-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiujfnPSRl2A8sVRssAhum11AKlvZkWX966/bC0Nl3CsmCoICXhnNrjRewgTFIEi NOD2GSkB9brhs5a8a6o5Xw== 0000930828-05-000021.txt : 20051130 0000930828-05-000021.hdr.sgml : 20051130 20051130141808 ACCESSION NUMBER: 0000930828-05-000021 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051130 DATE AS OF CHANGE: 20051130 EFFECTIVENESS DATE: 20051130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON RUSSIA & EAST EUROPEAN FUND INC CENTRAL INDEX KEY: 0000930828 IRS NUMBER: 650525725 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08788 FILM NUMBER: 051234015 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD., SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD. CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON RUSSIA & EAST EUROPEAN FUND INC DATE OF NAME CHANGE: 20021118 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON RUSSIA FUND INC DATE OF NAME CHANGE: 19941003 N-CSRS 1 trfsemiannual905.txt TEMP. RUSSIA & EAST EUROPEAN FUND SEMIANNUAL DTD 9/30/05 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., 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 -------------- Date of fiscal year end: 3/31 ---- Date of reporting period: 9/30/05 ------- ITEM 1. REPORTS TO STOCKHOLDERS [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- SEPTEMBER 30, 2005 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEMIANNUAL REPORT | INTERNATIONAL - -------------------------------------------------------------------------------- TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. - -------------------------------------------------------------------------------- [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. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [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 .......................................... 7 Financial Highlights and Statement of Investments ......................... 8 Financial Statements ...................................................... 11 Notes to Financial Statements ............................................. 14 Annual Meeting of Shareholders ............................................ 20 Dividend Reinvestment and Cash Purchase Plan .............................. 21 Shareholder Information ................................................... 22 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Based on Total Net Assets as of 9/30/05 [PIE CHART OMITTED] Diversified Telecommunication Services ............ 21.2% Oil, Gas & Consumable Fuels ....................... 18.1% Metals & Mining ................................... 13.6% Commercial Banks .................................. 13.5% Electric Utilities ................................ 8.1% Pharmaceuticals ................................... 7.8% Wireless Telecommunication Services ............... 3.9% Chemicals ......................................... 2.4% Automobiles ....................................... 2.1% Other ............................................. 2.1% Short-Term Investments & Other Net Assets ......... 7.2% - -------------------------------------------------------------------------------- Dear Shareholder: This semiannual report for Templeton Russia and East European Fund, Inc. covers the period ended September 30, 2005. 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 9. Semiannual Report | 1 PERFORMANCE OVERVIEW Templeton Russia and East European Fund posted six-month cumulative total returns of +54.19% in market price terms and +29.38% based on change in net asset value. In comparison, the Morgan Stanley Capital International (MSCI) Russia Index posted a +57.33% cumulative total return, and the MSCI Emerging Markets (EM) Eastern European Index posted a +41.15% cumulative total return in U.S. dollars for the same period.(1) In line with our long-term investment strategy, we are pleased with our long-term results. For the 10-year period ended September 30, 2005, the Fund delivered cumulative total returns of +565.23% in market price terms and +607.45% in net asset value terms, compared with the +1,014.17% and +248.34% cumulative total returns of the MSCI Russia Index and the MSCI EM Eastern European Index over the same period. 1 Please note that index performance information is provided for reference. We do not attempt to track the indexes but rather undertake investments on the basis of fundamental research. You can find the Fund's performance data in the Performance Summary on page 5. ECONOMIC AND MARKET OVERVIEW Russia's gross domestic product (GDP) expanded an estimated 5.9% in the first three quarters of 2005 compared with the same nine-month period in 2004.(2) High commodity prices, especially for oil, provided significant export revenues and a boost for the Russian economy, which relies heavily on its petroleum and natural gas industries. High commodity prices also supported Russia's trade balance, which grew to a surplus of US$80.1 billion in the first eight months of 2005, up from US$53.8 billion during the same eight-month period one year earlier.(3) Confirming signs of Russia's improved financial standing, the country repaid US$18.3 billion of its debt to the International Monetary Fund and the Paris Club (an organization of international creditors that provide debt relief to countries in need) ahead of schedule.(4) The Finance Ministry also announced plans to pay between US$3 billion and US$5 billion by the end of 2005, as well as another US$10 billion to US$15 billion in 2006, (1) Source: Standard & Poor's Micropal. The MSCI Russia Index is market capitalization weighted and measures total returns of equity securities in Russia. The MSCI EM Eastern European Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in Eastern European emerging markets. As of 9/30/05, the Fund's 10-year average annual total returns were +20.86% based on market price and +21.61% based on net asset value, compared with the +27.26% and +13.29% average annual total returns of the MSCI Russia Index and the MSCI EM Eastern European Index for the same period. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. (2) Source: Russian Economic Development and Trade Ministry. (3) Source: Federal Service of State Statistics, Russia. (4) Source: Russian Finance Ministry. 2 | Semiannual Report prior to debt maturity. Fitch Ratings, an independent international credit rating agency, upgraded the country's sovereign long-term foreign currency credit rating to BBB, mainly due to the country's improving fiscal position. Aimed at improving regional relations, Russia and the European Union agreed to increase cooperation in a number of areas, including travel/tourism and international diplomacy. Hungary's GDP grew an annualized 4.1% in second quarter 2005 compared with second quarter 2004.(5) This brought the growth rate to 3.5% annualized for the first half of the year.(5) GDP was driven by strengthening exports and domestic demand. Interest rates continued to fall in Hungary, with the central bank reducing its key policy rate as inflation remained relatively benign. The Hungarian central bank also substantially lowered its inflation outlook for 2006 and raised its 2006 GDP forecast to 3.9% from 3.6%. In politics, Hungary's presidential election was decided at the third and final vote and Laszlo Solyom, the candidate from opposition party Fidesz, emerged victorious. Eastern European markets outperformed their emerging markets peers as greater integration with Western Europe, benign inflation and falling interest rates resulted in a favorable investment environment. The Russian market was the strongest performer, with the MSCI Russia Index returning +57.33% during the period under review.(1) 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. MANAGER'S DISCUSSION The Fund's performance, relative to the MSCI EM Eastern European Index, benefited from good stock selection and an underweighted position in banks, TOP 10 EQUITY HOLDINGS 9/30/05 - ----------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ----------------------------------------------------- Sberbank RF 13.5% COMMERCIAL BANKS, RUSSIA - ----------------------------------------------------- Lukoil Holdings, ADR 10.2% OIL, GAS & CONSUMABLE FUELS, RUSSIA - ----------------------------------------------------- Cherepovets Mk Severstal 7.6% METALS & MINING, RUSSIA - ----------------------------------------------------- VolgaTelecom, ord. & ADR 6.8% DIVERSIFIED TELECOMMUNICATION SERVICES, RUSSIA - ----------------------------------------------------- Unified Energy Systems 5.6% ELECTRIC UTILITIES, RUSSIA - ----------------------------------------------------- Egis RT 5.0% PHARMACEUTICALS, HUNGARY - ----------------------------------------------------- Telekomunikacja Polska SA 4.9% DIVERSIFIED TELECOMMUNICATION SERVICES, POLAND - ----------------------------------------------------- Mining and Metallurgical Co. Norilsk Nickel 4.8% METALS & MINING, RUSSIA - ----------------------------------------------------- Mobile Telesystems, ADR 3.9% WIRELESS TELECOMMUNICATION SERVICES, RUSSIA - ----------------------------------------------------- Sibirtelecom 3.9% DIVERSIFIED TELECOMMUNICATION SERVICES, RUSSIA - ----------------------------------------------------- (5) Source: Hungarian Statistical Office. Semiannual Report | 3 and zero exposure to the media industry and the food, beverage and tobacco industry group. Alternatively, an underweighted position in the energy sector led to our largest negative performance relative to the index, as the sector recorded strong price appreciation during the period. Overweighted exposure to materials and pharmaceuticals stocks also adversely impacted relative performance, as these areas underperformed the index. As we continued our search for value stocks trading at attractive valuations, we added two new stocks to the Fund's portfolio during the six months under review. These were Oriflame Cosmetics, a cosmetics company that operates in Central and Eastern Europe; and Mobile Telesystems, a major Russian wireless telecommunications services provider. Other Russian stock purchases included JSC Salavatnefteorgsintez, which runs one of the country's largest oil refining and petrochemical complexes; Sibirtelecom, a leading integrated telecommunications services provider; and Unified Energy Systems, the country's biggest utility. Another key investment made during the period was BorsodChem Rt., a principal European producer of commodity and specialty chemicals. On the sell side, we reduced the Fund's exposure to Sberbank as we realized gains following the company's strong stock price appreciation. Similarly, we sold our investments in RBC Information Systems, Kalina and MOL on strength by period-end, while we trimmed holdings in GAZ Auto Plant as it also reached its sell target. Thank you for investing in Templeton Russia and East European Fund. We welcome your comments and look forward to serving your future investment needs. Sincerely, [PHOTO OMITTED] /S/ Mark Mobius - --------------- Mark Mobius President and Chief Executive Officer - Investment Management Templeton Russia and East European Fund, Inc. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2005, 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 9/30/05 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. All total returns include reinvested distributions according to the terms specified in the Fund's dividend reinvestment and cash purchase plan and 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 due on Fund dividends, capital gain distributions, if any, or realized gains on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------ SYMBOL: TRF CHANGE 9/30/05 3/31/05 - ------------------------------------------------------------------------------------ Net Asset Value (NAV) +$ 8.19 $ 48.78 $ 40.59 - ------------------------------------------------------------------------------------ Market Price (NYSE) +$17.00 $ 56.30 $ 39.30 - ------------------------------------------------------------------------------------ DISTRIBUTIONS (4/1/05-9/30/05) Short-Term Capital Gain $ 0.0675 - ------------------------------------------------------------------------------------ Long-Term Capital Gain $ 2.8763 - ------------------------------------------------------------------------------------ TOTAL $ 2.9438 - ------------------------------------------------------------------------------------
PERFORMANCE(1)
- ------------------------------------------------------------------------------------ 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------ Cumulative Total Return(2) - ------------------------------------------------------------------------------------ Based on change in NAV +29.38% +48.91% +340.37% +607.45% - ------------------------------------------------------------------------------------ Based on change in market price +54.19% +71.55% +381.80% +565.23% - ------------------------------------------------------------------------------------ Average Annual Total Return(2) - ------------------------------------------------------------------------------------ Based on change in NAV +29.38% +48.91% +34.52% +21.61% - ------------------------------------------------------------------------------------ Based on change in market price +54.19% +71.55% +36.96% +20.86% - ------------------------------------------------------------------------------------
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. FOR MORE CURRENT PERFORMANCE, CALL FRANKLIN TEMPLETON INVESTMENTS AT 1-800/342-5236. Semiannual Report | 5 PERFORMANCE SUMMARY (CONTINUED) 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) From 10/1/95 through 6/30/96, the Fund's Investment Manager agreed to reduce its fee by one-half. If the Investment Manager had not taken this action, the Fund's 10-year total return would have been lower. (2) Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated. Six-month return has not been annualized. 6 | Semiannual Report IMPORTANT NOTICE TO SHAREHOLDERS SHARE REPURCHASE PROGRAM The Fund's Board of Directors previously authorized management to implement an open-market share repurchase program pursuant to which the Fund may purchase Fund shares, from time to time, in open-market transactions, at the discretion of management. This authorization remains in effect. Semiannual Report | 7 TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------- SIX MONTHS ENDED SEPTEMBER 30, 2005 YEAR ENDED MARCH 31, (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 40.59 $ 39.89 $ 22.11 $ 21.60 $ 13.40 $ 20.48 -------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .............. 0.14 (0.01) 0.15 (0.07) 0.05 (0.03) Net realized and unrealized gains (losses) ... 10.99 4.28 21.86 0.68 8.23 (7.05) -------------------------------------------------------------------------------- Total from investment operations ................ 11.13 4.27 22.01 0.61 8.28 (7.08) -------------------------------------------------------------------------------- Capital share repurchases ....................... -- -- -- -- 0.01 0.02 -------------------------------------------------------------------------------- Less distributions from: Net investment income ........................ -- -- (0.22) -- (0.09) (0.02) Net realized gains ........................... (2.94) (3.57) (4.01) (0.10) -- -- -------------------------------------------------------------------------------- Total distributions ............................. (2.94) (3.57) (4.23) (0.10) (0.09) (0.02) -------------------------------------------------------------------------------- Net asset value, end of period .................. $ 48.78 $ 40.59 $ 39.89 $ 22.11 $ 21.60 $ 13.40 ================================================================================ Market value, end of period(b) .................. $ 56.30 $ 39.30 $ 45.65 $ 20.54 $ 27.10 $ 11.08 ================================================================================ Total return (based on market value per share)(c) .................................... 54.19% (5.15)% 150.26% (23.87)% 145.77% (40.83)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 263,441 $ 218,577 $ 214,166 $ 118,724 $ 115,943 $ 72,103 Ratios to average net assets: Expenses ..................................... 1.84%(d) 1.80% 1.84% 2.02% 2.07% 2.05% Net investment income (loss) ................. 0.66%(d) (0.02)% 0.47% (0.33)% 0.30% (0.17)% Portfolio turnover rate ......................... 9.92% 7.65% 18.76% 7.85% 70.05% 63.77%
(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) Annualized. 8 | See notes to financial statements. | Semiannual Report TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 92.8% AUTOMOBILES 2.1% AvtoVAZ .................................................................... Russia 197,950 $ 5,057,622 (a)GAZ Auto Plant ............................................................. Russia 7,640 320,880 ------------- 5,378,502 ------------- CHEMICALS 2.4% BorsodChem Rt. ............................................................. Hungary 557,200 6,353,447 ------------- COMMERCIAL BANKS 13.5% Sberbank RF ................................................................ Russia 37,091 35,607,360 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES 21.2% Rostelecom, ADR ............................................................ Russia 256,460 3,841,771 Sibirtelecom ............................................................... Russia 146,940,180 10,285,812 Southern Telecommunications Co. ............................................ Russia 63,812,635 7,051,296 Telekomunikacja Polska SA .................................................. Poland 1,646,000 12,822,303 Uralsvyazinform ............................................................ Russia 99,690,000 3,952,709 VolgaTelecom ............................................................... Russia 3,685,789 14,743,156 ------------- VolgaTelecom, ADR .......................................................... Russia 407,000 3,229,215 ------------- 55,926,262 ------------- ELECTRIC UTILITIES 8.1% Konakovskaya Gres .......................................................... Russia 5,278,000 6,474,523 Unified Energy Systems ..................................................... Russia 38,090,429 14,760,041 ------------- 21,234,564 ------------- MACHINERY 0.5% (a)Saturn Research & Production Association ................................... Russia 14,385,900 1,273,152 ------------- METALS & MINING 13.6% (a)Chelyabinsk Pipe Works ..................................................... Russia 3,180,000 3,307,200 Cherepovets Mk Severstal ................................................... Russia 2,047,500 20,024,550 Mining and Metallurgical Co. Norilsk Nickel ................................ Russia 158,300 12,561,105 ------------- 35,892,855 ------------- OIL, GAS & CONSUMABLE FUELS 18.1% (a)JSC Salavatnefteorgsintez .................................................. Russia 129,000 6,966,000 Lukoil Holdings, ADR ....................................................... Russia 466,500 26,940,375 Surgutneftegaz ............................................................. Russia 9,197,000 9,932,760 Tatneft .................................................................... Russia 1,207,300 3,863,360 ------------- 47,702,495 ------------- PERSONAL PRODUCTS 1.6% Oriflame Cosmetics, SDR .................................................... Sweden 141,250 4,111,564 -------------
Semiannual Report | 9 TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) PHARMACEUTICALS 7.8% Egis RT .................................................................... Hungary 144,317 $ 13,053,450 Pliva D.D., GDR, Reg S ..................................................... Croatia 554,800 7,517,540 ------------- 20,570,990 ------------- WIRELESS TELECOMMUNICATION SERVICES 3.9% Mobile Telesystems, ADR .................................................... Russia 253,800 10,324,584 ------------- TOTAL COMMON STOCKS (COST $90,547,578) ..................................... 244,375,775 ------------- SHORT TERM INVESTMENTS (COST $16,982,253) 6.4% MONEY FUND 6.4% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio .............. United States 16,982,253 16,982,253 ------------- TOTAL INVESTMENTS (COST $107,529,831) 99.2% ................................ 261,358,028 OTHER ASSETS, LESS LIABILITIES 0.8% ........................................ 2,082,540 ------------- NET ASSETS 100.0% .......................................................... $ 263,440,568 =============
SELECTED PORTFOLIO ABBREVIATIONS: ADR - American Depository Receipt GDR - Global Depository Receipt SDR - Swedish Depository Receipt (a) Non-income producing. (b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. 10 | See notes to financial statements. | Semiannual Report TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES September 30, 2005 (unaudited) Assets: Investments in securities: Cost - Unaffiliated issuers ............................... $ 90,547,578 Cost - Sweep Money Fund (Note 7) .......................... 16,982,253 ------------- Total cost of investments ................................. $ 107,529,831 ------------- Value - Unaffiliated issuers .............................. $ 244,375,775 Value - Sweep Money Fund (Note 7) ......................... 16,982,253 ------------- Total value of investments ................................ 261,358,028 ------------- Receivables: Investment securities sold ................................ 1,230,000 Dividends ................................................. 1,270,097 ------------- Total assets ............................................ 263,858,125 ------------- Liabilities: Payable to affiliates ....................................... 302,051 Accrued expenses and other liabilities ...................... 115,506 ------------- Total liabilities ....................................... 417,557 ------------- Net assets, at value ........................................... $ 263,440,568 ------------- Net assets consist of: Paid-in capital ............................................. $ 77,024,473 Undistributed net investment income ......................... 734,044 Net unrealized appreciation (depreciation) .................. 153,825,357 Accumulated net realized gain (loss) ........................ 31,856,694 ------------- Net assets, at value ........................................... $ 263,440,568 ============= Shares outstanding ............................................. 5,400,092 ============= Net asset value per share ...................................... $ 48.78 ============= Semiannual Report | See notes to financial statements. | 11 TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended September 30, 2005 (unaudited) Investment Income: Dividends (net of foreign taxes of $312,371): Unaffiliated issuers ..................................................... $ 2,555,862 Sweep Money Fund (Note 7) ................................................ 217,402 Interest ................................................................... 6,027 ------------ Total investment income ................................................ 2,779,291 ------------ Expenses: Management fees (Note 3a) .................................................. 1,369,937 Administrative fees (Note 3b) .............................................. 279,223 Transfer agent fees ........................................................ 17,962 Custodian fees (Note 4) .................................................... 294,109 Reports to shareholders .................................................... 21,907 Registration and filing fees ............................................... 11,908 Professional fees .......................................................... 40,050 Directors' fees and expenses ............................................... 10,655 Other ...................................................................... 5,789 ------------ Total expenses ......................................................... 2,051,540 Expense reductions (Note 4) ............................................ (6,293) ------------ Net expenses ......................................................... 2,045,247 ------------ Net investment income .............................................. 734,044 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .............................................................. 32,119,174 Foreign currency transactions ............................................ (70,169) ------------ Net realized gain (loss) ............................................... 32,049,005 ------------ Net change in unrealized appreciation (depreciation) on: Investments .............................................................. 27,381,175 Translation of assets and liabilities denominated in foreign currencies .. (3,235) ------------ Net change in unrealized appreciation (depreciation) ................... 27,377,940 ------------ Net realized and unrealized gain (loss) ....................................... 59,426,945 ------------ Net increase (decrease) in net assets resulting from operations ............... $ 60,160,989 ============
12 | See notes to financial statements. | Semiannual Report TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------- SIX MONTHS ENDED YEAR SEPTEMBER 30, 2005 ENDED (UNAUDITED) MARCH 31, 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................................... $ 734,044 $ (44,084) Net realized gain (loss) from investments and foreign currency transactions ............ 32,049,005 30,643,382 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .............. 27,377,940 (7,583,184) ----------------------------------- Net increase (decrease) in net assets resulting from operations .................... 60,160,989 23,016,114 ----------------------------------- Distributions to shareholders from net realized gains .................................... (15,854,283) (19,187,573) ----------------------------------- Capital share transactions: (Note 2) ..................................................... 557,205 582,185 ----------------------------------- Net increase (decrease) in net assets .............................................. 44,863,911 4,410,726 Net assets: Beginning of period ...................................................................... 218,576,657 214,165,931 ----------------------------------- End of period ............................................................................ $ 263,440,568 $ 218,576,657 =================================== Undistributed net investment income included in net assets: End of period ............................................................................ $ 734,044 $ -- ===================================
Semiannual Report | See notes to financial statements. | 13 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 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. 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. 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. 14 | Semiannual Report TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) 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 on a specified 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 the Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its income and net realized gains. Foreign securities held by the Fund may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. Semiannual Report | 15 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. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on 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 generally accepted accounting principles. 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 will 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. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK On November 29, 2000, the Board of Directors of the Fund authorized management to implement an open-market share repurchase program pursuant to which the Fund may purchase, from time to time, shares of the Fund's common stock in open-market transactions, at the discretion of management. This authorization remains in effect. At September 30, 2005, there were 100 million shares authorized ($0.01 par value). Through September 30, 2005, the Fund had repurchased a total of 50,000 shares. There were no share repurchases during the period ended September 30, 2005. 16 | Semiannual Report TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) During the period ended September 30, 2005, 14,447 shares were issued for $557,205 from reinvested distributions. During the year ended March 31, 2005, 16,290 shares were issued for $582,185 from reinvested distributions. 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 a monthly 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 0.25% per year of the Fund's average weekly net assets, of which 0.20% is paid to Princeton Administrators, a wholly-owned subsidiary of Merrill Lynch & Co., Inc. 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, 2005, the custodian fees were reduced as noted in the Statement of Operations. Semiannual Report | 17 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, 2005, the Fund deferred realized currency losses of $2,613. Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. At September 30, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments ...................................... $ 107,719,103 ============= Unrealized appreciation .................................. $ 154,308,139 Unrealized depreciation .................................. (669,214) ------------- Net unrealized appreciation (depreciation) ............... $ 153,638,925 ============= 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended September 30, 2005, aggregated $20,438,462 and $40,726,775, 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 fees paid by the Sweep Money Fund. 8. CONCENTRATION OF RISK Investing in equity securities of Russian and East European companies includes 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 such countries' underdeveloped systems of securities registration and transfer. 18 | Semiannual Report TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, 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, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds. The Fund did not participate in the CAGO Settlement. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or 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.) relating to the industry practices described above. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intends 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. Semiannual Report | 19 TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. ANNUAL MEETING OF SHAREHOLDERS, AUGUST 26, 2005 The Annual Meeting of Shareholders of the Fund was held at the Fund's offices, 500 East Broward Boulevard, Fort Lauderdale, Florida, on August 26, 2005 for the purpose of electing three Directors of the Fund. At the meeting, the following persons were elected by the shareholders to serve as Directors of the Fund: Harris J. Ashton, S. Joseph Fortunato and Constantine D. Tseretopoulos.* No other business was transacted at the meeting. The results of the voting at the Annual Meeting are as follows: Proposal: The election of three (3) Directors:
- -------------------------------------------------------------------------------------------------------- % OF % OF SHARES SHARES % OF PRESENT % OF PRESENT OUTSTANDING AND OUTSTANDING AND TERM EXPIRING 2008 FOR SHARES VOTING WITHHELD SHARES VOTING - -------------------------------------------------------------------------------------------------------- Harris J. Ashton ................ 3,988,681 73.86% 99.42% 23,117 0.43% 0.58% S. Joseph Fortunato ............. 3,964,403 73.41% 98.82% 47,395 0.88% 1.18% Constantine D. Tseretopoulos .... 3,992,014 73.92% 99.51% 19,784 0.37% 0.49%
* Harmon E. Burns, Frank J. Crothers, Edith E. Holiday, Charles B. Johnson, Gordon S. Macklin, Fred R. Millsaps and Frank A. Olson 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. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with the following features: If shares of the Fund are held in the shareholder's name, the shareholder will automatically be a participant in the Plan unless he elects to withdraw. If the shares are registered in the name of a broker-dealer or other nominee (i.e., in "street name"), the broker-dealer or nominee will elect to participate in the Plan on the shareholder's behalf unless the shareholder instructs them otherwise, or unless the reinvestment service is not provided by the broker-dealer or nominee. Participants should contact Mellon Investor Services, P.O. Box 3338, South Hackensack, NJ 07606-1938, to receive the Plan brochure. To receive dividends or distributions in cash, the shareholder must notify Mellon Bank, N.A. (the "Plan Administrator"), at the address above or the institution in whose name the shares are held. The Plan Administrator must receive written notice within ten business days before the record date for the distribution. Whenever the Fund declares dividends in either cash or common stock of the Fund, if the market price is equal to or exceeds net asset value at the valuation date, the participant will receive the dividends entirely in stock at a price equal to the net asset value, but not less than 95% of the then current market price of the Fund's shares. If the market price is lower than net asset value or if dividends and/or capital gains distributions are payable only in cash, the participant will receive shares purchased on the New York Stock Exchange or otherwise on the open market. The automatic reinvestment of dividends and/or capital gains does not relieve the participant of any income tax that may be payable on dividends or distributions. Whenever shares are purchased on the New York Stock Exchange or otherwise on the open market, each participant will pay a pro rata portion of trading fees. Trading fees will be deducted from amounts to be invested. The Plan Administrator's fees for a sale of shares through the Plan are $15.00 per transaction plus a $0.12 per share trading fee. The participant may withdraw from the Plan without penalty at any time by written notice to the Plan Administrator sent to Mellon Investor Services, P.O. Box 3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will receive, without charge, stock certificates issued in the participant's name for all full shares held by the Plan Administrator; or, if the participant wishes, the Plan Administrator will sell the participant's shares and send the proceeds, less a service charge of $15.00 and less trading fees of $0.12 per share, to the participant. Semiannual Report | 21 TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. TRANSFER AGENT Mellon Investor Services LLC 480 Washington Boulevard Jersey City, NJ 07310 1-800-416-5585 www.melloninvestor.com SHAREHOLDER INFORMATION Shares of Templeton Russia and East European Fund, Inc. are traded on the New York Stock Exchange under the symbol "TRF." Information about the net asset value and the market price is published each Monday in the WALL STREET JOURNAL, weekly in BARRON'S and each Saturday in THE NEW YORK TIMES and other newspapers. Daily market prices for the Fund's shares are published in the New York Stock Exchange Composite Transactions section of newspapers. For current information about distributions and shareholder accounts, call 1-800-416-5585. Registered shareholders can now access their Fund account on-line with INVESTOR SERVICEDIRECT(R). For information go to Mellon Investor Services' web site at https://vault.melloninvestor.com/isd and follow the instructions. The daily closing net asset value as of the previous business day may be obtained when available by calling Franklin Templeton Fund Information after 7 a.m. Pacific time any business day at 1-800/DIAL BEN(R) (1-800-342-5236). The Fund's net asset value and dividends are also listed on the NASDAQ Stock Market, Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS"). Shareholders not receiving copies of the reports to shareholders because their shares are registered in the name of a broker or a custodian can request that they be added to the Fund's mailing list by writing Templeton Russia and East European Fund, Inc., 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. 22 | 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 1-954/847-2268 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-CSRS for the fiscal year ended March 31, 2005. Additionally, the Fund expects to file, on or about November 30, 2005, such certifications with its Form N-CSR for the six months ended September 30, 2005. Semiannual Report | 23 This page intentionally left blank. 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 INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II(1) VALUE Franklin Balance Sheet Investment Fund(2) Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(2) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(3) Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care 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 Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(4) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund 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(5) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(6) 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(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1) The fund is closed to new investors. Existing shareholders can continue adding to their accounts. (2) The fund is only open to existing shareholders and select retirement plans. (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) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (6) Portfolio of insured municipal securities. (7) 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). (8) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS 100 Fountain Parkway P.O. Box 33030 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 3315 South Hackensack, NJ 07606-1915 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 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 S2005 11/05 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 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 Fred R. Millsaps, David W. Niemiec and Frank A. Olson, 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: Fred R. Millsaps, 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 Templeton Asset Management Ltd 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 Institutional Shareholder Services (ISS), 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 ISS' and/or Glass Lewis' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from ISS, 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. All conflicts are resolved in the interests of the manager's clients. In situations where the manager perceives a material conflict of interest, the manager may: disclose the conflict to the Fund's board of directors; defer to the voting recommendation of the Fund's board of directors, ISS, Glass Lewis or those of another independent third party provider of proxy services; or take such other action in good faith (in consultation with counsel) which would protect the interests of the Fund and its shareholders. 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 evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable, including the ISS 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 proxies. 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. 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 1-954/847-2268 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 and reflect the twelve-month period beginning July 1, 2004, and ending June 30, 2005. ITEM 8. PORTFLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASES. N/A ITEM 10. SUBMISSION OF MATTERS OF 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 21, 2005 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 21, 2005 By /s/GALEN G. VETTER Galen G. Vetter Chief Financial Officer Date November 21, 2005 EX-99.CODE ETH 2 ncsr-code704.txt CODE OF ETHICS Exhibit 12 (a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Dated July 2004 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics August 2004 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM JULY 2004 FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment - ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3 Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5 See Part X. EX-99.CERT 3 trf905_302cert.txt SECTION 302 CERTIFICATIONS Exhibit 12(a)(2) I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 21, 2005 /s/JIMMY D. GAMBILL - --------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 21, 2005 /s/GALEN G. VETTER - -------------------------- Galen G. Vetter Chief Financial Officer EX-99.906 CERT 4 trf905_906cert.txt SECTION 906 CERTIFICATIONS Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC.(the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 9/30/05 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: November 21, 2005 /s/JIMMY D. GAMBILL --------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the TEMPLETON RUSSIA AND EAST EUROPEAN FUND, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 9/30/05 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: November 21, 2005 /s/GALEN G. VETTER -------------------------- Galen G. Vetter Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----