Russian stocks are soaring – but don’t buy in

It's like the Cold War never ended. If Russia isn't propping up Syria or Iran, then ex-KGB spy (and de facto leader) Vladimir Putin is cracking down on protests at home.

Yet high oil prices mean the Russian economy looks strong. While growth in the UK and Europe looks set to be negative for this year, Capital Economics believes that Russian GDP could expand by 3%.

The Russian market has also responded strongly to the rising oil price. The RTS index has more than tripled from its low of 498 in early 2009 to reach 1,728.

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So should you get on board? Matthew Lynn argues the optimistic case for Russia in this week's copy of MoneyWeek magazine (out on Friday), and there's certainly food for thought in his piece.

But I'm not so sure that betting on Russia will pay off here's why.

Russia is too dependent on commodities

If you believe that commodity prices are going to keep rising, then investing in Russia certainly makes sense. Along with Saudi Arabia, it is one of the two major global producers of crude oil. It also exports large amounts of natural gas, wood products, metals and chemicals.

However, this does leave it vulnerable to any sort of slump in prices. There's no guessing what might happen to the crude oil price in the short term the Iran crisis is making the market very jumpy. But regardless of what happens with prices, it's never ideal to be so reliant on one key export.

Because, quite apart from the question of pricing, there is also the question of how long Russia's resources will last. Despite high output, Russia's reserves of crude oil are relatively low and opaque. Russia only has 20 years of reserves left at current production levels. That might sound like a lot, but this compares with 81 years for Saudi Arabia, 101 years for Iran and 163 years for Iraq.

If commodity revenues do dry up, the rest of the economy is in no condition to pick up the slack. Putin has talked about economic reform including selling state companies and cutting trade barriers. He has even stated recently that, "the age of national markets is over".

However, similar promises have been made in the past only for hopes to be dashed. Thirteen years after Putin first became president, property rights and the rule of law remain weak. Russia ranks 144th on the Index of Economic Freedom run by the Heritage Foundation and Wall Street Journal. This makes Russia less of a free market than either China or Haiti and on a par with the Central African Republic. Meanwhile, the World Economic Forum's latest report says that Russia is corrupt, over regulated and has some of the worst roads in the world.

Don't cross your fingers for political change

Optimists hope that a defeat for Putin in this year's presidential elections might pave the way for Russia to develop into a more mature democracy. And it's true that since last December, anti-Putin protests have quickly grown. Putin has even admitted that the presidential election could go to a second round something that would have been shocking just a few months ago.

However, most experts believe that it will take longer to remove him. US political scientist Jay Ufelder believes that "Russia now is about where Egypt was in 2005" which suggests that Putin will be in power for at least another six-year term. He predicts that there is only a 15% chance of a move to democracy this year. Even the protesters expect Putin to win.

And even if Putin loses - who will take his place? While he has cracked down on most opposition figures, the far right and left have been given much more freedom which allows Putin to claim that the alternatives are worse.

Of course, nothing is certain but in terms of risk / reward balance, investors need to assume that there won't be many positive political or economic changes in the near future.

There are better ways to bet on oil

Overall, I'd argue against investing in Russia. The economy is essentially a geared play on the oil price, and there's a good chance it'll stay that way for some time. There are easier ways to take advantage of a possible short-term price spike in oil, from betting on the oil price directly to investing in oil stocks: my colleague Phil Oakley thinks shares in both Royal Dutch Shell and BP represent decent value, for example.