The net value of the Hansa Russia Growth Fund share, an Eastern-oriented fund issued by Hansapank, has suffered similarly, falling by 85 percent since the beginning of the year from 831 to 119 kroons per share.
Indeed, what's going on in Russia has hit such Eastern-oriented funds hard. Still, Hansa Russia Fund Manager Vadim Ogneshtshikov declares that unlike some Eastern-oriented investment funds, his is not going to stop trading.
But a look at what did happen in Russia might help to understand why such funds have taken a hit.
"The mood of the investors changed after the Asian crisis on October 27, 1997, and this in its turn influenced the Russian stock market," said Ogneshtshikov.
Russia froze its internal bonds and offered new restructuring methods to its investors. The new method foresees that securities will be converted to other securities and the maturity date will be set on a fixed date three or four years away.
This method resembles the one that Russia used when it issued Eurobonds after increasing its foreign currency reserves due to the loan from the International Monetary Fund. Only that time, securities were converted voluntarily and on much better conditions for the investors.
The present conditions have meant big losses to those who invested in Russian T-bills. According to analysts, investors may receive only 15 to 20 percent of their money, and 20 percent of the T-bills will be converted to U.S. dollars for a 5 percent discount rate.
"Foreign investors are disappointed in the scheme as the Russian government cannot carry out its financial obligations and has lost its confidence in a way," Ogneshtshikov said. "When the United States issues T-bills, investors are confident that the government can carry out its obligations. The government should be the strongest issuer. T-bills are risk-free financial instruments."
The problems in Russia started when the government could not redeem its bonds. The market works like a financial pyramid - the government issues new bonds to redeem the previous ones.
Russia faced a problem where investors' interest in bonds decreased and the government did not succeed in issuing new bonds. About $33 billion of the $40 billion sunk into the market disappeared. About a third of the investors were from foreign countries. The Soros Fund, for example, has lost about $2 billion.
The crisis of the T-bill market in its turn decreased the prices of the Russian stocks as investors started selling. It also reflected on the local banks that had invested up to 50 percent of their assets in T-bills.
"The Russian banking system may go into bankruptcy one day although they are trying to avoid this through different methods like the mergers of the biggest banks," said Ogneshtshikov.
The Russian T-bill market does not directly influence the Estonian stock market, as the share of Russian stocks in Estonian banks accounts for less than 1 percent of their assets. The exposure of Hansapank, for example, is 250 million kroons ($17.8 million).
As the Hansa Russia Growth Fund is an open fund, it is obliged to repurchase the shares on a current net asset value.
"The value of the fund has decreased by nine times. The investor who bought the share for 1,000 kroons receives 119 kroons today," said Ogneshtshikov, commenting on the sad situation of his clients.
The future of the investment fund is still not clear, although some Russia-oriented investment funds in Estonia have already halted their activities.
"The future of our fund depends mostly on the continuity of the market economy in Russia," said Ogneshtshikov.
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