* Russia's oil reliance causes concern
* Long-standing corruption remains, say strategists
* Investors look to other emerging markets, Japan, U.S.
* But some see value in Russian equities
By Megan Davies
MOSCOW, April 18 Foreign investors weary of unfulfilled reform promises under Vladimir Putin have been fleeing Russia-focused funds this year, clouding prospects for the country's fragile equity markets.
So far this year, $1.2 billion has been pulled from Russia-focused equity funds - 8 percent of estimated Russia-dedicated assets - on concern over a slowing economy, Russia's exposure to falling commodity prices and a lack of progress on reforms to make a murky business environment more transparent.
With Russia's oil production now at post-Soviet records and rivalling that of Saudi Arabia, that might suggest more money sloshing around the economy will underpin company profits and push up equity values. But those abundant petrodollars may be removing some of the incentive for the kind of business-friendly reforms that comfort foreign investors.
"It seems to be an ongoing process of people gradually moving out of Russia... I think investors have got all the warning signals," said Steven Dashevsky, founder of Moscow-based investment firm Dashevsky & Partners, who expects to reduce the weighting of around 20 percent held by Russian equities in his funds.
In his first major speech to investors since returning to the Kremlin, President Putin said last June he would press ahead with sales of non-strategic state assets, fight corruption, reduce red tape, strengthen property rights and cut Russia's reliance on energy exports.
Nearly a year later, investors see few improvements to Russia's legal system and scant sign that widespread corruption has abated. Privatizations are moving slower than hoped.
An ongoing trial of anti-graft blogger Alexei Navalny and the posthumous trial of whistleblower Sergei Magnitsky appear to some to reinforce the impression of a country ruled by might, not right.
Recent treatment of minority investors has done nothing to help.
In the buyout of TNK-BP by state-controlled oil producer Rosneft, Russian tycoons including Mikhail Fridman sold stakes for a total $28 billion. The rump of listed shares has shrunk by 35 percent since it emerged that there was no plan to buy minority shareholders out, meaning they would not benefit from the takeover.
Veteran investor Mark Mobius, executive chairman of Franklin Templeton's emerging markets group, said the TNK-BP buy-out "is the kind of issue that gives pause for thought on the behalf of investors coming to Russia".
Speaking at an investment conference in Moscow, he warned: "The recent case of TNK-BP is probably very instructive because you had these ... oligarchs leave with billions of dollars, while minority investors are now sitting in a very risky, unstable situation".
Mobius is still enthusiastic about Russia and said he had about $1.2 billion invested in Russian equities. He said that, overall, he had made money in the country and would still like to add to his Russia exposure.
Many other investors are cutting theirs, some of them concerned that a lower oil price may push the country into recession following a growth downgrade in April.
Maarten-Jan Bakkum, emerging market strategist at ING Investment Management in the Netherlands, said ING's funds had reduced their Russian positions in the last three to five months and could cut them further.
"We don't have a big position in Russia. Last year we were overweight, but Russia has been disappointing," he said. "I find it very hard to play Russia in an environment where commodity prices are moving very fast and Russia is very sensitive to the oil price."
According to fund data provider EPFR, there were inflows of $153 million into Russia-focused funds overall in 2012, but $793 million exited in the final quarter. There have been eight straight weeks of outflows from Russia-dedicated funds.
"In the past, the Russia growth story was one thing that Russia investors could hang their hat on," said Erik DePoy at Gazprombank in Moscow. "Well, that growth story is not so exciting anymore."
Russia is not the only large emerging market to suffer as investors focus more of their attention on Japanese stocks and U.S.-based loan funds.
But Russia has seen net outflows this year while others in the BRIC group of countries - Brazil, Russia, India and China - have seen inflows if Russia's share of large global funds is included beside Russia-focused funds, according to EPFR.
Russian equities now trade on a 12-month forward price-to-earnings ratio - which compares share prices to forecast earnings - of 5 times, while Turkey trades at 11 times and Mexico at 16.3 times, according to one trader.
That suggests Russia represents good value, yet trading volume has declined. The nominal dollar value of the MSCI index's Russian constituents traded daily so far this year was 40 percent less than in full-year 2012, according to one Moscow-based bank.
"The most concerning thing is that when you see the market picking up you don't see a pick-up in volume, so there's a lack of conviction," said Peter Westin, Chief Equity Strategist at Aton, a brokerage in Moscow.
Selling has come from exchange-traded funds (ETFs) as well as actively managed funds, analysts say. ETFs typically have big weightings in large stocks such as Gazprom, Lukoil and MTS, said one trader. Stocks with large foreign ownership tend to be those listed in London, particularly miners such as Evraz and Polymetal , the trader said.
The Market Vectors Russia Fund, one of the largest ETFs focused on Russia, is down 14 percent this year.
Fund performance has also struggled. Average returns for the funds covered by Thomson Reuters fund research firm Lipper over the last three months are at a negative 4 percent.
While some are selling, others see an opportunity.
Sam Vecht, head of BlackRock's Emerging Europe equity team, believes investors are making a mistake by chasing emerging markets that have performed better than Russia in recent years, and has been topping up his Russian investments.
"Valuations are stupidly cheap," one London-based hedge fund manager said of Russia. "I've never seen stuff so cheap there. People must be putting a really high discount factor because companies may be raided or because of corruption."
Yet if the fortunes of Russian equities are about to turn, the evidence is slow to appear.
"There is a general sense of fatigue about the Russian market," said Gennadiy Babenko, equity research analyst at Renaissance Capital in Moscow.
"People say that you should buy now because its cheaper, and it will improve in the future," said Babenko. "But it is not improving."