Yukos and Emerging-Market Risk

The saga of Russian oil giant OAO Yukos continues to get stranger and more twisted as 2004 draws to a close. For investors in Russian equities, it's been a disappointing end to what started off as a banner year.

The machinations, with the government saying Thursday that Yukos was being refashioned into a new state-owned company minority-held by China National Petroleum, have turned a 38% gain in the Russian Stock Exchange's RTS Index through April into an under 7% gain for the entire year.

Of course, for U.S. investors, currency moves have been the saving grace. The dollar has depreciated vs. the ruble and other European currencies, improving the stock market returns for those in the U.S. The S&P-RTS Index denominated in dollars rose this year from 136.7 to 161.97, an 18% gain.

The Central Europe & Russia Fund(CEE), a closed-end fund traded in dollars on the New York Stock Exchange, is up 37% over the past year and it's still at an almost 11% discount to the value of its assets. Only about half of the fund was in Russian securities, with 22% in Poland and 11% in Hungary as of the end of August.

Luckily for energy consumers, though the Yukos saga was said to be driving world oil prices higher back in July, the tempest didn't last long. Oil has barely been affected by the most recent tragicomedic twists.

Looking ahead to 2005, contrarians might be tempted to wade into the area. After all, the Russian market lagged most of its emerging-market brethren and Putin's anticorporate behavior and other blunderings have dismayed virtually all western investors.

Then again, it's sometimes said that everything is darkest just before it goes pitch black. There's not much reason to hope Putin is going to get back on the virtuous path anytime soon, and if oil prices decline, the country's huge energy sector will suffer.