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Investing in Eastern and Central European Markets

written by: Jason C. Chavis•edited by: Michele McDonough•updated: 8/6/2011

After over two decades of investment into Eastern Europe by the rest of the continent and outside venture capital, the region still remains a profitable option for those with the right knowledge and perseverance.

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    Why Eastern and Central Europe?

    In the 21st century, many investors have found some of the greatest potential outside of the common places to explore risk and return. Many people concerned with the performance of public enterprises in Eastern Europe after the Cold War have learned that the private sector is far more profitable. When investing venture capital into Central or Eastern Europe, there is a new type of risk. However, certain instruments like exchange traded funds and real estate continue to prove profitable.

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    Look Toward ETFs

    Despite still being considered an emerging market, the former Eastern Bloc countries and Russia are among the most profitable examples of exchange traded funds in Europe today. Since the economic downturn, which hit Eastern and Central Europe as hard as anywhere, the region has made a strong recovery, particularly in its ETF market. According to statistics from early 2011, the region shows returns that greatly outperform traditional markets, such as the United States—despite the lack of capitalization into businesses in comparison.

    According to Yahoo!Finance, some of the most successful are the Central Europe and Russia Fund (CEE) and Market Ventures Russia ETF (RSX). Both outperform major international competitors over a two year period. Among the best markets are the energy, technology and financial sectors. Each of these are key growth industries in the region, particularly in regards to foreign investment.

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    Consider Real Estate

    Still holding true, as it was immediately following the breakup of the USSR, is the potential real estate maintains in Eastern and Central Europe. Despite the fact that many Americans and Western Europeans are unfamiliar with the types of property available in this region, one must consider the fact that land and property moving towards complete public control is a great asset to an investor. Following the collapse of the Iron Curtain, real estate was slowly returned from the public sector to the private one. This property was gobbled up at very low prices in the early years. Today, it is still being sold for great values compared to the rest of the world.

    Most notably is the fact that properties are currently under major modernization efforts. New electrical systems and telecommunications lines are being installed across the region. Infrastructure replacement means that many properties are literally being torn down and rebuilt. Changes in zoning means that a savvy investor can buy property for pennies on the dollar they would otherwise do in the rest of the world. However, all investors should keep in mind that when purchasing real estate in a foreign country, one should be sure to secure a legal entity such as a law firm or lawyer. This ensures good potential for the investor.

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    How Risky is Investment in the Region?

    When looking at investing in a business or financial security in the former Soviet Bloc countries, it is easy for one to ignore some of the more major signs of success. While many of the opportunities may seem minor when compared to traditional American and Western European options, one must keep in mind the existence of government and non-government entities dedicated strictly to the engagement of parity levels within Europe.

    After the fall of the Soviet Union, much of Eastern Europe and Central Asia was in poor position to upgrade its infrastructure and telecommunications networks. Indeed, much of the region was facing economic uncertainty. Within this framework, a number of organizations entered to assist in the economic stability and invest into private enterprise. At the time, investors with private equity were able to leverage the position.

    Today, this investment still continues, with major European financial bodies essentially guaranteeing investment from both domestic and foreign entities. Among one of the most notable of these institutions is the European Investment Bank (EIB). Supported by the European Union and mandated by a number of provisions and agreements, the EIB focuses on facilitating investment-grade business and infrastructure projects. Until 2013, the EIB is mandated to support the modernization of Armenia, Azerbaijan, Georgia, Moldova, Ukraine, and Russia. This means that direct foreign investment can work through the EIB without damage to the credit standing of the organization. Any individual or entity investing either directly or through a fund that works directly with the EIB is placing themselves in a solid position in terms of risk.

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    Going Forward

    With tough economic times in the European Union, many investors are looking at emerging or unestablished markets for the next possible place to make a good return. Recent events in Southern Europe and North Africa have opened up the former Soviet Bloc and Russia as prime regions for investment. This is particularly true when one pays close attention to the laws regarding venture capital and private equity.

    After a second bailout of Greece, many investors are looking at “old Europe" as a risky place to do business. However, the “new Europe" of the emerging capitalist economies may be one of the better investment options in the near to medium term.

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    References

    Invest-IQ, http://www.invest-iq.com/

    European Investment Bank, http://www.eib.org/projects/regions/eastern-neighbours/index.htm

    Seeking Alpha, http://seekingalpha.com/article/259696-investing-in-russian-and-eastern-europe-etfs

    Money News, http://www.moneynews.com/StreetTalk/PimcoLeadsChargetoInvestinEasternEurope/2010/03/03/id/351541

    Eurus Realty, http://eurus-realty.com/investing-in-eastern-europe.php

    Image: Eastern Europe supplied by Olahus under CC 3.0