Last year's investment pariah Russia comes in from the cold

[LONDON] Russia is returning from the investment wilderness after last year's oil price collapse and Western business sanctions with funds attracted by falling interest rates and a light 2016 debt repayment calendar.

Those who braved Russian markets this year are already in line to scoop dollar-based returns of 15-20 per cent on equities and bonds, among the best in the world.

But this merely represents recovery after a horrific 2014 that saw the rouble crash by 40 per cent, US$150 billion capital outflows and the spectre of default by Russian companies that had borrowed heavily in dollars.

Now, almost a year after a dramatic late night 6.5 percentage point interest rate rise to defend the collapsing rouble, a turnaround for the economy and investment flows may be nigh. That is, provided geopolitics, oil prices and the domestic economy all deliver as hoped. "Russia is definitely one to watch," Mark Burgess, CIO for Columbia Threadneedle Investments, EMEA told the recent Reuters Global Investment Outlook summit. "Were there to be any signs of sanctions being lifted, there would be investment opportunities being thrown up from that." Despite the latest geo-political spat with Turkey over the downing of a Russian warplane, the commonly held view now is that with Moscow joining the alliance against Islamic State militants in Syria, ties with the West are on the mend.

That in turn means sanctions imposed for Russia's meddling in Ukraine may be rolled off in 2016, at least by Europe.

While those measures only bar some companies such as Rosneft and Sberbank from tapping global capital markets, their removal will be a gamechanger because of the risk premium they have added to Russian assets in general.

Other positives: the exchange rate plunge has protected Russia's balance of payments surplus, and the rouble, having fallen 20 per cent this year in real terms - versus currencies of trade partners and adjusted for inflation - looks cheap.

Any sign of oil prices bottoming out into next year would also be a significant catalyst for Russian assets.

And while the economy will remain in recession, the worst of the downturn may be over, most investors believe.

REUTERS