Few people may have noticed, but this month marks the two-year anniversary of the 1998 Russian default crisis. Maybe not an event worth celebrating, but it is worth noting.

With everything Russia has endured during the past few months, it is tempting to think the country is again in crisis. The tragic loss of the nuclear submarine Kursk exposed Russia's deteriorating military and, in a larger sense, the country's weak infrastructure. Meanwhile, the war in Chechnya may have slowed, but has certainly not ended. Even the fire this week in the Ostankino TV tower, the second tallest free-standing structure in the world, seems to point to a country tottering on the brink of disaster.

Nonetheless, it is worth remembering that Russia actually is improving, albeit at a snail's pace. The country may not exactly be a poster child of economic reform, but it is slowly moving down the path toward a market economy.

Putin's Push

Since his election in March, Russian President Vladimir Putin has pressed through a number of reforms that will help push the country down the free-market path. He has reorganized Russia's chaotic federal structure, a legacy of the Yeltsin years, and tackled the country's confusing taxation system. (Read Kim Iskyan's piece last month describing Putin's first 100 days in office.)

"The end of the Yeltsin reign has been positive," says David Aserkoff, Russian analyst for Credit Suisse First Boston, based in London. "Now we have a president who is active and is willing and able to deal with the problems that face Russia," he says. Aserkoff sees improvement in a number of small areas, such as regulatory issues, that may not make headlines but will lead to an improving economic environment.

"Putin has done more of the right things than the wrong things," says Eswar Menon, manager of the Loomis Sayles Emerging Market Fund. That may sound like faint praise, but Menon thinks highly enough of Russia's recent performance that its securities now constitute a sizeable 8% of the fund.

Overall, Russia's economic health is as strong now as it has been in quite a while. The country posted 8.4% GDP growth in the first quarter of this year and should post growth of around 5% for the whole year.

In addition, Russia's markets have been on a tear for the past year. The benchmark Moscow Times Index is up 264% since it began a rally last September. While the markets were lackluster for the first half of 2000, the rally seems to have returned, with the index up 50% since late June.

That has translated into impressive gains for one of the pure-Russia plays available to U.S. investors. The open-end ( LETRX) Lexington Troika Dialog Russia Fund is up 98% over the past 12 months and has risen 31% this year. It carries an expense ratio of 3.09% and requires an initial investment of $5,000. However, the closed-end Templeton Russia Fund ( TRF) is up 27.78% over the past year, but is down 14% this year and trades at a 14.42% premium to net asset value.

Oil Is King

But make no mistake, the market rally is connected to one thing and one thing only: the price of oil. Whether one thinks Russia is on the path toward a market economy and democracy, or that Putin represents a slip back into authoritarianism, the strength of Russia's economy and the rise in its stock markets are quite simply rooted in the rise of oil prices the last couple of years.

At the time of Russia's default in 1998, oil sold for around $12 a barrel. Now it is going for around $30. That may cause a lot of griping among SUV drivers in this country, but it has been a blessing for Russia, since oil is still the country's largest export.

The challenge for Russia, then, is to seize the opportunity that the revenue from high oil prices provides to put in place the framework for a market system. If the country can't do that, it risks a repeat of the crisis of 1998.

In the meantime, more and more analysts are predicting that oil prices are not going to go down over the next few months. That gives the country more time to get its act together -- and is good news for the Russian market in the near term.
David Kurapka's Global Portfolio column appears Mondays, Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send it to David Kurapka.

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