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LONDON, Nov 27 (Reuters) - 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 percent 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 percent, $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 percent 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.
Also setting Russia apart from emerging peers such as Brazil and Turkey is a balance of payments surplus that may top 4 percent of annual economic output next year.
That's key at a time of rising U.S. interest rates when international capital is costlier and harder to come by.
Russian companies have been more resilient than expected, as their own cash buffers and state aid have headed off anticipated debt defaults.
That scenario looks even more unlikely now, given their external debt repayments amount to around $75 billion next year, versus well over $100 billion in 2015 and almost $50 billion just in the last 2014 quarter.
"The market is looking ahead and seeing external debt as less of a headwind," UBS strategist Manik Narain said.
Refinancing debt has been also less onerous than feared.
Russian bankers say they are flush with dollars, as firms fearing asset freezes by the West have repatriated cash held abroad - state-run lender VTB for instance says its corporate deposits have swollen 20 percent in the past year and loan books have grown 13 percent.
Receding default risk has helped the yield premia offered by Russian companies' dollar bonds over U.S. Treasuries to fall a massive 4 percentage points this year, according to JPMorgan which runs the most widely used emerging debt indexes.
Russian corporate bonds have returned 26 percent this year, more than double total returns on the CEMBI index, JPM said, predicting that low supply of new bonds and geopolitics will support gains into 2016.
Russian local bonds may prove even more juicy.
Thanks to the rouble's bounce from record lows and five interest rate cuts, Russia tops this year's local emerging debt league tables with 20 percent returns, but similar gains can be expected in 2016, says JPMorgan which advises clients to hold more Russian debt than the country's weight in the index.
That view assumes inflation will slow, allowing more rate cuts. Reuters polls forecast end-2016 inflation at 8 percent, from about 13 percent now, while interest rates are seen dropping to 8 percent from 11 percent.
"I like Russia for several reasons...first, rate cuts will lead to lower yields and second, we expect the rouble to stabilise because of oil and greater engagement with the West," said Marcelo Assalin, head of emerging debt at NN Investment Partners, who has been raising allocation to Russian debt.
Adjusted for inflation, Russian government spending should contract 5 percent next year after a 15 percent fall in 2015, savagely compressing price growth and making domestic debt a good structural trade, said David Hauner head of EEMEA debt and strategy at Bank of America Merrill Lynch.
"Our core view continues to be that Russian yields will come down very substantially...this is an economy which is very disinflationary in terms of trend with a very contractionary fiscal policy," he said.
It is harder to make a case for equities, given recession, weak commodities and the consumer demand squeeze. But Ken Lambden, chief investment officer of Baring Asset Management sees opportunities in sectors such as internet and retail.
"We are quite specifically looking to divide the Russian economy into new Russia and old Russia," he told the Reuters summit.
Graphics by Vincent Flasseur; editing by Anna Willard