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YEAREND—BULL RUN IN RUSSIA, EAST EUROPE MAY SLOW New York, Dec. 12 (Reuters)—More players, more issues but lower returns are expected for the fixed income markets in Russia and East Europe in 1997, U.S. experts said. Investors expect 1997 to be less bountiful than 1996, which so far has seen Russian debt double in value while Poland has risen 35% and Bulgaria 28%, they said. This year’s heady ride, of course, followed the 1995 liquidity crunch brought by rising U.S. interest rates, while next year’s performance will be compared to the much stronger baseline levels of 1996. Vladimir Kvint, senior consultant at Arthur Andersen Economic Consulting, said Russia’s political risk has diminished with a succession of free parliamentary and presidential elections, and portfolio investments have risen to reflect the changing perception. Kvint estimated that foreign direct investment would touch $3 billion this year, up from $2 billion in 1995. Yet he said he thinks foreign investment remains paltry if one considers Russia’s wealth of natural resources, educated labor force, and well-developed industrial infrastructure. What is holding foreign investors back from directly participating in Russia’s epochal transformation? Long-term foreign investors still fear Russia’s financial instability, Kvint asserted. He said a financial crisis could erupt in five months, noting that Russian citizens have been putting $2 billion to $3 billion worth of rubles per month into foreign currencies. Their savings—estimated at 25% of the gross domestic product—are not deployed productively in the Russian economy , he added. Kvint did not expect Russia’s economic growth to turn positive, as Russian officials have projected. Instead, he expected a contraction of one percent in 1997. Faced with mounting wage arrears and social unrest, the central bank may not resist the temptation to print ruReuters , Thursday, December 12, 1996, 14:13:09 (partial). 248 the emerging market of russia bles, leading to rising inflation and currency devaluation, he said. The specter of devaluation could speed capital flight from Russia and reverse the portfolio investment flow, he said. This could prompt investment in East Europe to spread between large markets of Poland and the Czech Republic and smaller new markets of Slovenia and Romania, he added. But Jaroslaw Aranowicz, senior European analyst at Freimark, Blair, and Co., doubted a financial crisis would happen in Russia. He pointed to the economy’s resilience and promising progress on tax collection by the government. But he agreed with Kvint’s assessment that under-investment would limit Russia’s economic growth, predicting a flat growth rate for 1997, compared to the official forecast of a two-percent rise. ...

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