Mutual funds investing in Russia have been a hot item in the U.S. in the past few years.

Established players like ING Russia and DWS’ Central European and Russian Fund have soared on the back of the booming Russian stock market, while other fund companies jumped in with new offerings of their own.

At the last count, ordinary Americans had more than $3 billion at stake in mutual funds that invest in Vladimir Putin’s Russia. That includes about $1.2 billion in the Market Vectors Russia exchange-traded fund, 900 million in the Central European and Russian Fund, $830 million in ING Russia, and $330 million in theTempleton & East European Fund.

But recent events in central Asia show why they’re playing with fire. The risks in that country are far greater than most ordinary investors realize. And at current prices, shareholders aren’t being paid enough to take them.

It isn’t so much about the invasion of Georgia so much as what that war, along with other recent events, says about the regime and the country.

It’s five years since the chairman of one of the west’s biggest banks explained to me over lunch why his bank had ruled out making any acquisitions in Russia. “We concluded,” he said, “the country doesn’t have the right ‘software’, in terms of the rule of law, and constitutional government, for us.” This was a banker, incidentally, whose company had made many successful acquisitions in emerging market countries around the world.

To invest in Russia is to play a game whose rules westerners do not understand – and which are subject to change without notice.

British Petroleum has been humiliated since investing $8 billion five years ago to create the joint venture TNK-BP. Local shareholders are asserting their control, helped by the fortuitous intervention of the authorities. Royal Dutch Shell was pressured last year into selling local investments at a bargain price to Russian interests. Shares in coal company Mechel just slumped after Mr Putin’s government launched an ominous investigation. A similar move against oil company Yukos, several years ago, led to its collapse and the imprisonment of its chief executive, a tycoon who had made the mistake of criticizing Mr Putin.

Meanwhile, while naïve westerners were pouring money into Russia, savvy local tycoons were taking it out. They’ve been buying up real estate, sports franchises and luxury goods in western Europe. Among the biggest beneficiaries has been the London real estate market, fueled by Russian émigrés into a monster bubble.

The investment risks aren’t just political, or even economic. Half the Russian stock market is made up with oil and gas stocks. Giant Gazprom alone accounts for 26%. No wonder the market has boomed.

Investors in Russia have ridden their luck up till now. ING Russia has nearly quadrupled in five years, while others have more than tripled. But the icing has come off the cake. The market has fallen by about a quarter since mid-May, much of it due to the slump in oil. This would be a great time for ordinary investors to cash in their chips.