UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08788
Templeton Russia and East European Fund, Inc.
(Exact name of registrant as specified in charter)
500 East Broward Blvd., Suite 2100, Fort Lauderdale, FL 33394-3091
(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 3/31
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Date of reporting period: 9/30/07
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Item 1. Reports to Stockholders.
[GRAPHIC OMITTED]
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SEPTEMBER 30, 2007
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SEMIANNUAL REPORT INTERNATIONAL
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TEMPLETON RUSSIA AND
EAST EUROPEAN FUND, INC.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
FRANKLIN TEMPLETON INVESTMENTS
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment
disciplines that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among
what it believes are undervalued stocks, as well
as arbitrage situations and distressed
securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as
well as the reliable, accurate and personal
service that has helped us become one of the
most trusted names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SEMIANNUAL REPORT
Templeton Russia and
East European Fund, Inc. .................................................. 1
Performance Summary ....................................................... 5
Important Notice to
Shareholders .............................................................. 6
Financial Highlights and
Statement of Investments .................................................. 7
Financial Statements ...................................................... 10
Notes to Financial
Statements ................................................................ 13
Annual Meeting of
Shareholders .............................................................. 20
Shareholder Information ................................................... 21
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Semiannual Report
Templeton Russia and East European Fund, Inc.
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Russia and East European Fund
seeks long-term capital appreciation. Under normal market conditions, the Fund
invests at least 80% of its net assets in investments that are tied economically
to Russia or East European countries.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 9/30/07
Metals & Mining 23.1%
Commercial Banks 17.5%
Diversified Telecommunication Services 16.2%
Oil, Gas & Consumable Fuels 13.5%
Electric Utilities 13.1%
Pharmaceuticals 5.3%
Energy Equipment & Services 2.7%
Chemicals 2.7%
Other 2.3%
Short-Term Investments & Other Net Assets 3.6%
Dear Shareholder:
This semiannual report for Templeton Russia and East European Fund covers the
period ended September 30, 2007.
PERFORMANCE OVERVIEW
Templeton Russia and East European Fund posted cumulative total returns of
+3.35% in market price terms and +6.67% based on change in net asset value for
the six months ended September 30, 2007. In line with our long-term investment
strategy, we are pleased with our long-term results. For the 10-year period
ended September 30, 2007, the Fund delivered cumulative total returns of
+232.93% in market price terms and +299.56% in net asset value terms. You can
find more of the Fund's performance data in the Performance Summary on page 5.
ECONOMIC AND MARKET OVERVIEW
Eastern European markets ended the reporting period with positive returns
despite some volatility in July and August as most countries reported positive
economic data and benefited from greater integration with the European Union.
Although the Russian equity market performed in line with major developed
markets, it underperformed most emerging markets as investors
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 8.
Semiannual Report | 1
adopted a more cautious view on the Russian market after its strong performance
in 2006. Elsewhere in the region, Hungary and the Czech Republic recorded robust
returns.
The Russian economy continued to record strong economic growth with second
quarter gross domestic product (GDP) growing an annualized 7.8%, in line with
the annualized 7.9% in the first quarter.1 A boom in consumer and investment
demand drove GDP growth, and strong income growth further supported domestic
demand. This led the Russian central bank to upgrade its 2007 GDP growth
forecast to 7.5% from 6.5%. Continuing efforts toward accession into the World
Trade Organization, Russia signed bilateral agreements with Guatemala and
Cambodia, and reached a memorandum of understanding with Vietnam with a formal
accord expected shortly. The country had negotiations pending only with Georgia
and Saudi Arabia, so accession by the end of 2008 remained a possibility.
The Russian government announced plans to invest US$1 trillion toward
infrastructure development before 2020 to ensure continued growth. Moreover, the
2014 Winter Olympics awarded to Sochi in Southern Russia could boost the
region's growth and development. As a result, tourism, employment and
infrastructure expenditures are also expected to increase. In the political
arena, the cabinet resigned ahead of December 2007 parliamentary elections and
March 2008 presidential elections. In September, President Putin appointed
Viktor Zubkov, the head of the federal agency for financial monitoring, as
Russia's new prime minister.
INVESTMENT STRATEGY
Our investment strategy employs a company-specific, value-oriented, long-term
approach. We focus on the market price of a company's securities relative to our
evaluation of the company's long-term earnings, asset value and cash flow
potential. As we look for investments, we consider specific companies in the
context of their sector and country. We perform in-depth research to construct
an Action List from which we construct the portfolio. Our emphasis is on value
and not attempting to match or beat an index. During our analysis, we also
consider a company's position in its sector, the economic framework and
political environment.
1. Source: Federal Services of State Statistics, Russia.
2 | Semiannual Report
MANAGER'S DISCUSSION
Key Fund holdings that contributed to absolute performance during the six-month
reporting period were Severstal (Cherepovets Mk Severstal), one of Russia's
largest iron and steel producers, Norilsk Nickel (Mining and Metallurgical Co.
Norilsk Nickel), the world's biggest nickel and palladium producer, and Sberbank
(Savings Bank of Russia), the country's largest bank. Severstal and Norilsk
Nickel benefited from high commodity prices during the period, while Sberbank
remained well positioned to gain from Russia's growing retail and commercial
banking sectors. From a sector perspective, the Fund's exposure to the materials
and banks sectors, which included the top three contributors, had the largest
contribution to performance during the period.2
Conversely, the largest detractors from Fund performance included UES (Unified
Energy Systems), Russia's principal utility, and leading integrated
telecommunication services providers VolgaTelecom and Sibirtelecom. The
telecommunication services and utilities sectors had the largest negative impact
on Fund performance at the sector level.3 We remained confident in these
companies' prospects due to their strong fundamentals and the potential for
restructuring in the telecommunication industry, as well as ongoing
infrastructure development in Russia.
During the reporting period, the Fund realized gains on select Russian stocks as
they reached sale price targets. These sales also allowed us to raise funds for
the capital gains distribution in June. The largest sales included Chelyabinsk
Pipe Works, a steel pipe producer, Mobile Telesystems, a major mobile
telecommunication services provider, Bank VTB North-West (formerly,
Promstroibank St. Petersburg), a large regional bank, and Evraz Group, one of
the world's largest steel producers. We also sold Tatneft, a mid-size oil
company, and Saturn Research & Production Association, one of the largest turbo
engine producers for military and civil aviation.
2. The materials sector comprises chemicals, and metals and mining in the SOI.
The banks sector comprises commercial banks in the SOI.
3. The telecommunication services sector comprises diversified telecommunication
services and wireless telecommunication services in the SOI. The utilities
sector comprises electric utilities, and independent power producers and energy
traders in the SOI.
TOP 10 EQUITY HOLDINGS
9/30/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Sberbank RF 16.0%
COMMERCIAL BANKS, RUSSIA
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UES (Unified Energy Systems) 12.5%
ELECTRIC UTILITIES, RUSSIA
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Norilsk Nickel
(Mining and Metallurgical Co.
Norilsk Nickel) 10.9%
METALS & MINING, RUSSIA
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LUKOIL, ADR 9.5%
OIL, GAS & CONSUMABLE FUELS, RUSSIA
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Severstal (Cherepovets Mk Severstal) 9.4%
METALS & MINING, RUSSIA
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VolgaTelecom, ord. & ADR 6.3%
DIVERSIFIED TELECOMMUNICATION
SERVICES, RUSSIA
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Egis Nyrt 4.7%
PHARMACEUTICALS, HUNGARY
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Sibirtelecom 4.3%
DIVERSIFIED TELECOMMUNICATION
SERVICES, RUSSIA
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Gazprom, ord. & ADR 4.0%
OIL, GAS & CONSUMABLE FUELS, RUSSIA
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Southern Telecommunications Co. 3.2%
DIVERSIFIED TELECOMMUNICATION
SERVICES, RUSSIA
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Semiannual Report | 3
Continuing the search for undervalued stocks trading at what we considered
attractive valuations, the Fund initiated positions in VTB Bank, a leading
Russian universal banking group, and VSMPO (Vsmpo-Avisma), one of the world's
largest integrated titanium products manufacturers. We believed VTB Bank could
benefit from Russia's growing banking sector, while VSMPO could gain from high
commodity prices and growing global demand for metals. The Fund also initiated
exposure to Kazakhstan via the purchase of Alliance Bank. The bank's dominant
presence in the retail loans segment coupled with Kazakhstan's strong economic
growth provided us with reasons to take a positive view on this stock.
Thank you for your continued participation in Templeton Russia and East European
Fund. We look forward to serving your future investment needs.
Sincerely,
[PHOTO OMITTED] /s/ Mark Mobius
Mark Mobius
Executive Chairman
Templeton Asset Management Ltd.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
4 | Semiannual Report
Performance Summary as of 9/30/07
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses. Total
returns do not reflect any sales charges paid at inception or brokerage
commissions paid on secondary market purchases. The performance table does not
reflect any taxes that a shareholder would pay on Fund dividends, capital gain
distributions, if any, or realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
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SYMBOL: TRF CHANGE 9/30/07 3/31/07
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Net Asset Value (NAV) +$0.24 $67.72 $67.48
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Market Price (NYSE) -$1.74 $68.67 $70.41
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DISTRIBUTIONS (4/1/07-9/30/07)
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Long-Term Capital Gain $3.9272
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PERFORMANCE
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6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1
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Based on change in NAV 2 +6.67% +42.14% +636.57% +299.56%
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Based on change in market price 3 +3.35% +20.53% +744.86% +232.93%
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Average Annual Total Return 1
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Based on change in NAV 2 +6.67% +42.14% +49.10% +14.86%
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Based on change in market price 3 +3.35% + 20.53% +53.24% +12.78%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING INCLUDING CURRENCY
VOLATILITY, ECONOMIC INSTABILITY AND SOCIAL AND POLITICAL DEVELOPMENTS OF
COUNTRIES WHERE THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS
RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR
RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. RUSSIAN AND EAST EUROPEAN SECURITIES
INVOLVE SIGNIFICANT ADDITIONAL RISKS, INCLUDING POLITICAL AND SOCIAL UNCERTAINTY
(FOR EXAMPLE, REGIONAL CONFLICTS AND RISK OF WAR), CURRENCY EXCHANGE RATE
VOLATILITY, PERVASIVENESS OF CORRUPTION AND CRIME IN THE RUSSIAN AND EAST
EUROPEAN ECONOMIC SYSTEMS, DELAYS IN SETTLING PORTFOLIO TRANSACTIONS AND RISK OF
LOSS ARISING OUT OF THE SYSTEM OF SHARE REGISTRATION AND CUSTODY USED IN RUSSIA
AND EAST EUROPEAN COUNTRIES. ALSO, AS A NONDIVERSIFIED INVESTMENT COMPANY
INVESTING IN RUSSIA AND EAST EUROPEAN COUNTRIES, THE FUND MAY INVEST IN A
RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT TO GREATER RISK
OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES.
1. Total return calculations represent the cumulative and average annual changes
in value of an investment over the periods indicated.
2. Assumes reinvestment of distributions based on net asset value.
3. Assumes reinvestment of distributions based on the dividend reinvestment and
cash purchase plan.
Semiannual Report | 5
Important Notice to Shareholders
EXCHANGE-TRADED FUNDS
The Fund may invest up to 10% of its total assets in shares of exchange-traded
funds (ETFs) for the purpose of short-term cash management. The Fund will use
ETFs when the investment manager determines that the Fund will benefit from
market exposure when there is excess cash in the Fund and the investment manager
is not able to invest in a single stock fast enough because either the stock is
not liquid enough to accommodate a large purchase or the Fund would cause
excessive market impact in trying to invest cash in a single stock immediately
(referred to as "equitizing cash"). This strategy can allow the investment
manager to be more selective in the securities it buys for the Fund and the
prices paid because the investment manager is not forced to buy stocks at any
price just to get market exposure. The Fund may also use ETFs to provide the
Fund with liquidity during volatile markets without having to hold
underperforming cash.
An investment in an ETF generally represents the same risks as an investment in
a conventional fund (i.e., an investment company that is not exchange-traded).
The price of an ETF can fluctuate and the Fund could lose money investing in an
ETF if the prices of the securities owned by the ETF go down. In addition, ETFs
are subject to certain other risks that do not apply to conventional funds, such
as the risk that the market price of the ETF's shares may trade at a discount to
their net asset value; the risk that an active market for an ETF's shares may
not develop or be maintained; or the risk that an ETF's shares could be delisted
from an exchange or that trading may be halted for various reasons.
Most ETFs are investment companies. Therefore, the Fund's purchases of ETFs are
subject to limitations on investments in other investment companies under
section 12(d)(1) of the 1940 Act, unless exemptions from those limitations are
available pursuant to the SEC's current rules, exemptions and interpretations
under the 1940 Act.
6 | Semiannual Report
Templeton Russia and East European Fund, Inc.
FINANCIAL HIGHLIGHTS
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SIX MONTHS ENDED
SEPTEMBER 30, 2007 YEAR ENDED MARCH 31,
(UNAUDITED) 2007 2006 2005 2004 2003
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 67.48 $ 60.92 $ 40.59 $ 39.89 $ 22.11 $ 21.60
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Income from investment operations:
Net investment income (loss) a ................. 0.06 (0.24) (0.26) (0.01) 0.15 (0.07)
Net realized and unrealized gains (losses) ..... 4.11 20.90 29.51 4.28 21.86 0.68
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Total from investment operations .................. 4.17 20.66 29.25 4.27 22.01 0.61
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Less distributions from:
Net investment income .......................... -- (0.95) -- -- (0.22) --
Net realized gains ............................. (3.93) (13.15) (8.92) (3.57) (4.01) (0.10)
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Total distributions ............................... (3.93) (14.10) (8.92) (3.57) (4.23) (0.10)
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Net asset value, end of period .................... $ 67.72 $ 67.48 $ 60.92 $ 40.59 $ 39.89 $ 22.11
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Market value, end of period b ..................... $ 68.67 $ 70.41 $ 76.06 $ 39.30 $ 45.65 $ 20.54
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Total return (based on market value per share) c .. 3.35% 14.07% 130.61% (5.15)% 150.26% (23.87)%
RATIOS TO AVERAGE NET ASSETS d
Expenses before expense reduction ................. 1.81% 1.85% 1.84% 1.80% 1.84% 2.02%
Expenses net of expense reduction ................. 1.81% 1.84% 1.84% 1.80% 1.84% 2.02%
Net investment income (loss) ...................... 0.21% (0.39)% (0.55)% (0.02)% 0.47% (0.33)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 371,114 $ 368,832 $ 330,324 $218,577 $ 214,166 $118,724
Portfolio turnover rate ........................... 3.63% 8.36% 15.73% 7.65% 18.76% 7.85%
a Based on average daily shares outstanding.
b Based on the last sale on the New York Stock Exchange.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 7
Templeton Russia and East European Fund, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2007 (UNAUDITED)
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COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 96.4%
CHEMICALS 2.7%
JSC Salavatnefteorgsintez .............................................. Russia 129,000 $ 9,836,250
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COMMERCIAL BANKS 17.5%
a,b Alliance Bank JSC, GDR, 144A ........................................... Kazakhstan 208,000 1,695,200
a,c Alliance Bank JSC, GDR, Reg S .......................................... Kazakhstan 112,000 912,800
Sberbank RF ............................................................ Russia 14,231,000 59,343,270
a VTB Bank OJSC, GDR ..................................................... Russia 175,000 1,566,250
a,b VTB Bank OJSC, GDR, 144A ............................................... Russia 162,582 1,455,109
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64,972,629
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DIVERSIFIED TELECOMMUNICATION SERVICES 16.2%
Sibirtelecom ........................................................... Russia 146,940,180 15,825,457
Southern Telecommunications Co. ........................................ Russia 63,812,635 11,773,431
Telekomunikacja Polska SA .............................................. Poland 603,200 4,780,329
Uralsvyazinform ........................................................ Russia 66,890,000 4,150,525
VolgaTelecom ........................................................... Russia 3,685,789 19,166,103
VolgaTelecom, ADR ...................................................... Russia 407,000 4,232,800
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59,928,645
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ELECTRIC UTILITIES 13.1%
OGK-5 .................................................................. Russia 15,687,543 2,442,551
a Unified Energy Systems ................................................. Russia 38,090,429 46,279,871
--------------
48,722,422
--------------
ENERGY EQUIPMENT & SERVICES 2.7%
a,b C.A.T. oil AG, 144A .................................................... Austria 138,000 3,540,464
a,c Integra Group Holdings, GDR, Reg S ..................................... Russia 149,700 2,362,266
b OAO TMK, 144A .......................................................... Russia 393,550 4,053,565
--------------
9,956,295
--------------
FOOD & STAPLES RETAILING 0.2%
a,b Cherkizovo Group OJSC, GDR, 144A ....................................... Russia 65,000 861,250
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.2%
TGC-5 JSC .............................................................. Russia 517,839,001 585,158
--------------
MACHINERY 0.4%
a JSC Mashinostroitelniy Zavod ........................................... Russia 4,240 1,526,400
--------------
METALS & MINING 23.1%
a Chelyabinsk Zinc Plant ................................................. Russia 27,800 3,829,450
Cherepovets Mk Severstal ............................................... Russia 1,655,300 34,844,065
Mining and Metallurgical Co. Norilsk Nickel ............................ Russia 158,300 40,524,800
Polyus Gold ............................................................ Russia 102,052 4,490,288
a Vsmpo-Avisma Corp. ..................................................... Russia 6,590 2,062,010
--------------
85,750,613
--------------
8 | Semiannual Report
Templeton Russia and East European Fund, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
OIL, GAS & CONSUMABLE FUELS 13.5%
Gazprom OAO ............................................................ Russia 524,000 $ 5,779,720
Gazprom OAO, ADR ....................................................... Russia 210,500 9,246,213
LUKOIL, ADR ............................................................ Russia 423,800 35,133,020
--------------
50,158,953
--------------
PHARMACEUTICALS 5.3%
Egis Nyrt .............................................................. Hungary 132,771 17,344,690
a Veropharm .............................................................. Russia 55,000 2,337,500
--------------
19,682,190
--------------
REAL ESTATE 1.5%
a Open Investments ....................................................... Russia 18,950 5,609,200
--------------
TOTAL COMMON STOCKS (COST $84,337,382) ................................. 357,590,005
--------------
SHORT TERM INVESTMENT (COST $15,007,386) 4.0%
MONEY MARKET FUND 4.0%
d Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.08% ... United States 15,007,386 15,007,386
--------------
TOTAL INVESTMENTS (COST $99,344,768) 100.4% ............................ 372,597,391
OTHER ASSETS, LESS LIABILITIES (0.4)% .................................. (1,483,296)
--------------
NET ASSETS 100.0% ...................................................... $ 371,114,095
==============
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
GDR - Global Depository Receipt
a Non-income producing for the twelve months ended September 30, 2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Fund's Board of Directors. At September 30, 2007, the aggregate value of
these securities was $11,605,588, representing 3.13% of net assets.
c Security was purchased pursuant to Regulation S under the Securities Act of
1933, which exempts from registration securities offered and sold outside of the
United States. Such a security cannot be sold in the United States without
either an effective registration statement filed pursuant to the Securities Act
of 1933, or pursuant to an exemption from registration. These securities have
been deemed liquid under guidelines approved by the Fund's Board of Directors.
At September 30, 2007, the aggregate value of these securities was $3,275,066,
representing 0.88% of net assets.
d See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 9
Templeton Russia and East European Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2007 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................... $ 84,337,382
Cost - Sweep Money Fund (Note 7) ...................................... 15,007,386
--------------
Total cost of investments ............................................. $ 99,344,768
==============
Value - Unaffiliated issuers .......................................... $ 357,590,005
Value - Sweep Money Fund (Note 7) ..................................... 15,007,386
--------------
Total value of investments ............................................ 372,597,391
Receivables:
Investment securities sold ............................................... 122,249
Dividends ................................................................ 1,161,658
--------------
Total assets ....................................................... 373,881,298
--------------
Liabilities:
Payables:
Investment securities purchased ....................................... 1,982,970
Affiliates ............................................................ 426,610
Accrued expenses and other liabilities ................................... 357,623
--------------
Total liabilities .................................................. 2,767,203
--------------
Net assets, at value ............................................ $ 371,114,095
==============
Net assets consist of:
Paid-in capital .......................................................... $ 81,983,715
Undistributed net investment income (loss) ............................... (5,415,940)
Net unrealized appreciation (depreciation) ............................... 273,252,623
Accumulated net realized gain (loss) ..................................... 21,293,697
--------------
Net assets, at value ............................................ $ 371,114,095
==============
Shares outstanding .......................................................... 5,479,779
==============
Net asset value per share ................................................... $ 67.72
==============
10 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Templeton Russia and East European Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended September 30, 2007 (unaudited)
Investment income:
Dividends: (net of foreign taxes of $409,733)
Unaffiliated issuers .................................................. $ 3,319,258
Sweep Money Fund (Note 7) ............................................. 264,123
--------------
Total investment income ............................................ 3,583,381
--------------
Expenses:
Management fees (Note 3a) ................................................ 2,224,444
Administrative fees (Note 3b) ............................................ 358,366
Transfer agent fees ...................................................... 25,358
Custodian fees (Note 4) .................................................. 512,918
Reports to shareholders .................................................. 17,518
Registration and filing fees ............................................. 10,570
Professional fees ........................................................ 50,449
Directors' fees and expenses ............................................. 17,297
Other .................................................................... 15,521
--------------
Total expenses ..................................................... 3,232,441
--------------
Expense reductions (Note 4) ........................................ (200)
--------------
Net expenses ....................................................... 3,232,241
--------------
Net investment income ........................................ 351,140
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 21,310,901
Foreign currency transactions ......................................... (5,771)
--------------
Net realized gain (loss) ..................................... 21,305,130
--------------
Net change in unrealized appreciation (depreciation) on investments ...... 1,197,885
--------------
Net realized and unrealized gain (loss) ..................................... 22,503,015
--------------
Net increase (decrease) in net assets resulting from operations ............. $ 22,854,155
==============
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 11
Templeton Russia and East European Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------
SIX MONTHS ENDED
SEPTEMBER 30, 2007 YEAR ENDED
(UNAUDITED) MARCH 31, 2007
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ......................................................... $ 351,140 $ (1,296,568)
Net realized gain (loss) from investments and foreign currency transactions .......... 21,305,130 65,957,437
Net change in unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies ....................... 1,197,885 47,594,128
-------------------------------------
Net increase (decrease) in net assets resulting from operations ................ 22,854,155 112,254,997
-------------------------------------
Distributions to shareholders from:
Net investment income ................................................................ -- (5,138,264)
Net realized gains ................................................................... (21,466,776) (71,453,671)
-------------------------------------
Total distributions to shareholders .................................................. (21,466,776) (76,591,935)
-------------------------------------
Capital share transactions: (Note 2) .................................................... 894,876 2,844,805
-------------------------------------
Net increase (decrease) in net assets .......................................... 2,282,255 38,507,867
Net assets:
Beginning of period ..................................................................... 368,831,840 330,323,973
-------------------------------------
End of period ........................................................................... $ 371,114,095 $ 368,831,840
=====================================
Undistributed net investment income (loss) included in net assets:
End of period ........................................................................... $ (5,415,940) $ (5,767,080)
=====================================
12 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Russia and East European Fund, Inc. (the Fund) is registered under the
Investment Company Act of 1940, as amended,
(the 1940 Act) as a non-diversified, closed-end investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund's Board of Directors.
Semiannual Report | 13
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend income received. Foreign taxes, if any, are recorded based on the tax
regulations and rates that exist in the foreign markets in which the Fund
invests.
14 | Semiannual Report
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States of
America. These differences may be permanent or temporary. Permanent differences
are reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At September 30, 2007, there were 100 million shares authorized ($0.01 par
value). Transactions in the Fund's shares were as follows:
-----------------------------------------
SIX MONTHS ENDED
SEPTEMBER 30, 2007 YEAR ENDED
(UNAUDITED) MARCH 31, 2007
-----------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------
Shares issued ...................... 13,602 $894,876 44,233 $2,844,805
Semiannual Report | 15
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
The Fund's Board of Directors previously authorized an open-market share
repurchase program pursuant to which the Fund may purchase, from time to time,
Fund shares in open-market transactions, at the discretion of management.
Effective December 6, 2006, the Board of Directors discontinued the share
repurchase program.
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
The Fund pays an investment management fee to TAML based on the average weekly
net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
1.250% Up to and including $1 billion
1.200% Over $1 billion, up to and including $5 billion
1.150% Over $5 billion, up to and including $10 billion
1.100% Over $10 billion, up to and including $15 billion
1.050% Over $15 billion, up to and including $20 billion
1.000% In excess of $20 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
average weekly net assets of the Fund.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended September 30, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
16 | Semiannual Report
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At March 31, 2007, the Fund deferred realized currency losses of
$11,425.
Net investment income and net realized gains (losses) differ for financial
statement and tax purposes primarily due to differing treatments of foreign
currency transactions and passive foreign investment company shares.
At September 30, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ....................................... $108,291,923
=============
Unrealized appreciation ................................... $268,056,604
Unrealized depreciation ................................... (3,751,136)
-------------
Net unrealized appreciation (depreciation) ................ $264,305,468
=============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended September 30, 2007, aggregated $12,596,517 and $37,611,619,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Franklin Advisers, Inc. (an affiliate of the investment manager). Management
fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in
an amount not to exceed the management and administrative fees paid by the Sweep
Money Fund.
8. CONCENTRATION OF RISK
Investing in equity securities of Russian and East European companies may
include certain risks not typically associated with investing in countries with
more developed securities markets, such as political, economic and legal
uncertainties, delays in settling portfolio transactions and the risk of loss
from Russia's underdeveloped systems of securities registration and transfer.
Semiannual Report | 17
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Following the public comment
period, and once the SEC approves the final plan of distribution, disbursements
of settlement monies will be made promptly to individuals who were shareholders
of the designated funds during the relevant period, in accordance with the terms
and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
18 | Semiannual Report
Templeton Russia and East European Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. NEW ACCOUNTING PRONOUNCEMENTS
The Fund adopted Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" (FIN 48), on September 28, 2007. FIN
48 clarifies the accounting for uncertainty in tax positions taken or expected
to be taken in a tax return. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. The Fund has reviewed the tax
positions for open tax years March 31, 2005-2007 and has determined that the
implementation of FIN 48 did not have a material impact on the Fund's financial
statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
(SFAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
Semiannual Report | 19
Templeton Russia and East European Fund, Inc.
ANNUAL MEETING OF SHAREHOLDERS, AUGUST 24, 2007 (UNAUDITED)
The Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 East Broward Boulevard, Fort Lauderdale, Florida, on August 24, 2007 for the
purpose of electing five Directors of the Fund. At the meeting, the following
persons were elected by the shareholders to serve as Directors of the Fund:
Edith E. Holiday, Charles B. Johnson, Gregory E. Johnson, Frank A. Olson and
Robert E. Wade.* No other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
Proposal: The election of five (5) Directors:
- -------------------------------------------------------------------------------------------------------
% OF % OF
SHARES SHARES
% OF PRESENT % OF PRESENT
OUTSTANDING AND OUTSTANDING AND
TERM EXPIRING 2010 FOR SHARES VOTING WITHHELD SHARES VOTING
- -------------------------------------------------------------------------------------------------------
Edith E. Holiday .............. 4,313,775 78.72% 97.05% 131,329 2.40% 2.95%
Charles B. Johnson ............ 4,373,837 79.82% 98.40% 71,267 1.30% 1.60%
Gregory E. Johnson ............ 4,375,302 79.84% 98.43% 69,802 1.27% 1.57%
Frank A. Olson ................ 4,370,729 79.76% 98.33% 74,375 1.36% 1.67%
Robert E. Wade ................ 4,353,381 79.44% 97.94% 91,723 1.67% 2.06%
* Harris J. Ashton, Frank J. Crothers, David W. Niemiec, Larry D. Thompson
and Constantine D. Tseretopoulos are Directors of the Fund who are
currently serving and whose terms of office continued after the Annual
Meeting of Shareholders.
20 | Semiannual Report
Templeton Russia and East European Fund, Inc.
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures (Policies) that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
CERTIFICATIONS
The Fund's Chief Executive Officer - Finance and Administration is required by
the New York Stock Exchange's Listing Standards to file annually with the
Exchange a certification that he is not aware of any violation by the Fund of
the Exchange's Corporate Governance Standards applicable to the Fund. The Fund
has filed such certification.
In addition, the Fund's Chief Executive Officer - Finance and Administration and
Chief Financial Officer and Chief Accounting Officer are required by the rules
of the U.S. Securities and Exchange Commission to provide certain certifications
with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's
annual and semiannual reports to shareholders) that are filed semiannually with
the Commission. The Fund has filed such certifications with its Form N-CSR for
the year ended March 31, 2007. Additionally, the Fund expects to file, on or
about November 29, 2007, such certifications with its Form N-CSRS for the six
months ended September 30, 2007.
Semiannual Report | 21
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN (R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio (R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust 9
1. The fund is open only to existing shareholders and select retirement plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07
Not part of the semiannual report
[LOGO](R) 100 Fountain Parkway
FRANKLIN TEMPLETON P.O. Box 33030
INVESTMENTS St. Petersburg, FL 33733-8030
SEMIANNUAL REPORT
TEMPLETON RUSSIA AND
EAST EUROPEAN FUND, INC.
INVESTMENT MANAGER
Templeton Asset Management Ltd.
TRANSFER AGENT
Mellon Investor Services LLC
P.O. Box 358015
Pittsburgh, PA 15252-8015
Toll free number: 1-800/416-5585
Hearing Impaired phone number: 1-800/231-5469
Foreign Shareholders phone number: 201/680-6578
www.melloninvestor.com/isd
FUND INFORMATION
1-800/342-5236
Investors should be aware that the value of investments made for the Fund may go
down as well as up. Like any investment in securities, the value of the Fund's
portfolio will be subject to the risk of loss from market, currency, economic,
political and other factors. The Fund and its investors are not protected from
such losses by the investment manager. Therefore, investors who cannot accept
this risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
TLTRF S2007 11/07
Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are David W. Niemiec and Frank A.
Olson and they are "independent" as defined under the relevant Securities and
Exchange Commission Rules and Releases.
Item 4. Principal Accountant Fees and Services. N/A
Item 5. Audit Committee of Listed Registrants.
Members of the Audit Committee are: Frank J. Crothers, David W. Niemiec, Frank
A. Olson and Constantine D. Tseretopoulos.
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
The board of directors of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Franklin Advisers, Inc. in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to RiskMetrics Group
(RiskMetrics), an unaffiliated third party corporate governance research service
that provides in-depth analyses of shareholder meeting agendas, vote
recommendations, recordkeeping and vote disclosure services. In addition, the
manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated
third party analytical research firm, to receive analyses and vote
recommendations on the shareholder meetings of publicly held U.S. companies.
Although RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from RiskMetrics, Glass Lewis or any other third party to be
determinative of the manager's ultimate decision. The manager votes proxies
solely in the interests of the Fund and its shareholders. As a matter of policy,
the officers, directors/trustees and employees of the Fund, the manager and the
Proxy Group will not be influenced by outside sources whose interests conflict
with the interests of the Fund and its shareholders. Efforts are made to resolve
all conflicts in the interests of the manager's clients. Material conflicts of
interest are identified by the Proxy Group based upon analyses of client, broker
and vendor lists, information periodically gathered from directors and officers,
and information derived from other sources, including public filings. In
situations where a material conflict of interest is identified, the Proxy Group
will refer the matter, along with the recommended course of action by the
manager to an interdepartmental Proxy Review Committee (which may include
portfolio managers and/or research analysts employed by the manager), for
evaluation and voting instructions. The Proxy Review Committee may defer to the
voting recommendation of RiskMetrics, Glass Lewis or those of another
independent third party provider of proxy services; or send the proxy directly
to the Fund with a recommendation regarding the vote for approval. Where the
Proxy Review Committee refers a matter to the Fund, it may rely upon the
instructions of a representative of the Fund, such as the board of trustees or a
committee of the board.
The recommendation of management on any issue is a factor which the manager
considers in determining how proxies should be voted, but is not determinative
of the manager's ultimate decision. As a matter of practice, the votes with
respect to most issues are cast in accordance with the position of the company's
management. Each issue, however, is considered on its own merits, and the
manager will not support the position of the company's management in any
situation where it deems that the ratification of management's position would
adversely affect the investment merits of owning that company's shares.
Manager's proxy voting policies and principles The manager has adopted general
proxy voting guidelines, which are summarized below. These guidelines are not an
exhaustive list of all the issues that may arise and the manager cannot
anticipate all future situations. In all cases, each proxy will be considered
based on the relevant facts and circumstances.
Board of directors. The manager supports an independent board of directors, and
prefers that key committees such as audit, nominating, and compensation
committees be comprised of independent directors. The manager will generally
vote against management efforts to classify a board and will generally support
proposals to declassify the board of directors. The manager may withhold votes
from directors who have attended less than 75% of meetings without a valid
reason. While generally in favor of separating Chairman and CEO positions, the
manager will review this issue as well as proposals to restore or provide for
cumulative voting on a case-by-case basis, taking into consideration factors
such as the company's corporate governance guidelines or provisions and
performance.
Ratification of auditors of portfolio companies. In light of several high
profile accounting scandals, the manager will closely scrutinize the role and
performance of auditors. On a case-by-case basis, the manager will examine
proposals relating to non-audit relationships and non-audit fees. The manager
will also consider, on a case-by-case basis, proposals to rotate auditors, and
will vote against the ratification of auditors when there is clear and
compelling evidence of accounting irregularities or negligence.
Management and director compensation. A company's equity-based compensation plan
should be in alignment with its shareholders' long-term interests. The manager
believes that executive compensation should be directly linked to the
performance of the company. The manager evaluates plans on a case-by-case basis
by considering several factors to determine whether the plan is fair and
reasonable, including the RiskMetrics quantitative model utilized to assess such
plans and/or the Glass Lewis evaluation of the plans. The manager will generally
oppose plans that have the potential to be excessively dilutive, and will almost
always oppose plans that are structured to allow the repricing of underwater
options, or plans that have an automatic share replenishment "evergreen"
feature. The manager will generally support employee stock option plans in which
the purchase price is at least 85% of fair market value, and when potential
dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although the manager will generally oppose "golden parachutes" that are
considered to be excessive. The manager will normally support proposals that
require a percentage of directors' compensation to be in the form of common
stock, as it aligns their interests with those of shareholders. The manager will
review on a case-by-case basis any shareholder proposals to adopt policies on
expensing stock option plans.
Anti-takeover mechanisms and related issues. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. On
occasion, the manager may vote with management when the research analyst has
concluded that the proposal is not onerous and would not harm the Fund or its
shareholders' interests. The manager generally supports proposals that require
shareholder rights' plans ("poison pills") to be subject to a shareholder vote
and will closely evaluate such plans on a case-by-case basis to determine
whether or not they warrant support. The manager will generally vote against any
proposal to issue stock that has unequal or subordinate voting rights. The
manager generally opposes any supermajority voting requirements as well as the
payment of "greenmail." The manager generally supports "fair price" provisions
and confidential voting.
Changes to capital structure. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase and proposals seeking preemptive rights. The manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
The manager will generally vote in favor of the issuance of preferred stock in
cases where the company specifies the voting, dividend, conversion and other
rights of such stock and the terms of the preferred stock issuance are deemed
reasonable.
Mergers and corporate restructuring. Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether each will be
beneficial to shareholders. The manager will analyze various economic and
strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring and reincorporation proposals are also subject to a
thorough examination on a case-by-case basis.
Social and corporate policy issues. The manager will generally give management
discretion with regard to social, environmental and ethical issues, although the
manager may vote in favor of those that are believed to have significant
economic benefits or implications for the Fund and its shareholders.
Global corporate governance. Many of the tenets discussed above are applied to
proxy voting decisions for international companies. However, the manager must be
more flexible in these instances and must be mindful of the varied market
practices of each region.
The manager will attempt to process every proxy it receives for all domestic and
foreign issuers. However, there may be situations in which the manager cannot
process proxies, for example, where a meeting notice was received too late, or
sell orders preclude the ability to vote. If a security is on loan, the manager
may determine that it is not in the best interests of the Fund to recall the
security for voting purposes. Also, the manager may abstain from voting under
certain circumstances or vote against items such as "Other Business" when the
manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com.
Alternatively, shareholders may request copies of the Policies free of charge by
calling the Proxy Group collect at 1-954/527-7678 or by sending a written
request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite
1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's
proxy voting records are available online at franklintempleton.com and posted on
the SEC website at www.sec.gov. The proxy voting records are updated each year
by August 31 to reflect the most recent 12-month period ended June 30.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosure
herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) Changes in Internal Controls. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
Item 12. Exhibits.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC.
By /s/JIMMY D. GAMBILL
-------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date November 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
-------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date November 27, 2007
Date November 27, 2007
By /s/GALEN G. VETTER
-----------------------------
Galen G. Vetter
Chief Financial Officer
Date November 27, 2007