View from City Road: The downside in Russia is political

With up to dollars 500m a month of Western money flowing into Russia for investment, the sudden collapse of the rouble must have hit some equity and bond investors hard. Russia's dollar debt fell 15 per cent and equities about 20 per cent. The pain is far from universal, however.

Latecomers who have just made their move into Russian equities will be seriously out of pocket. For the early birds, however, there is still a good profit. Most of the shares foreigners have taken an interest in have risen so fast over the past year that the gains swamp the losses from devaluation and a falling market.

The top 50 stocks have risen 25-fold since September 1993. No wonder Russia has attracted the hedge funds, which are said to have provided a significant part of the inflow.

So far there is no sign of a panic sell- off, with trading volumes thought to have fallen to about a tenth of recent levels. New investors such as Fleming's Russia Fund, which attracted dollars 55m last month from hedge funds and institutions, are talking optimistically of a buying opportunity.

The case for carrying on investing is that Russian privatisation has been on the cheap. Independent Strategy, a London firm of analysts, reckons that most of Russia's productive assets have been sold for a total of dollars 5bn - in an economy whose output must be at least dollars 300bn.

It is possible to construct a scenario in which the devaluation will boost Russian exports, slow the contraction of the economy and force a more effective monetary and fiscal policy on the government, which has returned to printing money over the summer after a brief effort to get things under control.

Indeed, the rouble rose when the markets heard of the removal of the acting finance minister and the Prime Minister's request to parliament to sack the head of the central bank, who will not be missed.

The real downside is political. Russia may react badly to its crisis of capitalism, put reforms into reverse, let monetary policy go out of control and inflation soar. Investors with steady nerves will be gambling that this is not the end of Russian capitalism but just a badly needed correction to an overvalued currency.