Is Russia still worth investing in?

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Russia has never been the easiest country to get your head around, as Churchill's famous 'riddle wrapped in a mystery inside an enigma' quote summed up, which is probably why many people don't even try.

One common misconception for example, is that Russia is all about oil. Now, as great believers in the long-term oil bull market, that wouldn't concern us - but the reality is that even if oil prices were to fall, Russia has plenty more to offer the intrepid investor.

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We've certainly criticised Russia's approach to property rights in the past - it's rarely a good idea to start taking assets that don't technically belong to you as it tends to put off foreign investors. But despite the well-publicised problems with Shell, BP and other oil majors, the rewards of investing in Russia in the recent past have been huge. So do the potential rewards still outweigh the risks?

Russia has a great deal going for it. Real wages rose by 10% last year. Those who visit Moscow complain about the rapid rise in the number of cars clogging the city's streets. Last year the country's RTS index rose 70%. Given that the oil price actually changed very little in the course of last year, despite the spike in May, you can start to see that there's a lot more to the country than just black gold.

Not that oil isn't important to Russia. But the country has been smart enough to use the good times to put away a massive stabilisation fund - most of the oil revenues above $40 a barrel are taxed away, and the fund now sits at around $400bn, says Tom Stevenson in The Telegraph, which can be used to "prevent overheating and provide a buffer when things slow down. The consequence is a more stable economy".

As the population becomes wealthier, consumption and credit are becoming far more important parts of the Russian story but they are still way behind Western countries. As Stevenson says, "Retail loans are growing at 80% a year, and mortgages at 300%, but loans stand at just 5% of GDP compared to 98% in the UK." Even much of eastern Europe has more developed credit markets.

Sven Lorenz wrote in MoneyWeek at the end of last year about how the Russian consumption boom would be a big theme for 2007 you can read more here: Our top six forecasters' New Year predictions.

So what about corruption and the rather flexible approach to property rights, as shown by the state effectively tearing up contracts written with oil companies in the 1990s?

Eric Kraus, investment advisor to the Nikitsky Russia / CIS Opportunities Fund gives an interesting alternative viewpoint on Russia in his regular 'Truth & Beauty' newsletter (it's worth a look for anyone interested in the country - www.nikitskyfund.com).

Yes, Russia has problems with corruption, he says - but as he points out 'none of the poor countries which have enjoyed the fastest sustained growth in overall well-being (first Japan, Korea, Taiwan, Singapore, Malaysia; now Vietnam, China, and Russia) were particularly democratic, at least during the initial phases of their transformation'. He argues that 'Russia is... relatively democratic for a country at its level of economic development.'

He also points out that despite the contract killings we've all read about ('Russia is a rough place'), it was far more violent during the Wild East' transition period of the 1990s.

It's understandable that Westerners hark back to those times, of course. They might have been unpleasant for ordinary Russians, but at the time, what most Western viewers saw was a country caught up in an exciting transformation - from an evil empire that was the biggest threat to Western civilisation, to a country embracing democracy and capitalism. It's small wonder that when we see the rather less jolly - and somewhat more threatening - regime under Vladimir Putin that we pine for pictures of Boris Yeltsin facing down tanks.

But so far, under Putin, Russia is becoming wealthier and more stable and ultimately, those are good conditions for investors. Those who are interested in getting exposure to the Russia story might want to look at Robin Geffen's Neptune Russia fund. We'll also have more on Russia in this week's issue of MoneyWeek, out on Friday.

Turning to the stock markets...

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In London, stocks staged a late recovery yesterday as investors bought into the latest takeover targets and miners were boosted by higher metals prices. The blue-chip FTSE 100 index gained 58 points to close at 6,189 with the broader indices also higher. Insurer Friends Provident rose over 4% ahead of its full year results, out today, making it the day's biggest gainer. For a full market report, see: London market close

Across the Channel, stocks also closed higher on M&A activity. The Paris CAC-40 ended the day 76 points firmer, at 5,458. In Frankfurt, meanwhile, tourism group TUI led the DAX-30 to a close of 6,671 - a 91-point gain - on news of its forthcoming merger with the UK's FirstChoice.

On Wall Street, the major indices rallied yesterday as investors were cheered by the latest deal-making. The Dow Jones gained 115 points to end the day at 12,226. The tech-heavy Nasdaq closed at 2,394, a 21-point gain. And the broader S&P 500 ended the day 15 points higher at 1,402.

The weaker yen saw the Nikkei close 153 points higher, at 17,163, with automotive and property stocks leading the advance.

Crude oil was little changed at $56.71 a barrel this morning, whilst Brent spot was at $60.92 in London.

Spot gold had fallen back to $653.30 this morning, off an intra-day high of $656.00. Fellow metal silver had risen to $13.17/oz.

And in London this morning, Friends Provident announced below-expectation profit increases, blaming the 'dampening effect' of recent stock market declines. Pretax profit was £338m, a 5.3% increase, but off an analysts' estimate of £374m. Shares in Friends Provident had fallen by as much as 6.8% this morning.

And our two recommended articles for today...

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Timber: the ultimate growth investment

- Given her erratic behaviour in recent weeks, Britney Spears may be the last person you'd want to take investment tips from. Yet her decision to invest $3.1m in forestry can hardly be faulted, hence our decision to devote a recent MoneyWeek cover to the sector (now available to non-subscribers). To find out why tax breaks and carbon credits are making timber an attractive investment, and the best ways to gain exposure to the sector, click here: Timber: the ultimate growth investment