 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) and to enhance total return, which may be deemed a
form of speculation. 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." Cross-hedging
involving the use of rubles involves special risks. The ruble has a limited
trading history and is particularly volatile, making any anticipation of its
movement difficult and increasing the risk of loss. See "Risk Factors and
Special Considerations--Foreign Currency and Exchange Rates." 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 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.
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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
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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.
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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 a representative office in Moscow, located at
Leninsky Prospect 113/1, E-516 Park Place, Moscow, Russia, which currently has a
staff of two securities analysts. The Investment Manager expects this office to
provide it with a valuable resource for
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research and securities analysis with regard to securities of Russia Companies.
Dr. J. Mark 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 totalling $6 billion as of March 31, 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 March 31, 1995, the
Templeton organization managed approximately $43.5 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 March 31, 1995, the
Franklin Templeton organization managed over $118 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 bachelors and masters 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, and Mr. Tek Khoan Ong, Portfolio
Manager, will exercise secondary 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. Mr. Ong has
worked as a product manager for Franklin Institutional Services Corporation
since 1993. Mr. Ong previously served as a senior review officer for five years
with Singapore's Central Bank, the Monetary Authority of Singapore. He also
interned with the San Francisco office of the Government of Singapore Investment
Corporation and was a teaching assistant at the University of Pennsylvania's
Wharton School, from which he received a masters of business administration
degree. Because securities markets in Russia are relatively new, the portfolio
managers do not have significant experience in investing in equity securities of
Russia Companies. However, it is expected that the portfolio managers will make
use of the Moscow office and will adhere to the Templeton organization
investment principles, which will include frequent on-site visits to Russia
Companies.
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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.
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
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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 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.
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 Investment Manager may retain the services of consultants and, with the
approval of the shareholders and the Board of Directors of the Fund, including a
majority of the Fund's "non-interested" Directors, sub-investment advisers at no
additional cost to the Fund when the Investment Manager determines it to be
appropriate.
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
36
<PAGE>
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, 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.
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>
CHARLES B. JOHNSON*............ President, chief executive officer, and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; chairman of the board and
San Mateo, California director of Franklin Advisers, Inc. and Franklin
Chairman of the Board and Templeton Distributors, Inc.; director of Franklin
Vice President Administrative Services, Inc., General Host Corporation
and 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.
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 of Franklin Templeton Distributors, Inc.;
Director executive vice president of Franklin Advisers, Inc.;
director of 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.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
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.; director, president and chief executive
officer of Templeton Global Investors, Inc.; president
or vice president and director or trustee of the
Templeton Funds; accountant, Arthur Andersen & Company
(1982-1983); and a member of the International Society
of Financial Analysts and the American Institute of
Certified Public Accountants.
NICHOLAS F. BRADY*............. Chairman of Templeton Emerging Markets Investment Trust
102 East Dover St. PLC; chairman of Templeton Latin American Investment
Easton, Maryland Trust PLC; A director or trustee of other Templeton
Director Funds; chairman and president of Darby Overseas
Investments, Ltd. (an investment firm) (1994-present);
director of the H. J. Heinz Company, Amerada Hess
Corporation, Capital Cities/ABC, Inc. and the Christiana
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; formerly 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; formerly
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 The Federal Reserve
Bank of Atlanta (1958-1965); and a director of various
business and nonprofit organizations.
JOHN Wm. GALBRAITH............. President of Galbraith Properties, Inc. (personal
360 Central Avenue investment company); director of Gulfwest Banks, Inc.
Suite 1300 (bank holding company) (1995-present) and Mercantile
St. Petersburg, Florida Bank (1991- present); chairman, Florida International
Director Museum, Inc. (1992-present); trustee, Eckerd College
(1983-present); vice chairman of Templeton, Galbraith &
Hansberger Ltd. (1986-1992); chairman of Templeton Funds
Management, Inc. (1974-1991); and a director or trustee
of other Templeton Funds.
ANDREW H. HINES, JR............ Consultant for the Triangle Consulting Group; chairman of
150 2nd Avenue N. the board and chief executive officer of Florida
St. Petersburg, Florida Progress Corporation (1982-February 1990) and director
Director of various 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.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
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 Fund America Enterprises Holdings,
Bethesda, Maryland Inc., Lockheed Marietta Corporation, MCI Communications
Director Corporation, Fusion Systems Corporation, Infovest
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................. Portfolio manager of various Templeton advisory
Two Exchange Square affiliates; managing director of Templeton Investment
Hong Kong Management (Hong Kong) Limited; president of
President 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).
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; formerly, investment
administrator with Roy West Trust Corporation (Bahamas)
Limited (1984-1985).
SAMUEL J. FORESTER, JR......... President of the Templeton Global Bond Managers Division
500 East Broward Blvd. of Templeton Investment Counsel, Inc.; president or vice
Fort Lauderdale, Florida president of other Templeton Funds; formerly, founder
Vice President and partner 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
Fort Lauderdale, Florida vice president of Franklin Templeton Distributors, Inc.;
Vice President formerly, vice president and controller of the 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.,
Fort Lauderdale, Florida Templeton Global Investors, Inc., and Templeton Funds
Treasurer Trust Company; formerly, senior tax manager of Ernst &
Young (certified public accountants) (1977-1989).
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
THOMAS M. MISTELE.............. Senior vice president of Templeton Global Investors, Inc.;
700 Central Avenue president of Templeton Funds Trust Company; vice
St. Petersburg, Florida president of Franklin Templeton Distributors, Inc.;
Secretary secretary of the Templeton Funds; formerly, attorney,
Dechert 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 formerly, 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. Johnson, 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, Galbraith, Hines, Ashton, Fortunato and
Macklin and Mrs. Krahmer are Directors who are not "interested persons" of the
Fund.
Each fund in the Templeton Family of Funds pays its independent
directors/trustees and Mr. Brady an annual retainer and/or fees for attendance
at board and committee meetings, the amount of which is based on the level of
assets in the fund. Accordingly, the Fund will pay the Independent Directors and
Mr. Brady an annual retainer of $1,000 and a fee of $100 per meeting attended of
the Board and its committees. Directors are reimbursed for any expenses incurred
in attending meetings.
The Fund has a standing Audit Committee presently consisting of Messrs.
Clarke, 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. Macklin and Hines, both of whom are members of the Board
of Directors and non-interested persons of the Fund. The Nominating Committee 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. 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.
40
<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.
41
<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 initially be valued at cost.
Subsequently, the Board will review, at least quarterly, the valuation of each
investment in the light of reports prepared by the Business Manager. If the
Board determines 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 the investment, the investment
will be revalued. 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 valuation of
direct investments. Also, pursuant to the requirements of the 1940 Act, the
Fund's assets will be subject to an independent audit on an annual basis.
However, given the high number of illiquid investments, including direct
investments, which are likely to be made by the Fund, valuation of the Fund's
portfolio will involve an element of judgment. See "Risk Factors and Special
Considerations--Illiquid Securities" and "--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
Chemical Mellon Shareholder Services (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 Chemical Mellon
42
<PAGE>
Shareholder Services 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
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 Chemical Mellon Shareholder Services, Dividend Reinvestment Services,
P.O. Box 750, Pittsburgh, PA 15230.
43
<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
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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
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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
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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.
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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
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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 Coopers & Lybrand.
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.
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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
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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. 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.
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 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
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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., C.J. Lawrence/Deutsche
Bank Securities Corporation, 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.
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................ 752,000
A.G. Edwards & Sons, Inc. ......................................... 752,000
C.J. Lawrence/Deutsche Bank Securities Corporation................. 752,000
Nomura Securities International, Inc. ............................. 752,000
Prudential Securities Incorporated................................. 752,000
PaineWebber Incorporated........................................... 80,000
Advest, Inc........................................................ 40,000
Robert W. Baird & Co. Incorporated................................. 40,000
J.C. Bradford & Co................................................. 40,000
Cowen & Company.................................................... 40,000
Fahnestock & Co. Inc............................................... 40,000
Gruntal & Co., Incorporated........................................ 40,000
Janney Montgomery Scott Inc........................................ 40,000
Kemper Securities, Inc............................................. 40,000
Legg Mason Wood Walker, Incorporated............................... 40,000
McDonald & Company Securities, Inc................................. 40,000
Morgan Keegan & Company, Inc....................................... 40,000
Piper Jaffray Inc.................................................. 40,000
Principal Financial Securities, Inc................................ 40,000
Rauscher Pierce Refsnes, Inc....................................... 40,000
Raymond James & Associates, Inc.................................... 40,000
The Robinson-Humphrey Company, Inc................................. 40,000
Sutro & Co. Incorporated........................................... 40,000
Tucker Anthony Incorporated........................................ 40,000
Wheat, First Securities, Inc....................................... 40,000
---------
Total................................................... 4,600,000
---------
---------
52
<PAGE>
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.
The Fund has been advised by the Representatives that the Underwriters
propose to offer the Shares of Common Stock offered hereby initially at the
offering price set forth on the cover page of this Prospectus, except that, due
to sales load reductions, the price will be reduced to $14.55 for purchases in
single transactions (as defined below) of between 66,667 and 333,333 Shares,
inclusive, and to $14.40 for purchases in single transactions of 333,334 or more
Shares. The Fund has also been advised by the Representatives that they propose
to offer Shares to certain dealers at the initial offering price set forth in
the preceding sentence less a concession not in excess of $.65 per Share ($.30
per Share for purchases in single transactions of between 66,667 and 333,333
Shares and $.20 for purchases in single transactions of 333,334 or more Shares).
The Underwriters may allow, and such dealers may reallow, a discount on sales to
certain other dealers not in excess of $.10 per Share. The Investment Manager
has agreed to pay Merrill Lynch a fee for acting as lead managing underwriter in
an amount equal to .3% of the value of the Shares sold by such firm. An
affiliate of the Investment Manager may purchase Shares in the offering in
connection with employee benefit plans or employee compensation arrangements.
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 June 21, 1995. The maximum sales load of
$.90 per Share is equal to 6% of the initial offering price.
The term "single transaction," as used in this Prospectus, refers to a
single purchase by an individual or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts, by an individual, his
parents, spouse, siblings and children purchasing Shares for his or their own
account and to single transactions by a trustee, money manager, or other
fiduciary purchasing Shares for one or more trust estates, one or more fiduciary
accounts and/or his own account. The term "single transaction" also includes
purchases by any "company," as that term is defined in the 1940 Act, its
directors, senior executive officers and controlling shareholders; provided,
however, that it does not include purchases by any such company which has not
been in existence for at least six months or which has no purpose other than the
purchase of Shares of the Fund or Shares of other registered investment
companies at a discount; and provided further, that it does not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company or non-investment advisory customers of a bank.
The Fund has granted to the Underwriters an option, exercisable for 45 days
after the date hereof, to purchase up to an aggregate of 690,000 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.
53
<PAGE>
Prior to June 19, 1995, the Shares will not be offered or sold in the United
Kingdom, by means of any document, other than to persons whose ordinary business
it is to buy or sell shares or debentures, whether as principal or agent or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act, 1985. On or after June 19, 1995, the Shares will not be
offered or sold in the United Kingdom other than to persons whose ordinary
activities involve the acquiring, holding, managing or disposing of investments
(as principal or agent) for the purposes of their business or in circumstances
which do not constitute an offer to the public within the meaning of the Public
Offers of Securities Regulations 1995. Any document issued in connection with
the issue or sale of the Shares, including the Prospectus, will be issued or
passed on only to a person who is of a kind described in Article 9(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988
or is a person to whom the document may otherwise lawfully be issued or passed
on.
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 has agreed not to offer or sell any additional Shares for a period
of 180 days after the date of the Purchase Agreement without the prior written
consent of the Underwriters, except for the sale of Shares to the Underwriters
pursuant to the Purchase Agreement and Shares issued in reinvestment of
dividends and distributions.
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 .2% of the Fund's average weekly net
assets, subject to a monthly minimum fee of $12,500.
CERTAIN INVESTOR SUITABILITY STANDARDS
Investment in the Fund is suitable only for investors who can assume the
risks described herein. Residents of certain states who purchase Shares in the
Offering made by this Prospectus must satisfy specific conditions. Residents of
Arkansas, New Mexico, Ohio and Wisconsin must sign a statement setting forth
that the conditions indicated below relating to his or her state have been met
before purchasing Shares in this Offering.
Arkansas. Residents of Arkansas are required to have either (a) a net worth
(exclusive of home, home furnishings and personal automobiles) of not less than
$60,000 and a current annual income of not less than $60,000 or (b) a net worth
(computed as described above) of not less than $225,000.
Minnesota. Residents of Minnesota are required to have either (a) a net
worth (exclusive of home, home furnishings and personal automobiles) of not less
than $45,000 and a current annual income of not less than $45,000 or (b) a net
worth (computed as described above) of not less than $150,000.
New Mexico. Residents of New Mexico are required to have either (a) a net
worth (exclusive of home, home furnishings and personal automobiles) of not less
than $45,000 and a current annual
54
<PAGE>
income of not less than $45,000 or (b) a net worth (computed as described above)
of not less than $150,000.
Ohio. Residents of Ohio are required to have a net worth (exclusive of home,
home furnishings and personal automobiles) of not less than $45,000 and a
current annual income of not less than $45,000.
South Dakota. Residents of South Dakota are required to (i) have made a
prior investment in securities and (ii) have either (a) a net worth (exclusive
of home, home furnishings and personal automobiles) of not less than $45,000 and
a current annual income of not less than $45,000 or (b) a net worth (computed as
described above) of not less than $150,000.
Wisconsin. Residents of Wisconsin are required to have either (a) a net
worth (exclusive of home, home furnishings and personal automobiles) of not less
than $45,000 and a current annual income of not less than $45,000, or (b) a net
worth (computed as described above) of not less than $150,000.
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. Chemical Mellon Shareholder Services is the
transfer and dividend paying agent and registrar for the Fund. Its address is 85
Challenger Road, Ridgefield Park, N.J. 07660.
PUBLIC ACCOUNTANTS
The statement of assets and liabilities included in this Prospectus has been
examined by McGladrey & Pullen, LLP, 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, LLP, 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 and Egorov, Pughinsky, Afanasiev &
Associates, Moscow, Russia and Philadelphia, Pennsylvania.
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.
55
<PAGE>
MCGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of
TEMPLETON RUSSIA FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Templeton Russia Fund, Inc. as of June 14, 1995. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Templeton Russia Fund, Inc.
as of June 14, 1995, in conformity with generally accepted accounting
principles.
McGladrey & Pullen, LLP
New York, New York,
June 14, 1995
56
<PAGE>
TEMPLETON RUSSIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 14, 1995
ASSETS
Cash............................................................... $100,011
Deferred organization expenses (Note 3)............................ 107,500
--------
Total assets................................................... $207,511
--------
LIABILITIES
Organization expenses payable...................................... $107,500
Commitments and contingencies (Note 3)............................. --
--------
$107,500
--------
NET ASSETS
Net assets applicable to 7,093 shares of common stock, $0.01
par value; authorized 100,000,000 shares......................... $100,011
--------
--------
Net Asset Value Per Share............................................ $ 14.10
--------
--------
- ------------
NOTES:
(1) The Fund was incorporated on September 30, 1994, and is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund has had no operations to date other than
matters relating to its organization and registration and the sale and
issuance of 7,093 shares of its common stock to Templeton Global Investors,
Inc., its Business Manager, on June 14, 1995. The books and records of the
Fund will be maintained in U.S. Dollars.
(2) The Investment Management Agreement, the Business Management Agreement, and
the Sub-Administrative Agreement are described elsewhere in the Prospectus.
(3) Organizational expenses incurred by the Fund, estimated at $107,500, will be
deferred and amortized ratably over a five year period. Offering costs in
connection with the public offering, in the amount disclosed in the
prospectus, will be charged against the proceeds of the offering.
57
<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 million square 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 148.2 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 1993, there were 548 educational establishments holding higher-education
status with 2.5 million students and, as of 1992, there were 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:
Higher Education................................................... 17.9%
General or Special Secondary Education............................. 63.6%
Secondary Education Not Completed.................................. 18.5%
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993 (1994).
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 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 partly 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 marked the
downfall of communist power in the U.S.S.R. The republics each declared
independence
A-1
<PAGE>
from 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 less volatile although elections for the newly created State Duma
showed sweeping gains for the right wing Liberal Democrat party led by the
nationalist Vladimir Zhirinovsky. Presidential elections are currently scheduled
for June 12, 1996 and elections for the State Duma are due around December 1995.
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 regional units including 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.
In the fall of 1994, civil war began with the Northern Caucasian ethnic
republic of Chechnya. The Chechen president had declared independence from the
Russian Federation in 1991. In August 1994, fighting began between Chechen
supporters and opposition groups. After failing to resolve the crisis by
political means, Russian forces entered Chechnya in December, 1994. While
fighting on a significant scale is still continuing, by the end of January,
1995, Russian forces had gained control of most of the republic, including the
capital city of Grozny. The civil war has weakened confidence domestically and
internationally in Mr. Yeltsin and the reformist government.
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 2,720,000 soldiers, including 1,500,000
conscripts. The current military policy calls for decreasing the armed forces to
approximately 1.5 million men and increasing the quality of equipment.
A-2
<PAGE>
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, and currently is seeking to be accepted as a
contracting party to GATT. In 1994, Russia applied for observer status in the
Paris Club.
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 removed.
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 4.7% 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 18% of gross
domestic product. The 1993 budget had an official deficit of 4.9% of gross
domestic product, although certain commentators estimate that the actual outturn
for the 1993 budget was a deficit of approximately 10% of gross domestic
product. The 1994 budget had an official deficit of 9.9% of gross domestic
product, although certain commentators estimate that actual outturn for the 1994
budget was a deficit of approximately 11% of gross domestic product. The 1995
budget, passed by the State Duma in January 1995, calls for a reduction of the
deficit and the financing of the deficit through non-inflationary means, such as
borrowing from the International Monetary Fund.
A-3
<PAGE>
The following chart shows official 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 1994
----- ----- ------- --------- ---------------
<S> <C> <C> <C> <C> <C>
TOTAL INCOME............................... 159.5 310.0 5,327.6 49,700 177,400
Includes:
Income Tax................................. N/A 91.9 1,566.8 10,000.0 40,000
VAT........................................ N/A N/A 1,998.9 11,271.2 37,300
Personal Income Tax........................ N/A 41.1 431.3 4,383.2 17,500
Excise Tax................................. N/A N/A 211.5 1,776.6 7,400
Foreign Activity Income.................... N/A 7.8 467.4 2,346.7 19,200
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 57,700.0 234,800
Includes:
Economic Projects.......................... N/A 129.9 2,038.7 16,134.7 63,400
Social and Cultural Projects............... N/A 103.1 1,383.1 14,297.0 55,300
Defense.................................... N/A N/A 855.3 7,210.0 28,000
Foreign Economic Operations................ N/A N/A 416.7 2,764.3 5,000
Law Enforcement and Government
Administration Organs.................... N/A 13.3 301.1 4,200.0 18,500
Difference between Revenue and Expenses.... 8.5 (37.6) (641.9) (8,000) (62,600)(2)
As Percentage of Gross Domestic Product.... 1.3 2.9 4.7 4.9 9.9
</TABLE>
- ------------
(1) This tax generates funds for new exploration.
(2) Net of credit and currency operations of 3.4 million rubles as of January 1,
1995.
N/A = Information not available.
Sources: Goskomstat, Russian Federation in 1992, Statistical Yearbook (1993);
Goskomstat, The Russian Federation in Figures, 1993 (1994); Goskomstat,
Russian Socio-Economic Conditions, January-September, 1994 (1994)
(preprint); Goskomstat, Russian Socio-Economic Conditions, January 1995
(1995) (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, and recent reports have
included figures for GDP as well as NMP. 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).
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<PAGE>
The GDP of Russia has fallen in recent years, in both the sectors for goods
and services. Since 1993, a structural shift in the composition of GDP has
occurred. The share of goods produced (industry, agriculture, and construction)
in relation to total GDP has fallen from 48.8% in 1993 to 43.5% in 1994, while
the share of services in relation to GDP has increased from 42.2% in 1993 to 50%
in 1994. The following chart sets forth the GDP of Russia and the percentage
change from the prior year's GDP.
GROSS DOMESTIC PRODUCT
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
GDP*......................................... 644.0 1,300.1 18,063.0 162,311.3 630,000
Percent from prior year**.................... -- 87 81 88 85
Goods*....................................... 473.3 1,055.8 10,518.3 79,157.2 274,050
Percent from prior year**.................... -- -- 79 87 80
Services*.................................... 126.1 193.2 5,886.2 68,532.1 315,000
Percent from prior year**.................... -- -- 84 91 90.5
</TABLE>
- ------------
* In actual prices (billion rubles).
** In comparable constant prices (rubles).
Sources: Goskomstat, The Russian Federation in Figures, 1992 (1993); Goskomstat,
The Russian Federation in Figures, 1993 (1994); Goskomstat, Russian
Socio-Economic Conditions in 1994 (1995).
The following table sets forth Russia's net material product by sector.
PRODUCTION OF NET MATERIAL PRODUCT BY SECTOR
(IN ACTUAL PRICES)
(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 1994
---------------------- ---------------------- ----------------------
IN BILLIONS IN IN BILLIONS IN IN BILLIONS IN
OF RUBLES PERCENT OF RUBLES PERCENT OF RUBLES PERCENT
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Material Product.................. 14,652.0 100.0 119,844.2 100.0 420,200 100.0
Industry............................ 7,594.9 51.8 53,356.3 44.5 N/A N/A
Agriculture......................... 1,428.6 9.8 12,015.4 10.0 N/A N/A
Construction........................ 1,242.0 8.5 13,748.1 11.5 N/A N/A
Other (Transportation,
Communications, Trade, Technical
Supplies, Harvesting, etc.)....... 4,386.5 29.9 40,724.4 34.0 N/A N/A
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993 (1994); Goskomstat,
Major Indices of Socio-Economic Conditions and State of Reforms in the Russian
Federation in 1994 (1995) (preprint).
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 currency 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 official Central Bank exchange rate determined by
reference to the market. Commercial banks are free to set their own exchange
rates by reference to 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
EXCHANGE RATE
RUBLES: U.S. DOLLARS
--------------------
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
December 30, 1994........................................ Rbs. 3,550: $1
March 31, 1995........................................... Rbs. 4,897: $1
May 30, 1995............................................. Rbs. 4,995: $1
- ------------
Sources: European Bank for Reconstruction and Development, Transition Report,
October, 1994; Izvestia, April 1, 1994, July 1, 1994 and December 30,
1994; and Kommersant Weekly, September 30, 1994, March 31, 1995 and May
30, 1995.
The Central Bank 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. 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, since September 1994, the exchange rate suffered a
period of high volatility. During the period September 1, 1994 to June 13, 1995,
the exchange rate ranged from a low of Rbs. 2,156: $1 to a high of Rbs. 5,130:
$1.
BANKING AND FINANCE
Under communism, the financial sector was highly centralized. The State Bank
of the Soviet Union (Gosbank) and the Ministry of Finance 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.
A-6
<PAGE>
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 loss
accounting and self-financing, thereby making those banks semi-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. In April, 1995, President Yeltsin restored the
rights of certain U.S. banks which had received the right, prior to November,
1993, to conduct banking operations in 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 1994
---- ----- ----- -------
<S> <C> <C> <C> <C>
Number of Officially Registered Unemployed Persons (in
thousands).................................................... 61.9 577.7 835.5 1,636.8
As Percentage of National Workforce........................... 0.1 0.8 1.1 2.2
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993 (1994); Goskomstat,
Russian Socio-Economic Conditions in 1994 (1995) (preprint).
Not all unemployed individuals, however, register with Russian employment
offices as being unemployed. As of December 31, 1993, 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
December 31, 1994, this number had increased to 5.3 million persons, or 7.1% 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
December 31, 1994, was 10.1 million persons or 13.5% of the national workforce.
In July 1994, Prime Minister Chernomyrdin signed a federal program for dealing
with unemployment.
Nominal wages have grown considerably in recent years. Average real wages
(nominal wages deflated by the rate of consumer price inflation) have fallen.
The real average monthly wage index, assuming a base of 100 in 1987, stood at
127 in 1990, 119 in 1991, 86 in 1992, 90 in 1993, and 88 as of July, 1994. 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 NOV. 1994
----- ----- ----- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Wages (in rubles)......................... 296.8 552.0 6,126 58,700 183,500 281,600
</TABLE>
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1992 (1993); Goskomstat,
The Russian Federation in Figures, 1993 (1994); Russian Federal
Government Center of Economic Conjuncture, Russia 1994--Economic
Conjuncture (Issue 1); Goskomstat, Russian Socio-Economic Conditions in
1994 (1995) (preprint).
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 initially fell, 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 increased,
however, to 8% in the month of September, 15.1% in the month of October, 14% in
the month of November, 16% in the month of December, and 17.8% in the month of
January 1995. However, inflation decreased to 11% in the month of February, 8.9%
in the month of March, 8.5% in the month of April, and 7.9% in the month of May,
1995.
The following chart shows selected inflation indices as a percentage of the
previous year for the years 1990 through 1994, expressed in nominal prices.
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Consumer Price Index Growth(1).............................. 110 260 2,610 940 324
Wholesale Industrial Price Index Growth(1).................. 103 240 2,050 990 N/A
Wholesale Agricultural Price Index Growth(1)................ 141 160 930 840 N/A
</TABLE>
- ------------
(1) Average for year, as a percentage of the previous year.
Sources: Goskomstat, The Russian Federation in Figures, 1992 (1993); Goskomstat,
The Russian Federation in Figures, 1993 (1994); Goskomstat, Russian
Annual Statistical Report, 1994 (1994); Goskomstat, Russian
Socio-Economic Conditions in 1994 (1995) (preprint).
AGRICULTURE
Agriculture in Russia was collectivized in the 1930's into collective farms
and state farms. This collectivization caused 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 freed up the prices of agricultural products, providing farms
with an incentive to increase production. The government has also begun to
privatize collective and state farms. Furthermore, 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 most of their output to the state, and may only sell the remainder in
the free market.
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 1990 through 1994.
AGRICULTURAL INDICES
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
----- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Agriculture(1)................................ 100.0 96.4 95.5 90.6 96.0 91.0
Crops(1)............................................ 100.0 92.4 100.4 94.6 97.0 90.0
Animal Products(1).................................. 100.0 98.8 92.7 88.1 95.0 92.0
</TABLE>
- ------------
(1) Indices calculated on gross production in 1983 comparable prices.
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, ]1993 (1994); Goskomstat, Russian
Socio-Economic Conditions in 1994 (1995) (preprint).
A-8
<PAGE>
The following chart shows agricultural production in Russia for the years
1990 through 1994.
AGRICULTURAL PRODUCTION
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
-------- ------- ----- ------- -------
CROPS (in millions of tons)
<S> <C> <C> <C> <C> <C>
Grain........................................ 116.7 89.1 106.9 99.1 81.3
Sugar beets.................................. 32.3 24.3 25.5 25.5 10.9
Sunflower.................................... 3.4 2.9 3.1 2.8 2.6
Potatoes..................................... 30.8 34.3 38.3 37.7 33.8
Vegetables................................... 10.3 10.4 10.0 9.8 9.6
Fruits, berries, grapes...................... 3.0 2.7 3.4 3.2 N/A
ANIMAL PRODUCTS
Meat (including fowl) thousand tons.......... 10,112 9,375 8,300 7,500 10,800
Milk, million tons........................... 55.7 52.0 47.2 46.5 42.8
Eggs, billion................................ 47.5 46.9 42.9 40.3 37.4
Wool, thousand tons.......................... 227 204 179 158 N/A
</TABLE>
- ------------
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, 1993 (1994); Goskomstat, Russian
Socio-Economic Conditions in 1994 (1995) (preprint).
ENERGY
The former Soviet Union was the world's leading producer of all major fuels.
The majority of the former Soviet Union's resources are located in the Russian
Federation. Oil and gas were the main sources of hard currency for the Soviet
Union and continue to be the main source 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
production and export from Russia have fallen in the past decade. It is believed
that the Russian government is committed to increasing oil production 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
engaged in oil production and they accounted for 4% of its total production in
Russia. It is expected that the fall in production will not be reversed until
the late 1990's.
OIL AND NATURAL GAS OUTPUT OF THE RUSSIAN FEDERATION
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Oil (including gas condensates)(1)............................ 516 462 399 354 316
Natural Gas(2)................................................ 641 643 641 619 607
</TABLE>
- ------------
(1) Millions of tons
(2) Billions of cubic meters
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, 1993 (1994); Goskomstat, Russian
Socio-Economic Conditions, January-September, 1994 (1994) (preprint);
Goskomstat, Russian Socio-Economic Conditions in 1994 (1995)
(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,
in 1991, consumer-oriented industries comprised only a quarter of total industry
output. 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 further down by 7.8% in 1991, 19% in 1992, 16% in 1993, and 20.9% in 1994.
The rate of decline, however, slowed noticeably during the second half of 1994.
FOREIGN TRADE
In the late 1980's, Russia had a trade surplus with other countries of 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.
According to Goskomstat, in 1993, Russia imported approximately $27 billion of
goods, which represents a decrease of 28% from 1992, but exported $44 billion of
goods, which represents an increase of 4% from 1992, resulting in a positive
balance of trade with foreign countries of $17.5 billion. In 1994, imports into
Russia increased by 33% and exports increased by 8%, resulting in a trade
surplus of $12.3 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
------ ------ ------
<S> <C> <C> <C>
Exports........................................... 42,391 44,297 48,000
Imports........................................... 36,990 26,807 35,700
</TABLE>
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1993 (1994); Goskomstat,
Russian Socio-Economic Conditions, January-June, 1994 (1994);
Goskomstat, Russian Socio-Economic Conditions in 1994 (1995)
(preprint). The Economist Intelligence Unit, Russia Country Report,
first quarter 1995 reports a number of 33,000 for 1993 imports.
A-10
<PAGE>
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.
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)
------------ ------------ --------------
(1) (2) (1) (2) (1) (2)
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
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 (1994); Goskomstat,
Russian Socio-Economic Conditions, January-June, 1994 (1994).
A-11
<PAGE>
The majority of Russian exports are fuel and raw materials. In 1994, 44.7%
of the volume of exported goods were fuel and energy goods, 20.2% were ferrous
and nonferrous metals, 7.6% were chemical industry products, 5.3% were machines
and equipment, and 4.3% were forestry, timber, paper, and cellulose industry
products. In 1994, imports of machines and equipment were 34% of total imports,
foodstuffs and agricultural produce were 29.2%, chemical industry products were
10.7%, textiles, textile clothing, and footwear were 8.8%, and ferrous and
nonferrous metals and products were 3.5%. 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>
- ------------
* Including humanitarian aid and unorganized trade.
Source: Goskomstat, The Russian Federation in Figures, 1993 (1994).
The volume of trade with the former Soviet republics has decreased. In 1990,
exports within the U.S.S.R. accounted for 12% of Russia's GDP. As of the first
quarter of 1994, annualized exports to the former republics had fallen to 4% of
Russia's GDP. Trade with the former Soviet republics consists mainly of
industrial products.
BALANCE OF PAYMENTS
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 in the same period. Other sources, however, estimate
that the trade balance increased from $4.4 billion in 1992 to $11.9 billion in
1993, while the services balance decreased from -10.1 billion in 1992 to -9.7
billion in 1993. It is believed that the balance of payments statistics compiled
by Goskomstat have not been prepared in compliance with international
compilation practices. In addition, it is believed that data has become less
available as the Russian economy has become less centralized.
The following table sets forth estimates of Russia's balance of payments for
1991, 1992, 1993, and the first quarter of 1994. 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>
JAN.-
MARCH
1991(1) 1992 1993(2) 1994(3)
------- ----- ------- -------
<S> <C> <C> <C> <C>
Current account........................... 3.5 -5.7 2.3 -0.9
Trade balance........................... 5.9 4.4 11.9 1.7
Exports................................. 51.0 41.6 46.3 9.1
Unadjusted............................ N/A 41.6 42.9 9.1
Oil................................. 11.8 12.7 11.8 2.3
Natural gas......................... 9.7 7.5 6.9 1.9
Gold................................ N/A 1.1 1.0 0.2
Other............................... 29.5 20.3 23.1 4.7
Adjustments........................... N/A N/A 3.4 N/A
Imports................................. -45.1 -37.2 -34.3 -7.4
Unadjusted............................ N/A -37.2 -24.8 -6.1
Food and light industry............. N/A -8.3 -8.1 -2.6
Machinery and equipment............. N/A -16.2 -9.8 -2.2
Humanitarian imports................ N/A -1.9 -0.3 N/A
Other............................... N/A -10.8 -5.9 -1.1
Adjustment............................ N/A N/A -9.6 -1.3
Services, net........................... 4.6 -10.1 -9.7 -2.6
Nonfactor services, net............... N/A -5.5 -5.3 -1.4
Transportation and insurance........ 0.1 -1.7 -0.1 -0.1
Travel and tourism.................. -0.3 -0.4 -1.4 -0.4
Construction........................ N/A N/A -1.7 -0.4
Training and technical assistance... N/A N/A -0.4 -0.2
Other............................... N/A -3.4 -1.6 -0.4
Interest, net......................... -2.2 -4.6 -4.3 -1.2
Receipts............................ 0.5 0.9 0.7 0.2
Payments............................ -2.7 -5.5 -5.1 -1.4
Capital account......................... 4.7 -1.2 -10.1 -3.5
Grants, net........................... 1.6 3.0 2.8 0.7
Medium- and long-term capital
(official), net..................... N/A 2.7 -10.0 -2.6
Disbursements....................... 7.8 12.2 4.8 0.6
Amortization........................ -5.0 -8.9 -14.1 -3.0
Other............................... 1.1 -0.6 -0.7 -0.3
Medium- and long-term capital
(private), net...................... N/A N/A 0.5 0.2
Commercial banks, net................. -0.7 -6.4 0.1 -0.3
Currency operations, net.............. N/A N/A -2.2 -1.5
Purchases of foreign currency....... N/A N/A -5.7 -4.2
Counterpart of "private" imports.... N/A N/A 3.5 2.7
Other short-term...................... N/A -1.4 -2.7 N/A
Trade credits....................... N/A N/A -1.8 N/A
Other long-term flows................. N/A 0.7 0.4 N/A
Direct investment, net.............. -0.1 0.7 0.7 N/A
Monetization of gold.................. N/A 0.2 0.9 0.1
Errors and omissions, net............... -2.3 -6.4 -6.5 -1.1
</TABLE>
A-13
<PAGE>
<TABLE>
<CAPTION>
JAN.-
MARCH
1991(1) 1992 1993(2) 1994(3)
------- ----- ------- -------
<S> <C> <C> <C> <C>
Overall balance......................... 5.9 -13.3 -14.4 -5.4
Financing............................... -5.9 13.3 14.4 5.4
Net official international reserves... 0.6 -0.8 -3.4 1.3
Assets.............................. 1.5 -1.7 -4.4 1.2
Liabilities......................... -0.9 0.9 1.0 0.1
Fund purchases...................... N/A 1.0 1.5 N/A
Other............................... -0.9 -0.1 -0.5 0.1
Convertible currency payments of
countries of former Soviet Union.... N/A N/A 0.4 0.2
Arrears............................... N/A 6.9 -2.7 N/A
Official (Paris Club)............... N/A 3.8 -2.7 N/A
Nonofficial......................... N/A 3.1 N/A N/A
Deferral of precutoff principal....... N/A 7.2 5.6 0.9
Official (Paris Club)............... N/A 1.6 N/A N/A
Nonofficial......................... N/A 5.6 5.6 0.9
Official rescheduling................. N/A N/A 11.2 1.9
Amounts unpaid pending rescheduling... N/A N/A 3.2 1.1
Nonofficial......................... N/A N/A 1.8 N/A
Suppliers........................... N/A N/A 0.3 N/A
Official (non-Paris Club)........... N/A N/A 1.2 N/A
</TABLE>
- ------------
(1) Estimated.
(2) Revised estimates.
(3) Preliminary estimates.
Sources: International Monetary Fund, Russian Federation 1993, International
Monetary Fund, Russian Federation 1994.
EXTERNAL DEBT
As of January 1, 1995, foreign debt of Russia, including debt of the former
U.S.S.R., was estimated to be approximately $112.7 billion. It is estimated that
60% of the foreign debt is owed to official creditors, 30% is owed to commercial
banks, and 10% is owed to private creditors such as bond holders. The Russian
government has entered into several agreements to postpone or reschedule the
repayment of interest and/or principal due on external debt; however, no
comprehensive debt rescheduling agreement has been reached. In 1994, payments on
the external debt were estimated at $32.5 billion. The State Duma imposed a
limit of $4.1 billion on the repayment of external debt during 1994.
A-14
<PAGE>
FOREIGN INVESTMENT
Foreign direct investment in Russia is regulated by the Law on Foreign
Investment adopted in July 1991. A revised edition of the law is being prepared.
Its contents and likelihood of timely adoption by the State Duma are generally
unknown. Repatriation to foreign investors of interest, dividends, and proceeds
from the sale of investments is permitted under existing legislation, subject to
payment of all applicable taxes and duties, as is 100% foreign ownership of most
types of businesses. Recent legislation governing currency regulation and
control does not expressly permit the repatriation of capital from the
realization of investments; however, current practice is to recognize the right
to repatriation of capital.
As of January 1, 1994, 12,173 enterprises with foreign investment were
registered with the Russian Statistics Committee. In 1992, direct investment was
$1.4 billion with portfolio investment at $0.2 billion. In 1993, direct
investment in Russia remained at $1.4 billion while portfolio investment
increased to $0.4 billion. In 1994, total foreign investment was $1.37 billion,
of which direct investment was $1.03 billion and portfolio investment was $0.18
billion.
Limited information is available on the distribution of 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 1994, received 68.2% of all foreign investment. The trade and
mining industry received 5.5%, the construction industry received 3.8%, and the
timber, paper, and cellulose industries received 3.1% of all foreign investment.
The United States is the leading foreign investor in Russia. Other prominent
investors include France, South Korea, Germany, Great Britain, and Italy.
LEGAL SYSTEM
The Russian Federation operates on a civil legal system.
Part I of a new Civil Code largely went into effect on January 1, 1995. This
first part deals with general provisions, legal entities (including commercial
organizations), rights, ownership, general issues of law of contracts, agency,
security and other questions of a general character. The second part is still to
be adopted and may go into effect late in 1995.
The Civil Code states that it has priority over all other legislation
including federal laws. It also identifies a number of issues to be governed by
federal laws. "The Fundamental Principles of Civil Legislation of the USSR and
Republics," adopted May 31, 1991, is still recognized as valid law in Russia but
only in those parts and to the extent that it is not inconsistent with or
superseded by the new Civil Code or other legislation adopted after June 12,
1990.
The new Civil Code has replaced previous legislation aimed at addressing the
movement toward a market economy and the subsequent development of the private
sector, such as the Law On Ownership and most of the Law On Enterprises and
Entrepreneurial Activities.
According to the Civil Code, legal persons are divided into commercial
(business) and non-commercial organizations. The Civil Code provides for several
types of business organizations. Among them is a joint-stock company that can be
"open" or "closed," the principal difference being the existence of a
shareholder's preemptive right in a closed joint stock company to acquire shares
sold by other shareholders. Open joint-stock companies may carry out public
share issues. Other types of vehicles for business activity are (1) the limited
liability society which broadly is a similar type of entity to a closed
joint-stock company but with no shares issued to partners, (2) a full
partnership, (3) a "kommandit" partnership (a form of limited partnership), (4)
an additional liability society, and (5) a cooperative.
According to the Civil Code each particular type of business organization is
to be regulated by a corresponding Law, which in each case is yet to be passed.
Until the Law On Joint-Stock Companies is
A-15
<PAGE>
adopted, the Regulations On Joint-Stock Companies approved by Resolution 601 of
the Russian Council of Ministers on December 25, 1990 will apply. Although much
of it is superseded, Regulation 601 still sets out some of the basic rules for
the establishment and management of joint-stock companies. A company is entitled
to issue only registered shares (although the draft Law "On the Securities
Market" adopted by the State Duma on May 24, 1995, but not yet effective,
provides for bearer shares subject to certain restrictions), which may be
designated either ordinary or preferred; all shares of the same category must
have the same rights. A fixed dividend on preferred shares and a rate of
interest on bonds must be set at the time of their issue. All shares have the
right to dividends except for those acquired less than 30 days before the
announced day of the dividend payment. Dividends on ordinary shares are paid out
of the net profit of a company after taxes. Given the speed of development of
reforms in Russia and the fact that Regulation 601 was passed in 1990, it is out
of date and contains a number of unsatisfactory provisions and omissions. There
is a notable gap in the regulations with respect to directors' rights and
liabilities. There are several issues related to joint-stock companies that are
addressed in the Civil Code itself such as the procedure for establishment of a
company, the increase and decrease of a company's capital, and general
provisions relating to types of shares, dividends, directors and management,
auditing and subsidiaries and liquidation.
Regulations on registration of business vehicles were recently adopted by
Presidential Decree on general questions related to the registration of
companies. Currently the minimum charter capital of any enterprise with foreign
investment, as well as all joint stock companies, state and municipal
enterprises, must be not less than 1,000 times the minimum monthly wage set by
the Russian Federation (currently, the minimum wage is 43,700 rubles). This is
reviewed periodically depending on the level of inflation. The minimum charter
capital of enterprises of all legal organizational forms other than joint stock
companies may not be less than 100 times the minimum monthly wage.
The primary regulation in the field of securities is the Regulation "On the
Issue and Circulation of Securities and Stock Exchanges in the R.S.F.S.R."
approved by Resolution No. 78 of the Government of the R.S.F.S.R. of 28 December
1991. This Regulation describes different activities of investment institutions
(brokers, investment consultants, investment companies, investment funds), sets
forth some of the licensing requirements for investment institutions and
establishes other basic rules for activity in the securities market. It also
regulates issues of securities by either private placement (i.e., up to 100
investors and for an amount up to 50 million rubles) and public offers (which
necessitate publication and registration of an issue prospectus). This
regulation also contains rules on circulation of securities and basic
requirements for stock exchanges. Among other things it provides that if one
person or a group of connected persons acquires over 15 percent of the shares of
any issuers they shall notify the Ministry of Finance of the acquisition and if
a person or group of connected persons acquires 35 percent or more of shares of
any issuer or shares providing for over 50 percent of shareholders' votes they
must obtain prior consent of the State Anti-Monopoly Committee.
In addition to Regulation No. 78, a large number of Instructions and Letters
issued by the Ministry of Finance, the Federal Commission on Securities and the
Stock Market, the Central Bank, the State Anti-Monopoly Committee, the State
Property Management Committee (GKI) and other bodies regulate various aspects of
the securities market. An important draft of a new federal law establishing a
framework for the securities market was adopted by the State Duma (the lower
chamber of the Russian Parliament) in its third reading on May 24, 1995. The
draft requires approval by the Federation Council (the upper chamber of the
Russian Parliament). The draft shall become a law if and when the President
signs it. The likely time for signature, if this occurs, is unknown but it has
been indicated that it might be signed before the end of July this year. The
draft law contains sections regulating the issue and circulation of certain
types of securities, the formation and activity of professional participants in
the securities market, decisions to issue securities, prospectus information and
registration, offers and types of securities, disclosure requirements, insider
trading, advertising rules, regulation and licensing, the powers of the Federal
Commission on Securities and the Stock Market and powers and requirements of
self regulatory organizations, and imposes liability for breach of regulations.
It does not
A-16
<PAGE>
contain any provisions specifically relating to regulation of the activities of
investment companies in Russia, although many of its provisions, if adopted,
will be relevant to regulating operators on the securities market generally,
including the Fund.
Meanwhile, independently of preparation of the draft federal law, a recent
Governmental Regulation No. 336 of April 15, 1995 instructed certain authorities
to introduce a series of regulations concerning the securities market to become
effective shortly. These will be subordinate to the draft securities market law.
The purpose of such regulations is stated in the Resolution to be protection of
the interests of investors, prevention of discrimination of both Russian and
foreign investors and introduction of higher standards for participants in the
securities market. Among other things this Resolution gives a direction to the
Federal Commission on Securities and the Stock Market to submit to the
government a draft resolution on changes and amendments to Regulations No. 601
and No. 78. Drafts of those subordinate regulations have not yet been published.
The Russian judicial system consists of three branches of courts. These are
courts of general jurisdiction united in a system under the supervision of the
Supreme Court of the Russian Federation, a system of arbitration courts
resolving economic disputes under the supervision of the High Arbitration Court
of the Russian Federation, 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 (i.e., disputes regarding
commercial matters, although in some cases the court requires an arbitration
clause between the parties or an appropriate international agreement to accept
jurisdiction) are heard by courts of the so-called arbitration court system
headed by the High Arbitration Court of the Russian Federation. However, a
particular contract might provide for private arbitration (as opposed to the
High Arbitration Court System, which is a state court) to be the forum for the
resolution of disputes.
Russia as successor to the U.S.S.R. is a signatory to the 1958 New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Russian courts therefore should normally 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. However, there are a number of grounds 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 Civil Procedure
Code and the Code of Arbitration Procedure.
The Law of the Russian Federation on International Commercial Arbitration
reproduces similar provisions contained in the UNCITRAL Model Law. Under this
law the arbitrator is entitled to apply the law which the parties have chosen as
applicable. Another important provision is that an arbitral award made in a
country whose arbitral awards are recognized in Russia is recognized and
enforced subject to a written application to a competent court.
The International Commercial Arbitration Court, which is the most common
private arbitration forum in Russia, is established under the Chamber of Trade
and Industry of the Russian Federation and may hear cases in which one of the
parties is located abroad or, in the case of an enterprise, has economic
activity abroad.
A-17
<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 to
approximately 148 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. Vouchers
could also be 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
in most privatized companies. The voucher program ended in June 1994, when
vouchers ceased for most purposes to be valid.
To begin the privatization process, enterprises were incorporated and
transferred to state property funds at appropriate levels of
government--municipally and state owned enterprises to local and regional
property funds, and federally owned enterprises to the Federal Property Fund.
State Property Management Committees were given responsibility for managing the
privatization of enterprises at each level.
Medium- and large-scale enterprises were obligated to transform themselves
into open joint stock companies in 1992. Three privatization options were
developed that gave employees and former employees at the enterprise the
opportunity 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 appropriate State Property Management
Committee, a privatization plan was developed for each enterprise which defined
the methods of distributing the company's shares. In some cases, employees
together had 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,
medium and large scale open-type 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.
According to the latest version of the State Privatization Program, called
"On the Fundamental Provisions of the State Privatization Program for State and
Municipal Enterprises in the Russian Federation after July 1, 1994," developed
for the period following the expiration with certain limited exceptions of
vouchers and voucher auctions on June 30, 1994, the remaining shares of medium
and large enterprises transformed into joint stock companies of the open type
are to be allocated through "investment tenders," "commercial tenders," "cash
auctions" or "specialized auctions for the sale of shares." An investment tender
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 a minimum set out in
the company's investment program (which is part of its privatization plan). 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 a nominal fee 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," this amount may not
B-1
<PAGE>
be recoverable and does not provide the investor any rights other than the right
to acquire the shares at a nominal value.
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 (apart from voucher auction and specialized auction) have not, to date,
been adopted. Regulations governing the procedure of holding specialized
auctions were adopted by the State Property Management Committee on October 6,
1994. In addition, the Governmental Resolution on the manner of holding
interregional and all-Russian specialized auctions was adopted on April 28,
1995. 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.
Reliable information concerning privatization of Russian enterprises is not
available. Such figures as are available should be treated with particular
caution inter alia since privatization of an enterprise is often an on-going
process involving a number of stages such as transformation into a legal entity,
closed subscription to workers, voucher auction, tenders and other types of
auctions described above extended over a considerable period of time. Different
sources, or even the same source, may use different bases for considering an
enterprise privatized for the purposes of statistics, or exclude particular
classifications of enterprises from their statistics. The following is a summary
of some of the available statistics:
The following tables indicate the rate of privatization by activity and
region during 1993 and 1994.
NUMBER OF ENTERPRISES PRIVATIZED BY ACTIVITY
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1, JULY 1,
1993 1994 1994
---------- ---------- -------
<S> <C> <C> <C>
Light industry................................................ 776 1,112 1,431
Food industry................................................. 1,588 2,972 3,208
Construction.................................................. 2,344 5,253 6,132
Construction materials........................................ 806 1,385 1,474
Agriculture................................................... 1,560 3,938 4,389
Automobile and repair......................................... 1,010 3,220 4,294
Retail trade.................................................. 18,803 30,638 33,511
Wholesale trade............................................... 573 1,339 1,727
Public catering............................................... 4,487 8,061 9,367
Consumer services............................................. 10,982 17,198 18,457
Unfinished construction sites................................. 651 1,503 1,776
Other......................................................... 4,715 12,195 18,030
Total....................................................... 48,295 88,814 103,796
</TABLE>
- ------------
Source: International Monetary Fund
B-2
<PAGE>
NUMBER OF ENTERPRISES PRIVATIZED BY REGION
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1, JULY 1,
1993 1994 1994
---------- ---------- -------
<S> <C> <C> <C>
Northern...................................................... 1,598 3,374 3,928
Northwestern.................................................. 3,986 5,971 7,021
Central....................................................... 10,910 21,044 26,508
Volga-Vyatsk.................................................. 2,037 4,978 5,588
Central Black-Earth........................................... 3,847 5,485 5,781
Volga......................................................... 3,720 7,481 8,916
North Caucasus................................................ 5,686 11,158 12,100
Urals......................................................... 6,968 10,766 12,003
Western Siberia............................................... 4,341 7,947 9,590
Eastern Siberia............................................... 2,547 5,754 6,782
Far East...................................................... 2,339 4,307 4,900
Kaliningrad................................................... 316 549 679
Total....................................................... 48,295 88,814 103,796
</TABLE>
- ------------
Source: International Monetary Fund
The following table provides information for voucher auctions concluded as
of June 24, 1994 in sectors which represent more than 3% of the total redeemed
shares.
<TABLE>
<CAPTION>
AVERAGE
CHARTER CAPITAL AVERAGE
CAPITAL SOLD 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
Transportation machinery 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.
B-3
<PAGE>
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. Yuganskneftegaz (Yugansk 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 8.90 253,465,841
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: Finansovaya Gazeta, Issue No. 44, October 26, 1994.
Since the inception of the privatization program, more than 100,000
enterprises have been privatized, with approximately 15,000 of these being
medium- and large-scale enterprises. 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.
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.
B-4
<PAGE>
SECONDARY SECURITIES MARKET TRADING
Immediately after the launch of the privatization program, a secondary
market for shares and vouchers emerged. At the beginning of 1995, the Russian
Ministry of Finance had issued licenses to 66 stock exchanges. 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
Commodities and Raw Materials Exchange (stock department).
The following table sets forth basic information regarding market activity
of commodity, stock and currency exchanges for the years 1991 through 1994:
<TABLE>
<CAPTION>
1991 1992 1993 1994
----- ----- ----- ------
<S> <C> <C> <C> <C>
Number of exchanges (end of year)............................ 182 238 180 166
Completed transactions (in thousands)........................ 106.3 195.7 329.6 626.6
Market volume (billions of rubles)........................... 69.9 346.8 1,593 31,577
Market Volume by Sector:
Consumer goods........................................... 23.6 107.9 215.5 235
Industrial and technical production...................... 45.0 227.0 656.6 1,081
Securities............................................... 1.2 6.0 480.0 29,091
Money resources.......................................... 0.1 5.7 234.6 1,090
Other goods and services................................. 0.05 0.2 6.3 80
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993 (1994); Goskomstat,
Russian Socio-Economic Conditions--January 1995 (1995) (preprint).
The following table provides a breakdown of capital markets activity in 1993
and 1994 (in billions of rubles).
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Total sales volume..................................................... 2,046.6 N/A
includes:
securities............................................................. 595.1 29,091
of which:
stocks............................................................... 37.3 218.7
government obligations............................................... 283.1 27,493
certificates......................................................... 0.4 2.6
bills of exchange.................................................... 0.6 2.7
options.............................................................. 2.4 18.9
futures.............................................................. 0.2 1.3
privatization vouchers............................................... 270.4 1,333.8
other................................................................ 0.7 N/A
monetary resources..................................................... 1,445.3 105(1)
of which:
deposits............................................................. 13.2 N/A
interbank loans...................................................... 1,429.6 N/A
commercial loans..................................................... 2.5 N/A
currency (in conversion to rubles)................................... 6.2 N/A
</TABLE>
- ------------
(1) This figure only includes sales volume data for commodity exchanges.
Source: Goskomstat, The Russian Federation in Figures, 1993 (1994); Goskomstat,
Russian Socio-Economic Conditions--January 1995 (1995) (preprint).
B-5
<PAGE>
Government Regulation No. 78 authorizes the Ministry of Finance to establish
minimum listing criteria for Russian stock exchanges and investment
institutions. Article 5 of the program for the control of the activity of stock
exchanges, approved by Letter No. 5-1-66 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 obtain a listing on the Russian Commodities and Raw
Materials Exchange only if there are more than 250 investors, the issuance
exceeds 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. The actual volume of
exchange-based trading in Russia is low and active on-market 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.
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. 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 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 President, the State Property Management Committee and 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
the Stock Market, having the status of a Federal Ministry) have issued detailed
regulations and decrees 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. The GKI Regulations No. 840 on
shareholder registers and No. 859 on depository activity are not
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technically valid because they were not properly registered with the Ministry of
Justice, although in practice they are followed by many market participants.
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 of or influence on 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 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 have traded at over a 50% discount to face value in the
international markets. Moreover, Russian corporate borrowers currently have
limited access to foreign commercial 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 by 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 issued Rbs. 240.5 billion
Treasury bills in 1993 and Rbs. 20,530 billion Treasury bills in 1994. During
the first quarter of 1995, the Ministry of Finance issued a total of Rbs. 21,750
billion Treasury bills, including Rbs. 14,000 billion with a maturity of three
months, Rbs. 6,800 billion with a maturity of six months, and Rbs. 950 billion
with a maturity of less than one year. Although a small amount, the proceeds
from the Treasury bills are psychologically significant in the prevailing
conditions of a rudimentary capital market and an unstable economy.
CORPORATE AND SECURITIES MARKET REGULATION
Regulation of Joint Stock Companies. Among the first legislative efforts to
address, within the confines of the existing Civil Code, the movement toward a
market economy and the subsequent development of private enterprise was the Law
on Enterprises and Entrepreneurial Activities, adopted by the Supreme Soviet on
December 25, 1990, and amended on June 24, 1992, July 1, and July 20, 1993, and
December 24, 1993. This law is, however, with the exception of two articles
concerning registration, no longer in effect and has been replaced by Part I of
the Civil Code.
The 1990 Law on Enterprises and Entrepreneurial Activities was accompanied
by the Regulation on Joint Stock Companies approved by Regulation No. 601 of the
Russian Council of Ministers on December 25, 1990. Although largely superseded,
many parts of Regulation No. 601 remain in force,
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insofar as they are not inconsistent with Part I of the new Civil Code, pending
adoption and the coming into force of, inter alia, a new Law "On joint stock
companies" which is envisaged by Part I, and which is scheduled for adoption in
the course of 1995. Regulation No. 601 sets forth the basic rules for the
establishment and management of joint stock companies. Under Regulation 601, the
share capital of a company may consist of ordinary and preferred shares.
According to Part I of the Civil Code, capital contributions may be made either
in cash or in kind. The value of contributions in kind is assessed by a joint
decision of shareholders, and no concept of authorized but unissued shares
exists. At least 50% of the share capital is required to be paid up within 30
days after registration of a company, the other half due within one year of
registration.
Currently, the minimum charter capital of an enterprise with foreign
investments, joint stock companies and state and municipal enterprises must be
an amount not less than 1,000 times (and for other enterprises 100 times) the
minimum monthly wage set by the Russian Federation, which presently is Rbs.
43,700. This minimum monthly wage is typically reviewed every three to six
months depending on the level of inflation.
A company is entitled to issue only registered shares. These may be one of
two types, ordinary or preferred shares; all shares of the same category must
have the same rights. Preferred shares carry a fixed dividend. All outstanding
shares have the right to dividends except for those shares acquired less than 30
days before the declaration of the dividend payment. Dividends are paid out of
the net profits of a company after taxes and payments into reserve funds.
As the owners of a joint stock company, shareholders as a group are regarded
as the company's highest governing body. Joint stock companies are required to
hold annual shareholder meetings and shareholders holding more than 10% of
shares may require the calling of extraordinary meetings on notice at any time.
It is usual (although, since introduction of Part I of the new Civil Code, no
longer obligatory in all cases) for companies to have a two tier management
structure with a board of directors and an executive governing body, the
relative competence of which are defined in the company's charter. In the
absence of specific guidance from the shareholders, such as at an annual
meeting, a company's board of directors, the governing body, and also the
general director (or president) are given the responsibility for governing the
company's affairs. Certain actions by the joint stock company, such as a change
in the charter or reorganization or liquidation of the company, must be approved
by three quarters of the total votes cast by the shareholders present at the
meeting. All other matters submitted for shareholder approval need only be
supported by a simple majority of votes of those present at the meeting. Special
rules in this respect apply to privatized open joint stock companies according
to the State Privatization Program for 1994 approved by Presidential Decree on
December 22, 1993. According to this certain additional actions including
approval of transactions over certain limits, must be approved by a three
quarters majority of shareholders.
Regulation of joint stock companies suffers from the speed and volume at
which legislation has been passed, and the diversity of authorities regulating
both companies and the securities market in general. This situation is
aggravated by the lack of a legislative custom of repealing legislation which is
outdated or no longer applied. As a result, legislation is frequently
inconsistent, contradictory or not in practice applied. On the one hand this
means that authorities may in the future seek to apply regulations which are
currently regarded as not being in effect, and different authorities may apply
different regulations or interpretations of regulations. On the other hand
provisions that are designed to protect investors may in practice be widely
ignored. For example, although rudimentary concepts of directors' duties exist,
for example in the standard form of charter required for certain privatized
companies, the Law on Insolvency (Bankruptcy) of Enterprises, and Part I of the
Civil Code, the provisions are widely ignored by directors in practice. Also,
while Regulation No. 601 and Part I of the Civil Code require open companies,
and in some cases closed companies, to publish their annual accounts and to send
copies to shareholders, this is rarely done. In addition, development of a
system of
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corporate governance and investor protection is still very much in the early
stages in Russia. For example, although the Ministry of Finance's existing
regulations require that investors receive adequate information about their
investments and hold issuers responsible for the content of their prospectuses
and advertisements, in practice few facilities exist to investigate alleged
malpractice or to enforce sanctions imposed for violation of the regulations.
Securities Laws. Russian securities markets are primarily subject to
regulation pursuant to Regulation On the Issue and Circulation of Securities and
on Stock Exchanges in Russia approved by Government Regulation No. 78, enacted
on December 28, 1991. The Regulation describes 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 over
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 of persons acquires 35% or more of the shares providing for more than
50% of votes. With the creation of the new Federal Commission on Securities and
the Stock Market (see "Regulatory Agencies" below), and the adoption of a new
law regulating the securities market by the State Duma, a new procedure for
licensing professional activities in the securities market and for qualification
of all financial instruments is expected to be effective in the near future.
A draft Law "On the Securities Market" was adopted by the State Duma on May
24, 1995. Before becoming effective as a law the draft has to be approved by the
Federation Council and signed by the President. Although no timetable has been
set for this, and the President is not obliged to sign the draft, current
expectations are that he may sign it as early as the end of July.
The draft Law is much more advanced in comparison with Regulation No. 78.
The draft law contains sections regulating the issue and circulation of certain
types of securities, the formation and activity of professional participants in
the securities market, decisions to issue securities, prospectus information and
registration, offers and types of securities, disclosure requirements, insider
trading, advertising rules, regulation and licensing, the powers of the Federal
Commission on Securities and the Stock Market and powers and requirements of
self regulatory organizations, and imposes liability for breach of regulations.
Apart from Regulation No. 78, a large number of Instructions and Letters
issued by the Ministry of Finance, the Central Bank, the State Property
Management Committee, the State Anti-Monopoly Committee and other bodies
regulate in some way the securities markets. On May 10, 1995, the Central Bank,
for example, adopted Provisional Regulations governing depository activities of
banks in the Russian Federation. The effect is that banks are subject to rules
in addition to those otherwise applicable to institutions when acting as
depositories.
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, managers and operating employees of an investment fund
must possess qualification certificates 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 the requirement that the Fund be
licensed in Russia, including not offering or selling any of the Fund's Shares
in Russia.
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Regulatory Agencies. There are a number of regulatory agencies that are
involved in the regulation of joint stock companies and securities markets.
Federal Commission on Securities and the Stock Market. 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 Securities and the Stock Market under
the Government of the Russian Federation. This Federal Commission, which was
formed within the government of the Russian Federation, and which was granted
the status of a Ministry, replaces the former Russian Commission on Securities
and Stock Exchanges, and is located within the office of the President of the
Russian Federation. The Federal Commission consists of a Chairman and ten
commission members from various other Russian agencies. In addition, a
representative of each chamber of the Federal Assembly will serve as members 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;
. determine standards for the activity of investment funds and private
pension funds; and
. issue general licenses to licensing bodies, such as self-regulating
organizations of investment institutions.
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. Regulations of the Ministry of Finance adopted by
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;
. 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;
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. 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 was created 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. Its functions are set forth in the law
"On Privatization of State and Municipal Enterprises in the RFSFR" of July 3,
1991. The State Property Management Committee, inter alia:
. drafts and monitors implementation of state privatization programs;
. makes decisions on the reorganization of State enterprises and their
privatization and transfers them to the Federal Property Fund;
. creates funds and holding companies to hold shares owned by the State;
. issues regulations regarding the privatization process and interprets
these and state privatization programs; and
. monitors the privatization process through its territorial agencies.
Federal Property Fund. This body acts as the holder of and ultimately
the seller of enterprises being privatized. Its functions include exercising the
state's rights as shareholder at shareholders meetings and collecting dividends.
Both the Federal Property Fund and the State Property Management Committee exist
not only at the federal level but also act through territorial agencies at
regional and local levels. These agencies have authority defined separately in
the Privatization Law and in the statutes governing the activity of each
committee and fund.
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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 June 15, 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. Chemical Mellon Shareholder Services (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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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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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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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
D-1
<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.
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 THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS 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
PAGE
----
PROSPECTUS SUMMARY.................... 3
FUND EXPENSES......................... 11
THE FUND.............................. 12
USE OF PROCEEDS....................... 12
INVESTMENT RATIONALE.................. 13
INVESTMENT OBJECTIVE AND POLICIES..... 16
RISK FACTORS AND SPECIAL
CONSIDERATIONS........................ 19
ADDITIONAL INVESTMENT
PRACTICES............................ 30
INVESTMENT RESTRICTIONS............... 33
MANAGEMENT OF THE FUND................ 33
DIRECTORS AND OFFICERS................ 37
PORTFOLIO TRANSACTIONS AND
BROKERAGE............................. 41
NET ASSET VALUE....................... 42
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT PLAN..................... 42
TAXATION.............................. 44
COMMON STOCK.......................... 50
UNDERWRITING.......................... 52
CERTAIN INVESTOR SUITABILITY
STANDARDS............................ 54
CUSTODIAN AND TRANSFER AND
DIVIDEND PAYING AGENT................ 55
PUBLIC ACCOUNTANTS.................... 55
LEGAL MATTERS......................... 55
ADDITIONAL INFORMATION................ 55
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS................... 56
STATEMENT OF ASSETS AND LIABILITIES... 57
APPENDIX A............................ A-1
APPENDIX B............................ B-1
APPENDIX C............................ C-1
APPENDIX D............................ D-1
UNTIL SEPTEMBER 13, 1995 (90 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 OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
4,600,000 SHARES
TEMPLETON RUSSIA FUND, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
C.J. LAWRENCE/DEUTSCHE BANK
SECURITIES CORPORATION
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
JUNE 15, 1995
================================================================================
<PAGE>
TEMPLETON RUSSIA FUND, INC.
Dear Shareholder:
If your shares of Templeton Russia Fund, Inc. are registered in the name of a
broker-dealer or other nominee, please contact the registered representative
from whom you purchased the shares regarding your status in the Plan.
If you do not wish to participate in the automatic Dividend Reinvestment Plan,
please mail the attached card. This card must be received not less than 10
days prior to a dividend record date; otherwise the election to receive cash
will be effective with respect to the subsequent dividend. Dividend
information may be obtained by calling the Fund at (800) 347-0738.
The terms and conditions of the Dividend Reinvestment Plan are contained in
Appendix C of the accompanying Prospectus.
TEMPLETON RUSSIA FUND, INC.
Use this form if you do not wish to participate in the Dividend
Reinvestment Plan
TO: Chemical Mellon Shareholder Services Date:_______________
I do not wish to participate in the Dividend Reinvestment Plan and hereby
request that all dividends and distributions on my Templeton russia Fund,
Inc. account be paid in cash.
Please Print
- --------------------------------------------------------------------------------
Name(s) in which Shares are Registered
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip Code
Day Time Phone: ( ) -
Signature:
---------------------------------------------------------
(owner)
Signature:
---------------------------------------------------------
(co-owner)
Broker/Dealer:
-------------------------------------------
(Detach and Mail) 9/94
<PAGE>
- ------------------ Place
Stamp
- ------------------ Here
- ------------------
CHEMICAL MELLON SHAREHOLDER SERVICES
DIVIDEND REINVESTMENT SERVICES
P.O. BOX 750
PITTSBURGH, PA 15230
