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Is It Time to Invest In Russia?

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Investors, with a swig of vodka and a spoonful of caviar, have embraced Russia as a money-making opportunity.

As energy prices continue rocketing higher, market participants have decided that Russia could be a winner. After all, outside the Gulf region and other political hot spots, strategists note that the country is one of the biggest net exporters of oil in the world.

This morning, fund tracker EPFR notes that, for the week ending March 9, flows into Russia equity funds hit a seven week high as oil prices climbed over $110 a barrel. It was the 15th straight week of inflows for this fund group, says EPFR, which has absorbed over $2.7 billion year-to-date. That’s versus $3.48 billion for all of 2010.

The performance of Russia stands in sharp contrast to other emerging markets so far this year. Specifically, the iShares MSCI Emerging Markets Index ETF (EEM) is down 4% year-to-date, but the Market Vector Russia ETF (RSX) is up by that same amount.

Peter Halloran, CEO of Pharos Financial Group and manager of the Pharos Russia Fund, recently argued to Barron’s that many investors have underestimated the changes that have transpired in Russia.

"What investors have missed is that Russia's private sector has grown from zero to 65% of total GDP [gross domestic product], from $180 billion at its low up to $1.6 trillion," Halloran says. "Its stock market is one of the most liquid among emerging markets, with $6 billion in volume per day. The Kremlin has tamed hyperinflation and built a stable currency with no capital controls. In addition, Russia has one of the biggest foreign-exchange reserves—$500 billion—in the world."

Furthermore, the hedgie argues that the Russian market is still relatively cheap, trading at a significant discount to the MSCI Emerging Market Index and that there is more potential good news ahead: Russian stocks could get a boost later this year, he says, if the country finally wins membership in the World Trade Organization, which it has been pursuing for almost two decades.

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POSITION:  No positions in stocks mentioned.