Can Russia’s stockmarket rally last?

With Greece hogging the headlines, Russia has been put on the back burner. So few investors have noticed that Russian stocks have found their feet again, with the Micex index up around 30% this year. Last year, both stocks and the Russian currency, the rouble, plunged as the West imposed sanctions on Russia after it invaded Ukraine. The plummeting oil price also throttled growth.

The currency hit a record low against the US dollar, stoking inflation, and the central bank raised interest rates to stop foreign money from fleeing and undermining the rouble even further.The economy fell into recession.

In the past few months, however, the outlook has improved. The price of oil, a key Russian export, has risen. That's bolstered the currency, which is now up by around a fifth from its nadir against the dollar. Along with higher interest rates, this has helped temper inflation. Interest rates are now expected to fall gradually for the rest of the year.However, "Russia is not out of the woods yet", says Steven Pifer of the Brookings Institution in The Washington Times.

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For one thing, the bounce in the oil price looks precarious. Russia needs oil "north of $65 to $70" a barrel in order to stoke growth and keep its foreign-currency reserves topped up, reckons Ariel Cohen of the Atlantic Council. If oil sticks around $50, Russia could burn through its reserves by the end of the year. Brent is currently around $62 a barrel, but more likely to fall gently than rise, given the enduring glut in the market.

The corporate sector which has had trouble refinancing large debts to Western lenders due to sanctions has also been a drain on reserves. EU foreign ministers have just extended their trade restrictions, centred on the banking, technology and defence industries, for another six months. And there is no sign of Russia handing back control of Ukraine's eastern border to Kiev, a key prerequisite for the lifting of sanctions.

The upshot, says Capital Economics, is that the downturn is set to wipe 5% off GDP this year, with a tepid recovery in the second half underpinning growth of 1.5% next year. And this assumes no further deterioration in the Ukraine situation, which could spur another round of capital flight, and also no renewed dip in oil prices. Throw in the ever-present threat of a capricious state, and it seems the rally has run its course.