Experienced hands like to say that investors should plunge into last-frontier stocks only when they know that they should not be doing so. Mark Dampier, research director at Hargreaves Lansdown, the financial adviser, is more blunt: “When there’s shooting in the streets and it feels desperately uncomfortable, that’s the time to buy.” At present, Russia is the market testing speculators’ mettle.

A long-running dispute over control of TNK-BP, accusations of government fraud by Hermitage Capital, the investment fund, and Vladimir Putin’s crackdown on Mechel, the steel company, for alleged price-fixing has made investors worry about the stability of the Russian business environment. The tension ratcheted up still further last month when Russia invaded Georgia.

“From a Russian point of view, all their individual actions over the past five years look sensible, reasonable and logical,” Jules Mort, an emerging markets fund manager for Thread-needle, said. “The problem is that, when considered in aggregate, they don’t make for a comfortable background for international investors.”

RTS, the Russian stock market, has been hit by the political uncertainty. Since they peaked in May, shares have lost almost 39 per cent of their value. Spooked by the turmoil, foreign investors have pulled their cash. In the week of the Georgian invasion last month, Russia’s foreign exchange reserves fell by $16.4 billion (£9.3 billion), the biggest outflow of capital since the country’s financial meltdown in 1998. More than $20 billion is thought to have been withdrawn from Russia by the end of last month.

Mr Mort attributed the capital clawback in part to investors dropping their bets that the rouble would continue to rise against the dollar. As a result, Russia’s central bank intervened last week, selling off an estimated $4.5 billion of roubles in an attempt to stem the currency’s decline.

Russia is also hugely exposed to fluctuations in the price of oil.

Commodities stocks make up half the stock market and the Government’s tax take from the oil companies depends on the price of oil. Prices for a barrel of crude recovered to $108 on Friday, still well ahead of the $85-a-barrel threshold at which Russia’s current account surplus disappears.

Christopher Traulsen, director of fund research for Morningstar UK, reckons that Russia is too much like a game of roulette for retail investors. “I’m not a big fan of Russia funds,” he said. “Go into a global emerging markets fund that allows the fund manager to dip in and out of Russia when the time is right.”

Britain’s main European emerging markets funds have had a hard time this year, with all of the big names down by more than 12 per cent. The Neptune Russia & Greater Russia fund, which invests entirely in Russia, has dropped by more than 20 per cent of its value. However, Mr Dampier is a big buyer of Russia funds. “It’s the only thing I’ve bought recently,” he said. “On more than six times earnings, you’ve just got to bide your time and buy into it.”

Nervous investors can get direct exposure to Russia’s biggest companies by buying ADRs and GDRs on the London Stock Exchange. Yet Mr Dampier noted that by doing so they would miss out on strong domestic performers such as WimBillDan, the food manufacturer.

Claire Simmonds, a portfolio manager for JPMorgan’s Russian Securities fund, also likes the opportunities in domestic consumption – “There are 150 million consumers with high levels of disposable income,” she said – and infrastructure. Russia plans to spend $537 billion over the next 20 years extending its railways, $13 billion by 2012 on improving utilities in the east of the country and £12 billion on the 2014 Winter Olympic Games in Sochi.

Mr Mort says that Russia can easily withstand the withdrawal of foreign capital. “The Government’s enjoying a 9 per cent GDP fiscal surplus, they have over $500 billion in foreign exchange reserves and a huge trade surplus,” he said, arguing that investors must take a long-term view, because political tension is likely to remain high for some time. However, he advises that Russian stocks are too cheap to ignore: “The Russian stock market now looks very, very cheap at 7.3 times 2008 earning, with 20 per cent earnings growth expected in 2009.”

Otkritie Securities, the London-based broking business of Otkritie, the Russian investment bank, is so confident that investors such as hedge funds will step up their investments in Russia that it is about to open a New York office. Roman Lokhov, the broker’s chief executive, said that the RTS was quickly moving to international standards. He said: “In two to three years’ time, there will be no difference between European markets and the Russian markets.”

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4709714.ece