The Russian company director emerged beaming from a meeting with prospective shareholders. "Great," he said. "I persuaded them not to buy our shares."


It may sound like a joke, but the comment, reported by a Western fund manager in Moscow, sums up the problems investors face in the turbulent world of Russian equity trading.


Many companies are not keen on outside shareholders. Others think it is immoral to let foreigners buy Russian assets cheaply.


Add to this the problems of ever-changing regulations and soaring crime -- many international investment bankers in Moscow have bodyguards and some even carry knives.


Despite all the chaos, however, Russia's securities market is finding its legs.


"In three to four years, the Russian securities market will look like New York or Hong Kong," said Jonathan Bulkley, a managing director at consultants KPMG Peat Marwick which is creating a U.S. NASDAQ-style over-the-counter market in Russia.


A joint KPMG project with the Russian Securities Exchange Commission will link share trading in Moscow, Vladivostok, St. Petersburg and Yekaterinburg on computer by the end of 1994.


The impetus to the Russian share market came at the end of June when the government's voucher privatization program drew to a close. More than 15,000 state enterprises have issued shares for vouchers so far.


Voucher sell-offs dismantled the command economy with lightning speed, creating more than 40 million shareholders and attracting a growing volume of foreign money.


"Russian companies have begun to mature. People who were brave enough to pick certain company shares cheaply will probably be able to pay for their investments," said Jeffrey Hammer, head of investments at the U.S.-owned Newstar fund.


The second stage of privatization, decreed by President Boris Yeltsin last week after the Duma rejected the plan, is designed to increase the inflow of foreign investment by offering controlling stakes in companies at investment tenders. Under the plan, investors will also be able to buy and sell industrial land.


Enterprises will have to value themselves at prices the market is prepared to pay. Companies will be allowed to keep 51 percent of the return. This should multiply the offerings.


Privatization officials have said that Russian investors are likely to invest a meager $1.5 billion to $2 billion in the second stage program, making foreign participation more important. Privatization chief Anatoly Chubais has said foreign investment in post-voucher privatization this year alone could be as much as $10 billion, or as little as $1 billion.


Foreign portfolio investors are looking at asset-intensive sectors such as telecommunications, oil, electricity and airlines. One upcoming new issue is a 22 percent stake in Moscow's City Telephone Network, which is 38 percent state-owned.


Russia's educated workforce and low labor costs still lure investors. A skilled Russian worker earns the equivalent of way below $100 a month, compared to $25 an hour in Germany.


Unlike voucher privatization, the stakes will be higher in cash sell-offs. Big investors will outgun smaller ones at tenders when companies will be sold to the highest bidder.


"Companies were sold ridiculously cheaply for vouchers," said Mark Jarvis, vice president of Fleming's Russia investment fund. "Many will try to make it up. Share prices will go up."


Some Western bankers say prices may soar initially as inexperienced firms value their assets based on world prices.


"It's going to be a disaster," said one investment banker. "One company director told us 'We've got this factory here and it costs $2.3 billion. You must pay 30 percent of it in cash!'"


Others were less sure. "I'd be very surprised if prices go up. There isn't enough money around," said Roman Pipko, managing director at the Russian American Enterprise Fund.


For vouchers, bankers say oil firms sold for only 4 cents per barrel of proven reserves against $7 in the United States.


Phone companies also go for a fraction of world prices. Shares of the St. Petersburg Telephone Company sell at $18. With 2.5 million telephone lines, this gives it a value of $150 per access line compared to more than $1,600 in the United States.


Another example is Vnukovo Airlines, an Aeroflot offshoot now handling domestic flights. A recent voucher auction valued the airline, which has 59 aircraft, only at $1 million.


"If you take this aircraft, melt it into blocks of metal and sell it, even that would give a much higher value," Jarvis said.


Fleming has bought an undisclosed stake in Vnukovo and hopes to secure a seat on the management board soon, Jarvis added.


The government must now phase out the initial dog-eat-dog stage of sell-offs and fill in the legal gaps. There are no rules on shareholders' rights. Almost all company information is "inside" because many regard it as commercial secret.


Bankers say Russia's topsy-turvy share market will begin to look downright normal under cash sell-offs.


"Brokers are realizing the need for Western-style auditing and disclosure if they are going to play the market," said Elizabeth Hebert, a Fleming Russia analyst. (Reuters, MT)