Russia - why Europe's top performer is risky but appealing

When it comes to risky investments, Russia is close to the top of the table. Over the past few years, the government has confiscated assets from oil giant Yukos, thus showing it has no respect for property rights; investors have also been rattled by renationalisations and plans to clamp down on foreign investment in strategic industries such as energy.

Nonetheless, the market also offers plenty of inducements for brave investors. Thanks mainly to high oil prices, along with tax cuts and rising consumption, the economy is humming, with growth running at 6.5%. Inflation and unemployment have been tamed and the government budget and balance of payments boast respective surpluses of 12% and 13% of GDP. "It's just a totally different country" to the mess it became after the Asian crisis, says Roland Nash of Renaissance Capital. This backdrop helps explain why the stockmarket has gained 24% this year, making it Europe's top performer.

The outlook is positive, says Plamen Monovski of Merrill Lynch. While emerging markets are vulnerable to rising global-risk aversion, Russia's strong growth and undemanding valuation it is on a p/e of eight should continue to buoy the market, he says. Energy prices are set to stay high, which bodes well for growth, but Russia is not just an energy story. The emerging banking sector should soon begin to support economic growth; at present, less than 1% of the population has taken out any kind of loan at all. That presages plenty of potential for market leader Sberbank (SBNA, e172 in Frankfurt), while Monovski likes gas giant Gazprom (OGZD, $44 in London) not least because it will benefit from future gas-price rises in Russia. A UK-based pure fund play on Russia is the Neptune Russia and Greater Russia fund, up 63% in the past year.

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