The Russian equity market has spent the past several weeks defying the old investor saw about emerging markets catching pneumonia when developed markets catch a cold. The

Russian Trading System Index

has been uncharacteristically resilient to global market volatility, up a healthy 28% for the year and down just 7% from its 2000 high. That's pretty good for a year when the

Nasdaq Composite Index

is down 5% for the year (and 24% from its high) and when many other global markets are treading water.

The key to the Russian market's strength is that the country may be getting its act together -- for real this time. The economy is showing strong signs of growth and domestic confidence in it -- as reflected by decreasing capital flight. The new president -- to be inaugurated on May 7 -- continues to make the right noises about kick-starting reform in Russia. Combine economic growth and political will to bring about reform, add a dash of asset undervaluation, and you may have a recipe for stock market resilience -- and strong appreciation -- once concern about global markets tapers off.

But investors in Russia have heard the swan song of change before -- and lived to regret heeding it. The installation of a few so-called young reformers in key government posts by then-President

Boris Yeltsin

and early hints of economic growth at the time prompted investors to price in wholesale change in Russia -- pushing the equity market up 141% in 1996 and 98% in 1997 -- before reform ever really got off the ground. Hollow promises led to disappointment and the virulent Russian strain of the Asian flu that ultimately led to the ruble's devaluation in 1998, a default on the $40 billion Russian domestic bond market and a severe global liquidity squeeze. The Russian equity bubble deflated by 93% from its October 1997 peak to its trough one year later.

What's different now is that signs the economy is moving in the right direction are stronger than at any time since the end of the Soviet Union, and gains have moved beyond the benefits of devaluation. In the first quarter of this year, the gross domestic product was up between 6% and 8% (depending on which government body is working the numbers), while industrial production was up 12%. Gross international reserves are up $4.5 billion to $17 billion in the first four months of the year, reflecting a dramatic 25% to 35% decrease in capital flight. That cash outflow has for years robbed Russia of funds desperately needed for domestic investment. On the fiscal front, tax collection is up significantly, with revenue as a percentage of nominal GDP reaching about 18% in the first quarter, compared with 11% in the first quarter of 1999. Government spending is running at about 14% of GDP, suggesting a remarkable budget surplus of 4% of GDP. Finally, the price of oil -- which is high, but easily overstated -- is stable, boding well for the federal budget and tax revenue.

Investors also are heartened by increasing evidence of President-elect

Vladimir Putin's

reformist leanings. While Putin hasn't done anything very concrete over the past month -- during the dead period between his election March 26 and his inauguration -- he's sent the right signals by appointing a highly respected liberal economist as a key adviser, and dropping hints about the technocratic and reform-oriented team he will name to his Cabinet. During his first trip to the West as acting president, Putin highlighted the main tenets of his economic program, including liberalizing the economy, creating an independent judiciary, tax reform and honoring all foreign debt liabilities. Within a week, Putin persuaded the


, the lower house of parliament, to pass the START II and the Comprehensive Test Ban Treaty, underscoring the Duma's willingness to play ball with the new president. In Putin, it seems Russia may have a leader ready, willing and able to push through reform.

Investors are likely to respond positively to two pivotal events later this month when Putin is expected to name his Cabinet and unveil a long-term economic program being developed by some of Russia's more respected and competent economists and policymakers.

Ultimately, though, reforms need to be implemented -- and they need to work. Many observers outside of the business and financial community are distinctly pessimistic that Putin will deliver, dismissing him as a second-rate Soviet spook who knows the language of money, but has little intention of carrying through with his promises. But while the doubters wait for results, the Russian market will likely continue to move in line with high expectations.

The safest way to play Russia is via a mutual fund focused on the Russian market, like the closed-end

( XTRFX)Templeton Russia Fund or the open-end

(LETRX) - Get Report

Lexington Troika Dialog Fund. A few regional funds, such as the

Morgan Stanley Dean Witter


Russia and New Europe Fund, the


Vontobel Eastern European Equity Fund and the

U.S. Global Regent East Europe Fund

, also may have Russian exposure -- although it will be diluted by holdings in Eastern Europe. Russian stocks likely to benefit the most from continued investor interest in the market include national power monopoly

Unified Energy System

( USERY), which is perceived as a highly leveraged play on reform, and Russian oil majors






If Putin doesn't deliver on reforms, Russian stocks are likely to slowly drift back down to earth. But in the meantime, as expectations continue to grow, the outlook is upbeat.

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 - Buy; Unified Energy System - Buy; Surgutneftegas - Buy. 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 positions in any of the securities mentioned in this column, though positions can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at .