The $2 billion East Capital Russian fund was up 20-fold in 10 years from early 1998 to May 2008. Since then, markets have swooned. AsianInvestor spoke to Michael Hanson Lawson, who heads East Capital in Hong Kong. East Capital is a Stockholm-based fund management and private equity firm with approximately $7 billion under management.

What has happened to Russian markets since May 2008?

The Russian markets have had a series of bad news. It started with an argument about the 50/50 shareholding in TNK-BP.

Then, a few weeks ago, Vladimir Putin accused one of the major steel producers, Mechel, of price gouging with its coking coal facility.

The steel producers have a lobby in Russia, and they had pointed out to him that the price of their raw material seemed unusually high. So the government stepped in. This was then mischaracterized by the press as being somehow linked to the Yukos affair. Mechel will probably get fined, and that will be the end of it. However people saw the spectre of Yukos, which is wrong, because there are steel lobbies protecting their interests in this way in every country.

Now we have the situation in Georgia.

So since the beginning of July, the market has been down approximately 25%. ThereÆs no doubt that the risk premium for Russia has risen although the market is trading at a P/E ratio of 8.8 times and by that measure seems cheap. Our Russian fund is down this year 22%. Most of the investors are holding fast, though we have seen some redemptions. The Russia-Georgia situation is a major political event, so people want to see the outcome.

Has Russia been more than just a hydrocarbons play?

Despite the heavy weighting of the Russian markets towards energy, this fund invests in the Russian equity markets across a diverse range of sectors, underweighting oils and gas and tends to highlight domestic demand themes.

We might have been up a bit more in the last year if we had been overweight oil and gas, but there were just as good opportunities elsewhere in Russia. For example, Russian utilities have performed well because of electricity deregulation that has liberalised consumer tariffs. It was the result of a blackout over Moscow about two years ago and the government decided it wasnÆt going to be allowed to happen again. Foreigners were allowed in to take majority stakes and the earnings of the electrical utilities are going to be high over a prolonged period.

Steel companies have been taking advantage of the (until recently) weak US dollar and investing in the USA. WeÆre not talking BHP/ Rio Tinto here, these are smaller targeted acquisitions. TheyÆll take this slowly, having only had a capitalist system for a few years, itÆs a big jump to make cross-border M&As. Capitalism there now is a bit like American capitalism in the later 19th century. Businessmen there have evolved through the radical changes in a somewhat unregulated way and might display an early form of capitalist manners to one another. That said, theyÆve got a stock market run along lines that we all recognise, plus an anti-monopoly bureau.

Are the rights of minority shareholders protected in Russia?

We invest in nearly 200 Russian companies and weÆre invariably minority shareholders. WeÆve only ever had two problems and both of those were resolved by discussion with the companies, by pointing out to them that it wasnÆt in their long term interests to behave incorrectly towards minority investors and in both cases it was resolved amicably and we didnÆt lose any money

The government has declared this year that certain companies in certain industries, I think approximately 47, are companies in which the state has an interest. That doesnÆt mean that investors canÆt invest, but it means that you are a co-investor with the government, and that they will have a major sway in which way the company may go. I think that declaration is a positive thing, and will help minority shareholders [to navigate the way around].