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Growing anticipation that the March 26 presidential elections will bring a new era of relative political stability and modest reform has helped push the Russian equity market up 22% since

Boris Yeltsin's

resignation on Dec. 31.

Since the political situation in Russia could hardly be more uncertain than it was under Yeltsin, betting on increased stability post-Yeltsin is probably a good gamble.

It's also a safe bet that Acting President

Vladimir Putin

will win the election and usher in the next era.

But the optimists are going a step further, hoping that besides bringing stability, Russia's second president may be a reformer as well. This feeling could further boost the Russian equity market, which is still 68% below its October 1997 high, despite a 197% climb last year.

But what Russia's next president really wants to do -- and what that might mean for investors -- is as murky as the Moscow River because Putin has turned vague and cryptic policy prescriptions into an art form. It's far from clear whether Putin will be the reforming savior of Russia or whether he'll end the country's experiment with democracy as a nationalistic dictator.

Here are a few signposts to look out for in gauging the edgy, sentiment-driven Russian equity market over the next several weeks:

  • First round good; second round OK: The days immediately prior to the election are likely to see a relief rally that the elections are, at long last, really happening, even though the result appears predetermined. Putin's lead in the polls is so strong that the focus now is not on whether he will win the election, but whether he'll win in the first round. The Russian constitution mandates a run-off between the top two vote-getters if no candidate wins a majority in the first round. A first-round victory would be a relief for investors, since as recently as September, worries that the Kremlin would engineer a cancellation or postponement of the elections seemed all too real.
  • Not enough voters is a big downer: Under the Russian constitution, an election is considered null and void if at least half of all voters don't turn out to the polls. New elections would be held four months later, causing investors to have nasty flashbacks of the political uncertainty they seem so close to leaving behind. A weak turnout would also raise questions about whether Putin could maintain his strong ratings until the next elections. That said, it's pretty unlikely that the Kremlin wouldn't be able to drum up enough voters to hit the 50% mark -- either through legal means, such as bringing the ballot box to babushkas -- or just by fudging the figures as necessary.
  • What might he do? The million-ruble (that's $34,843, if you're counting) question is what Putin will do once he's officially in office. Putin has pointedly avoided making any policy statements of substance, declaring that since they would be "torn to pieces," he prefers to remain mum. (Apparently Putin either isn't watching or isn't inclined to borrow from the American political scene.) Since being named acting president, he's done little more than carry on the bloody war against Chechnya and cultivate an image as a strong but caring nationalistic protector of the Russian people -- not much of a foundation for a policy platform.
  • Hints of real reform: Although Putin hasn't said much about what he'll do in office, the Russian market has already priced in some hopes that he'll turn out to have a soft spot for reform. His association with Anatoly Chubais and other so-called reformers -- who are widely viewed as morally bankrupt and lacking credibility, but are the best Russia has to offer -- has encouraged some to believe he is a reformer working on consolidating his power base before showing his true colors. The release of an economic program -- expected in the first weeks of Putin's administration -- may turn out to be a bit of a disappointment if investors are expecting a Russian 90-days-to-market-reforms wish list. More likely, the Putin economic program will have a time horizon of 10 to15 years, with little to satiate the appetites of investors searching for short-term changes that could unlock the value of Russian assets. But investors in Russia -- hankering for real economic restructuring and reform -- would respond with exuberance to a truly reformist agenda, particularly if it's focused on the medium-term.
  • Whither Russian democracy? Fears that Putin will derail Russia's young post-Soviet experiment in democracy and destroy what little progress has been made toward implementing market reforms aren't entirely unfounded. Rumors have already circulated that Putin has floated the notion of extending the term of the Russian presidency from four to seven years, presumably to give himself time to implement his long-term economic plan. Also, anyone who spent 15 years in the KGB, one line of reasoning goes, is probably not enamored of the idea of democratic process and transparency. Putin may be beholden to the Kremlin insiders who have manipulated Russian politics for years, and may allow the quiet rape of Russia's assets by well-connected oligarchs to continue. Putin has repeatedly emphasized the need for the state to remain heavily involved in the economy -- not exactly reassuring words to those hoping that the market, rather than the state, will receive top billing.

In the short term, a big question for the Russian equity market is the price of oil. With roughly 60% of the

Russian Trading System

index composed of oil stocks, any downshift in oil prices -- which appears increasingly likely at the March 27


meeting -- will hit Russian market sentiment hard. Although the macroeconomic environment is likely to remain strong as long as oil stays above $23 per barrel, market momentum could wilt in the face of a slump.

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In the meantime, indications that Putin isn't such a bad guy may help bring back some of the big institutional money that fled the Russian market during its 93% decline from October 1997 to October 1998. Since dedicated money -- that is, mutual funds that focus on Eastern Europe or Russia -- has had no choice but to remain invested in Russia, a real influx could come from global and emerging-market funds, which have shied away for the past year or two. Hedge funds and domestic investors remain active, but for the Russian market to ramp up, the big money will need to reassess the country in a positive light. A very small slice of a few multibillion dollar funds can go a long way when reported daily turnover in the Russian stock market averages only around $25 million.

Despite these uncertainties, the Russian equity market is poised to move up another 25% or so by the end of June, strictly on the possibility of reform. That upside could expand dramatically if Putin turns out to be an investor's dream. But the downside could be sharp and quick if he disappoints.

The safest way to play Russia is through a focused fund such as the closed-end

Templeton Russia Fund


or the open-end

(LETRX) - Get Voya Russia Fund A Report

Lexington Troika Dialog fund. A number of regional funds, such as the

Morgan Stanley Dean Witter Russia and New Europe Fund


, the


Vontobel Eastern European Equity fund and the

(EUROX) - Get US Global Emerging Europe Report

U.S. Global Regent East Europe fund, may also have Russia exposure, although it may be diluted by holdings in Eastern Europe.

Stocks primed to move up


Putin proves to be a big-time reformer include the country's largest energy supplier,

Unified Energy Systems

( USERY) and the Moscow-region utility,



. Russia's utilities hold tremendous latent value that could be unlocked by effective reform.

A few other stocks well-positioned to rise on the return of large institutional money are oil giant



, which is planning a Level 3 ADR later this year, and cellular provider



. Though expensive on a fundamental basis, VimpelCom is Russia's only Level 3 ADR and can be accessed by investors without a lot of hassle. VimpelCom is also being viewed as a potential Russian Internet play.

Kim Iskyan is an equity strategist at Moscow-based brokerage firm and investment bank Renaissance Capital. The following are the firm's analyst recommendations and underwriting relationships for the companies mentioned in this column: LUKoil, short-term buy, long-term market outperform; VimpelCom, short-term hold, long-term market underperformer; Mosenergo, short-term buy, long-term market outperformer: UESR, short-term buy, long-term market outperformer. Renaissance Capital has done no underwriting for any of the companies mentioned.

Iskyan began his career at the emerging markets trading desk of Oppenheimer & Co. At the time of publication, he held no position in any of the stocks mentioned, though positions can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at NK>.