UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM N-CSR

 

| Investment Company Act file number | 811-6041 |
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Central Europe & Russia Fund, Inc.

 (Exact Name of Registrant as Specified in Charter)

 

345 Park Avenue

New York, NY  10154

(Address of principal executive offices)             (Zip code)

 

Registrant’s Telephone Number, including Area Code: (212) 454-7190

 

Paul Schubert

345 Park Avenue

New York, NY 10154

(Name and Address of Agent for Service)

 

| Date of fiscal year end: | 10/31 |
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| Date of reporting period: | 10/31/07 |
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**ITEM 1.**           **REPORT TO STOCKHOLDERS**

 

 

**SUMMARY OF GENERAL INFORMATION**

**THE FUND**

The Central Europe and Russia Fund, Inc. (the "Fund") is a non-diversified, actively-managed closed-end fund listed on the New York Stock Exchange with the symbol "CEE." The Fund seeks long-term capital appreciation primarily through investment in equity and equity-linked securities of issuers domiciled in Central Europe and Russia. It is managed and advised by wholly-owned subsidiaries of the Deutsche Bank Group.

**SHAREHOLDER INFORMATION**

Prices for the Fund's shares are published daily in the New York Stock Exchange Composite Transactions section of newspapers. Net asset value and market price information are published each Monday in *The Wall Street Journal* and each Saturday in *Barron's* and other newspapers in a table called "Closed End Funds." Daily information on the Fund's net asset value is available from NASDAQ (symbol XCEEX). It is also available by calling: 1-800-437-6269 (in the U.S.) or 212-454-6266 (outside of the U.S.). In addition, a schedule of the Fund's largest holdings, dividend data and general shareholder information may be obtained by calling these numbers.

The foregoing information is also available on our Web site: www.ceefund.com.

**There are three closed-end funds investing in European equities managed by wholly-owned subsidiaries of the Deutsche Bank Group:**

•  The European Equity Fund, Inc.-investing primarily in equity or equity-linked securities of companies domiciled in European countries that utilize the Euro currency.

•  The New Germany Fund, Inc.-investing primarily in the middle market German companies and up to 20% elsewhere in Western Europe (with no more than 10% in any single country).

•  The Central Europe and Russia Fund, Inc.-investing primarily in Central European and Russian companies.

Please consult your broker for advice on any of the above or call 1-800-437-6269 (in the U.S.) or 212-454-6266 (outside of the U.S.) for shareholder reports.

These funds focus their investments in certain geographical regions, thereby increasing their vulnerability to developments in that region. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation, political and economic changes, and market risks.

**The Central Europe and**

**Russia Fund, Inc.**

**Annual Report**

**October 31, 2007**

20675

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**The Central Europe and Russia Fund, Inc.**

**LETTER TO THE SHAREHOLDERS**

Dear Shareholder,

We are pleased to report that for the fiscal year ended October 31, 2007, The Central Europe and Russia Fund's total return based on share price was 41.83% while its total return based on net asset value per share was 42.32%. The Fund's benchmark rose 38.95% during the same period.1

In the Fund's fiscal Q4 2007, each of the Fund's core markets — with the exception of Hungary — performed strongly, posting double-digit returns. In the Czech market, while stocks are not a bargain at current price levels, Czech equities do have several factors in their favor: a robust economy, low domestic interest rates, business-friendly reforms, and strong earnings momentum. We have not significantly changed the Fund's positioning in the Czech portion of the portfolio during the past quarter, so the Fund continues to be underweight Czech equities relative to the benchmark.2 The only Czech company in which the Fund holds an overweight position is electric utility Ceske Energeticke Zavody (CEZ). Electricity prices in Eastern Europe remain around 25% below those of Germany but the gap has been steadily closing over the past five years, and convergence of Eastern European electricity markets with those of Western Europeis expected to continue over the next several years. We added a position in television broadcaster Central European Media. As in the case of electricity price, we expect that the media and advertising markets of Eastern Europe will converge with those of Western Europe, leading to better pricing and higher spending on advertisements in the future.

Hungarian stocks are more expensive than Turkish and Russian stocks, which may not be justifiable as takeover stories, once regarded as an ultimate trigger for the stocks, may not materialize due to new legislation that would provide the target companies with much stronger tools of protection. Protectionism and political intervention are on the rise, another reason we are not overly positive on the market. From a top-down perspective, we expect the weak growth picture to continue to burden the market. Hungary is the smallest absolute weighting among the Fund's five core countries. The Fund is overweight OTP Bank while maintaining underweight positions in MOL Hungarian Oil & Gas and the pharmaceutical stocks.

The Polish market has been hindered by political distractions, but we expect investors to begin focusing on valuations again. Polish stocks seem to be reasonably priced at a price/earnings ratio (P/E) of 14x on 2008 forecast earnings growth of 18%, which is a bit lower than the 5-year average forward P/E ratio of 15x. We expect the Polish stock market to remain at a premium to the Fund's other core markets. On a relative basis, the Fund's position in Polish equities represents its largest underweight compared to the benchmark.

Despite very strong gains in the third quarter, the convergence/disinflation story remains a strong medium-term catalyst for the Turkish stock market, which remains the least expensively valued of the emerging European markets on a one-year-forward basis. Risks have diminished considerably but not disappeared: the optimism driving the market could be dented by a shock to sentiment from the political arena, which could in turn limit investor demand for Turkish stocks. We prefer financials, consumer-related stocks, construction, and media, which are all sectors that should benefit from the steady decline in interest rates that we expect over the next 12-18 months.

1

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**LETTER TO THE SHAREHOLDERS (****continued****)**

The Russian market suffered along with other global markets during the recent setback but managed to rebound, and finished the third quarter near all-time high levels. Natural resources stocks led the market while most domestic economy-driven shares were quiet after rallying earlier in the year. Oil and gas stocks, which had been underperforming, started to recover while steel companies led the blue chips, rallying amid strong demand for steel, rising prices, and the expectation of continued growth in domestic consumption. Meanwhile, UES was the worst-performing Russian blue chip stock during the third quarter, which is likely explained by the company's asset spin-off as part of the unbundling process. As the Russian market has been one of the worst-performing emerging markets in 2007, Russian equities have become more attractive on a P/E basis relative to global emerging market peers. Russia remains the Fund's largest overweight on a country basis.

The Central Europe and Russia Fund resumed open-market purchases of its shares by buying 47,900 shares with the share buy-back program being reestablished in September 2007. The Central Europe and Russia Fund's discount to net asset value averaged 11.43% during the fiscal year ended October 31, 2007, compared with 6.8% for the same period last year.

The sources, opinions and forecasts expressed herein are as of the date of this report. There is no guarantee that the views, opinions and forecasts expressed herein will come to pass. This information is subject to change at any time based on market and other conditions and should not be construed as a recommendation for any specific security. Past performance does not guarantee future results.

1  A custom blend of 45% in Central Europe (CECE-Index), 45% Russia (RTX-Index) and 10% in Turkey (ISE National 30). The CECE is a regional capitalization-weighted index, including stocks from the Czech Republic, Hungary, Poland and Slovakia and is published daily by the Vienna Stock Exchange. The RTX is a capitalization-weighted index of Russian blue chip stocks and published daily by the Vienna Stock Exchange. The ISE National 30 is a capitalization-weighted index composed of National Market companies except investment trusts and will also be used for trading in the Derivatives Market. Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly in an index. Please refer to page 5 for the definition of each index.

2  "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.

Sincerely,

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| Christian Strenger |