Connor sites low trade and budget deficits, strong central bank reserves and mild domestic inflation, plus a 4 percent GDP growth prediction for 2012.
Global events on Russian soil could improve its profile and boost infrastructure projects like bridge, road, and airport expansion, plus hotel and stadium projects. Later this year, Russia will host the Asia-Pacific Economic Cooperation meetings at Vladivostok's Russky Island where it is building an 1,100-meter bridge. In 2014, Russia will host the Winter Olympics and in 2018, the soccer World Cup. And, Russia joined the World Trade Organization in December after an 18-year tussle over its membership.
Tax revenues from the energy sector account for almost half of the government's revenues. One of the main issues at this time is slowing production from mature fields, which the government has addressed by adjusting the tax regime to stimulate capital investment in new and risky projects in offshore and more remote areas, said Morningstar analyst Patricia Oey, in an analysis of ETF SPDR S&P Russia (RBL).
At the same time, this fund's heavy exposure to commodities may provide diversification benefits for a U.S. investor, as commodities have historically exhibited low correlations to equity markets, she added.
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Pro-market moves. The country is also taking gradual steps to open its markets to more foreign investment. The Russian MICEX-RTS stock exchange will launch a government bond trading section beginning in mid-February. And foreign fund flows, looking for opportunity outside of developed Europe, have been channeling money into Russian debt.
But other business dealings remain mired in controversy in some instances, and plagued by uncertain market conditions.
The government is planning to reduce its stake in large, partially government-owned corporations such as Rosneft and Sberbank as part of its efforts to further develop the local capital market, as well as to draw money into public coffers. Privatization efforts have been delayed because of the recent volatility in global markets, and Russian IPOs have not fared very well, said Oey.
There's a greater chance for sudden market volatility because foreign investors hold a significant portion of Russian equities "free float," and not limited by typical exchange rules. So when markets are in a risk-off mode, sudden outflows of foreign funds negatively impact the Russian stock market.
For long-term investors, the statistics may be on their side.
Importantly, consumer optimism may drive Russia's future: More than a third of the country considers itself to be "middle class," the Citi research shows.
Now, government recognition must follow. "If Mr. Putin heeds his own words and democratic practices become even more evident in Russia, hopefully this will greatly reduce the deep 'Russia discount' which investors currently suffer and the Russian stock market will better reflect values relative to international peers," says Connor.
Here's a short list of Russian-focused mutual funds and ETFs: Results are year-to-date through the end of January. Investors should also consider expenses tied to these funds, which can run higher than domestic-focused funds.
Third Millennium Russia Fund (TMRFX), up 10.1 percent year-to-date.
ING Russia Fund (LETRX), up 16 percent year-to-date.
JPMorgan Russia A (JRUAX), up 16.4 percent year-to-date.
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