Extreme volatility and a general decline in the Russian stockmarket during the third quarter resulted from a convergence of political and global economic forces far removed from the fundamentals underpinning Russian growth. The economy is well shielded from the global financial crisis, but the Russian market has nonetheless been affected by fears gripping investors globally.The war with Georgia that erupted during the quarter focused the world's attention on Russia's political situation, but in spite of geopolitical concerns on its boundaries the country remains very stable politically, with a domestically popular government. Also, the Government's actions over domestic price-fixing by the coal and steel company Mechel raised concerns over renewed intervention in private companies, but these fears proved overdone and the issue has been resolved.In fact, government action was very supportive of the economy during the quarter. Given the size of its foreign currency reserves, the government is able to inject sufficient liquidity into the financial system to ensure that banks continue to lend. The Russian banking system has been a source of strength during the credit crunch, as it lacks the leverage found in more developed systems, with very few housing loans and no credit cards.There have been no significant changes to the portfolio. It remains invested in the key themes of global infrastructure development and the rise of the domestic Russian consumer. During the quarter we visited Russia on one of our regular research trips and interviewed the management of companies we invest in.They are continuing to generate positive cash flow, and several have plans to pay special dividends or engage in share buybacks. Importantly the companies we invest in are maintaining or even in some cases increasing their capital expenditure programmes.
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