Moscow these days is reminiscent of Pamplona, such is the quantity of bulls appearing in the streets, proclaiming the amazing growth of the Russian stock market.

The Russian stock market is at present the fastest growing stock market in the world. The RTS index has risen over 40% since June, smashing through analysts’ predictions as to where it would be by the end of the year. Most predicted the RTS would end at around 800, but it went through that in July, and has now reached 940. Analysts now predict it will surpass 1000 by year-end, which few thought possible at the beginning of the year.

The rally is mainly, of course, being driven by the rise in oil prices. There’s a very strong correlation between the RTS index and the price of oil, and oil has never cost as much as it does today.

High oil prices, high corporate earnings, high stock market returns – there’s a giddy feeling in the air in Moscow, the feeling of having so much money you don’t actually know what to do with it.

Suddenly, foreign investors and analysts like Russia again. Sergei Karaganov, of the Institute for Europe, wrote earlier this year that relations with the West were at a dangerous low. Relations with the West had worsened all through 2004, and reached a nadir in December – the month that Yuganksneftegaz was sold to Rosneft, and Russia made its blundering intervention in the Ukrainian election.

However, “In the last month or so", says Karaganov, "the situation appears to be changing for the better.” The mood has definitely shifted among foreign investors, analysts and commentators. With the Khodorkovsky case off the front pages, foreign investors are focusing more clearly on the attractive state of the Russian economy and the country’s large reserves of oil and gas. Who needs a functioning judiciary or a free press with oil at $70 a barrel?

The Kremlin has been on a charm offensive with the foreign investment community, and though this has not produced a single concrete piece of policy, investors have been charmed. Having been mainly underweight Russian stocks last year, many emerging market investors say they have moved to an overweight position.

Actually, we shouldn’t be surprised by the stock market rally. It’s very much in line with rallies taking place throughout the emerging market universe. What was unusual was how badly the Russian stock market did last year, because of Yukos. With that incident forgotten (no one has shorter memories than cash-rich foreign investors) the Russian market is now catching up with its emerging market peers.

And it’s very unlikely, with Russia becoming president of G8 next year, that the Kremlin will launch another attack on an oligarch – Vladimir Potanin, for example – in the near future. It would be too ugly, too embarrassing, if it took place right when Putin was trying to convince the world it was a more reliable energy partner than the Middle East. That means that the stock market is likely to grow fairly solidly throughout 2006.

So, the question I’m asking myself is, should I buy some Russian stock? I’ve written about the markets for five years but, strange as it sounds, I’ve never invested in them. Journalism doesn’t pay that well, and to be honest, I never had the money.

Now, however, I’ve managed to save up a bit of cash, maybe a thousand dollars. George Soros, step aside, there’s a new high-roller in town. So why don’t I gamble on the RTS, put it all on LUKoil or Novatek, or even better, some of those obscure second-tier pulp factories where the big cash is being made?

The problem is, the stock market has already risen 40% in three months, and it’s getting close to fair value. I know enough about the markets to know you don’t want to buy when the market is high.

But the market won’t always be high. When the 2008 election campaign begins, and the various groups around Putin start slandering each other, accusing each other, and most likely shooting at each other (hey, it happened to Chubais), I’m fairly confident foreign investors will get frightened again and start to pull out of Russian stocks.

You see, the main factor driving the market’s recovery since 1999, apart from oil, has been president Putin. Foreign investors recognize that he’s a far better Russian leader than almost all Russian leaders before him, not that that’s saying much. For example, he hasn’t killed any members of his family, or forced them to suicide. That immediately puts him above Ivan the Terrible, Peter I, Alexander I, Stalin. He doesn’t have a mental illness, he’s not an alcoholic, he’s not hypnotised by a corrupt rustic charlatan. All in all, he’s a fairly regular fellow, which is highly unusual for Russian leaders.

That’s why many foreign investors are hoping Putin will tamper with the constitution and remain for a third term. Elisbeth Rubinstein, head of EMEA at Schroders, says: “Investors would probably welcome it if Putin stayed on.” Or, as Eric Kraus, chief analyst at Sovlink Securities, puts it: “Please Vladimir, don’t go!”

Unfortunately for them, Vladimir will go. And the RTS rally will probably go with him. Roland Nash, chief strategist at Renaissance Capital, thinks the next election will bring a “massive shift in power” which will “go a long way to undermining today’s positive sentiment”. Foreign investors will run like the chickens they are, the stock market will dive. And that, my friends, is when I will buy.

Julian Evans is a British freelance journalist based in Moscow. The article is written specially for "Eurasian Home".

September 28, 2005