So inevitable is

Vladimir Putin's

election Sunday as the next president of Russia that the buoyancy is long since priced into the country's equity market, which is up nearly 60% since the first of the year. Yet despite the confidence over the prospect of a healthy and relatively young leader -- and the promise of predictability -- the risk is on the upside now, as market focus shifts to pondering what a President Putin will mean for reform in Russia.

A key sign of whether Putin is serious about changing Russia for the better will show up soon in how he treats the Russian oligarchs. This small group of powerful insiders has won most of the spoils of the country's transition to a twisted form of market capitalism. If Putin follows through on his reformist rhetoric (without evoking too many strains of Stalinism in the process), expect the Russian equity market to fly higher than the


space station.

But if Putin's promises turn out to be as empty as those of almost every other so-called reformer who has stained Russian politics since the end of the Soviet Union, Russia may continue to slowly slide into irrelevance. And deep-seated structural problems may choke off promising signs of economic growth and development, pulling the Russian equity market down with it.

The reign of the oligarchs has been a cornerstone of Russia's twisted relationship with capitalism for much of its post-Soviet history. In the early- to mid-1990s, a small group of well-connected former party apparatchiks won control over huge swaths of the Russian economy, in part through a number of highly controversial "auctions." There, state assets were sold to insiders at fire-sale prices. These half-dozen or so oligarchs came to dominate the cash flows of the Russian economy, routing them out of the crumbling Russian state in one of the largest-scale episodes of asset-stripping of all time.

Because it was in bed with the oligarchs, the Yeltsin administration provided only feeble and token resistance to the raping of the Russian state. The Yeltsin administration itself probably benefited handsomely from the wealth of the oligarchs. And Yeltsin won re-election in 1996 largely thanks to the assistance of the oligarchs. Just months before the election, when Yeltsin was badly trailing the Communist candidate, the oligarchs used their massive media and financial firepower in his favor.

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Without the oligarchs, Yeltsin may well have retired early. But the cost of the deal to the Russian economy and to the 50 million Russians who live below the official poverty line of $34 a month has been incalculable.

Last weekend, Putin sounded the battle cry, vowing to "eliminate oligarchs as a class." But until Putin does more than talk about it, he won't be taken seriously. If he means business about changing Russia, tackling the oligarchs head-on will need to be near the top of his agenda.

A recent controversy about the future of Russia's powerful aluminum industry doesn't bode well for Putin's ability and willingness to follow through. Within the span of a few weeks, the most notorious of Russia's oligarchs, Boris Berezovsky, amassed controlling stakes in three of Russia's largest aluminum plants. Through a complex series of completely non-transparent and shady transactions, Berezovsky landed 62% of Russia's total aluminum production (or about 7% of global production). The state anti-monopoly committee meekly acquiesced. Perhaps more importanly, Putin tacitly consented by doing nothing as Berezovsky made a masterful asset grab of 1.3% of the country's total GDP.

What could Putin do? Oligarchs such as Berezovsky could be prosecuted on any number of charges that could put them behind bars for years. But Putin might hesitate to immediately bite the hands that helped him get to the top. It's far from clear that the new president will have the political support -- to say nothing of the will or desire -- to make a break with the forces that have crippled the development of the Russian economy.

And even if he goes after the oligarchs, they may simply be replaced by a slew of Putin cronies -- old KGB hands and other characters who would be more than happy to pick up where the oligarchs of the '90s left off. Despite decades of asset-stripping, Russia still has lots of wealth that could be carted offshore.

Most likely, Putin will rein in the oligarchs over time and obliterate them as a class by making them adhere to the laws that should govern any society. If Putin does manage to consolidate his power base and bring the oligarchs back into the realm of the law, investors are likely to cheer noisily.

Such action could signal his willingness to take on the other seemingly intractable ills that have paralyzed Russia: byzantine land and tax codes, an industrial sector in dire need of restructuring, a crippled banking sector, and the massive corruption that permeates every level of society. This would open the door for Russia to enter the realm of "normal" emerging markets -- markets that are actually emerging rather than stagnating or submerging.

In that case, the Russian equity market would be the place to be.

Kim Iskyan is an equity strategist at Moscow-based brokerage firm and investment bank Renaissance Capital. 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