Russia’s roaring stock market rally

Don't take stock market advice from White House press secretary Jay Carney. In mid-March he told investors to avoid Russian equities unless they were tempted to go short. Since then, Russia's MICEX index has gained 25%. It's largely a case of a crisis not proving as bad as first feared.

The market's main worry was that sanctions against Russia, following its annexation of Crimea, could seriously dent its economy. But measures so far have been "toothless", says Joseph Dayan of BCS Financial Group. And this looks unlikely to change in the near future.

As we noted in May, with Europe partly reliant on Russian gas and oil, it is reluctant to impose severe restrictions in case Russia retaliates. Meanwhile, says The Wall Street Journal, the US is not inclined to go as far as imposing restrictions on entire sectors of the Russian economy.

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Russia's president, Vladimir Putin, also seems to be doing just enough to deter a major crackdown.Last week, for instance, he asked "his rubber-stamp parliament to revoke its largely symbolic authorisation to deploy Russian forces in Ukraine".

So, while fighting continues in eastern Ukraine, the stand-off is starting to look like a chronic, rather than an acute, problem. Still, it looks far from resolved and could easily flare up again, while the Russian macroeconomic backdropremains uninspiring. Growth is inching along at an annual pace of around 1% and inflation is almost 8%.

The cause of both problems is a lack of investment to boost the economy's productivity. Corruption, red tape and weak property rights are key obstacles. The rate of decline in investment has at least slowed, says Capital Economics, presumably because the easing threat of Western sanctions is bolstering confidence. However, there is little sign of structural reform on the horizon.

That said, the mediocre outlook is in the price, even following the rally from the March low. Russian stocks are on a price-to-book ratio of just 0.7 and a cyclically adjusted price/earnings ratio of 6.13, the cheapest in the world after Greece.

If Russia, which still has 145 million well-educated people and the world's biggest fossil fuel reserves, gets its act together, stocks could recover fast. One way to buy is via the JPMorgan Russia Securities Trust (LSE: JRS), which still trades on an 11% discount to net asset value.