Viktor Vekselberg, one of Russia's leading businessmen, recently spent Dollars 100m (Pounds 54.2m) on nine Faberge eggs, which he then loaned to the Kremlin. His attempt to curry favour with the government shows how effectively the so-called oligarchs, who run the business conglomerates which dominate the Russian economy, have been cowed since the arrest last year of one of their number, Mikhail Khodorkovsky. As well as making gifts, the oligarchs are apparently cleaning up their corporate act by pursuing more transparent accounting practices and shutting down their "tax minimisation" schemes. Fund managers argue that this improvement in corporate governance is one reason why investors in Russian equities should feel positive even though the market has lost a quarter of its value since April after more than doubling over the year before. The market continues to be jittery as the trial of Khodorkovsky, chief executive of oil company Yukos, who was arrested on fraud and tax evasion charges last October, approaches. "Yukos is definitely the number one issue," says Michael Bartek, investment manager at fund manager New Star. "Many people were caught off guard at the time, and investors didn't expect the issue to drag on for so long." "We were not expecting an attack of this kind," agrees Leila Kardouche, emerging Europe fund manager at Schroders. "It has had damaging repercussions for the whole investment environment." But she argues that the Yukos issue is likely to be resolved soon, and that the government will be unwilling to attack the other oligarchs and their companies, which still produce 50 per cent of Russia's industrial output. "Those who suggest that Putin does not care about foreign capital are deluding themselves," she says. Schroders, whose Emerging Europe fund has 50 per cent invested in Russia, and which has maintained an overweight position there for the past three years, believes that some of the oligarchs will be asked to contribute a part of their wealth into state coffers as compensation for excessive profiteering from the poorly executed privatisations of the 1990s. Uncertainty over future developments in the Yukos saga reflects the lack of transparency surrounding the decision-making processes of the Putin government. To many observers, today's Russia looks more like a dictatorship than a liberal democracy. But for others, the strength of Putin's leadership, reinforced by the recent presidential and parliamentary elections, is a plus. "Law and order and stability are better than chaos," says Bartek. The pro-Putin camp cites his success in reforming the taxation system and improving property rights, and believes that only a strong leader will be able to force through necessary changes in the banking and energy sectors as well as reduce the powers of the bureaucracy. Tapan Datta, emerging market economist at Schroders, says investors should focus on what has been achieved. "While the transition from stabilisation to growth has been helped by the high level of oil prices, Russia's achievements since the 1998 crisis have been impressive," he says. "A large fiscal deficit has moved to a large surplus, an external deficit to surplus and recession to rapid growth." The economy is expected to grow by between 6 per cent and 7 per cent this year and next, and Putin has set a target of doubling GDP by 2010. The population of 145m is getting richer, helped by higher wages and the appreciating currency. However, investors in the stock market find it difficult to get exposure to companies which will benefit from any boom in domestic demand. "There are structural challenges and inefficiencies in the stock market," says Philip Ehrmann, head of emerging markets at fund manager Gartmore. "The market is still heavily dominated by energy companies and state-owned utilities." The oil sector accounts for more than half of Russia's exports, and possibly as much as 2 per cent of GDP growth this year. More than 80 per cent of the stock market is made up of energy and utility companies. A single oil company, Lukoil, makes up a third of the MSCI Russia index. Investors in an emerging Europe fund are likely to be making a large "energy bet". Baring's Emerging Europe investment trust has nearly half the fund invested in Russia, and Lukoil is the fund's largest holding. Schroder's Emerging Europe unit trust has 10 per cent invested in Yukos and 9 per cent in Lukoil. Analysts argue that the market will become broader as an increasingly vibrant private sector launches more initial and secondary public offerings. Another concern - that the interests of minority shareholders are poorly protected - is also likely to ease. "Levels of disclosure are better than they were," says Bartek. "Management at larger groups understands that it is beneficial to keep minority investors happy." Schroder's Kardouche adds that ample liquidity, driven by Russians returning capital they have kept parked offshore, and attractive valuations should drive the market higher.