A $2 trillion (R17.5 trillion) economy, a seat at the top table of world powers and a stock market that trades at valuations cheaper than Pakistan – Group of Twenty (G20) host Russia is still struggling to gain the trust of international capital.

Despite years of reform pledges, several privatisations and an apparent tick-up in the global growth outlook, Russian shares trade only around five times expected earnings for the coming year, approaching depths plumbed during the 2008 market crash.

That’s less than half the average for emerging market peers, many of whom Russia is hosting this week at the meeting of G20 nations in Moscow.

Given that the G20 chair is charged with forging consensus on economic governance among the world’s leading economies, there is an irony in it being one of the least trusted investment destinations of its peers – at least as reflected by prices and demand.

Even if one accounts for the commodity firms that make up most of the index and generally trade at a discount to retailers and banks, valuations are well below Russia’s own past average.

Most will attribute this, with some justification, to Moscow’s past record of expropriations, weak corporate governance and the Kremlin’s heavy-handed involvement in the economy. All this has been driving tens of billion dollars in capital to flee from Russia every year.

But investors also point to prosaic factors such as the lack of a domestic capital base that leaves markets exposed to the vagaries of global risk appetite. Russia is also overwhelmingly reliant on oil, which provides over half of budget revenues.

As a result, those betting on valuation re-ratings for returns, have had their hopes dashed year after year.

“People who have been watching Russia for a long time are feeling a real sense of frustration,” said Jose Morales, the chief investment officer of Mirae Asset Global Investments in New York. “Some people point to the valuation discount as a reason to buy but that is a structural discount that will not disappear until we see some really significant progress on reforms.”

Fund managers such as Morales do acknowledge improvements – above all this month’s move to ease foreigners’ access to domestic bond markets, which Barclays estimates could lead to $40 billion in capital inflows in 2013/14.

But any faith in the Kremlin’s reform pledges suffered a blow last year when state-run Rosneft took over oil joint venture TNK-BP, grabbing control over 40 percent of Russian oil output.

The oil sector’s consolidation around Rosneft was a clear sign that Russia retained its proclivity for state intervention, said John-Paul Smith, the head of emerging equity strategy at Deutsche Bank, who sees a clear cause-and-effect link between share valuations and state ownership across emerging markets.

That is particularly so for mining and energy. Rosneft, the world’s largest oil firm, is valued at six times forward earnings. ExxonMobil, the second-biggest, trades at 11 times.

The risk image has driven up Russia’s implied equity risk premium – the spread investors demand to hold stocks over government bonds – to a near record high.

“The general view still seems to be that you don’t own your shares in Russia, you only rent them,” Smith said.

Bank of America-Merrill Lynch’s monthly survey shows Russia is fund managers’ favourite play these days after China, with over 40 percent overweight.

But very few of these investments are backed by conviction.

“We view Russia as a tactical market that we increase exposure to when risk appetite and oil prices are going up,” Morales said.

Russia will be the world’s fourth-biggest consumer market by 2020, doubling its annual value to $3bn, or a tenth of total developing world consumption, a Sberbank report predicts.

Ed Conroy at HSBC Global Asset Management is one of the few fund managers with a long-term bullish bias on Russia. “With privatisation you are looking at companies such as rail freight operators and airlines coming to market. That will dilute the commodity component of the Russian index and bring it down from the current two-thirds of the index,” he said.

Privatisations last year fell short of the $10bn target but the government hopes to raise up to $14bn this year, with mines, banks and shippers slated for sale.

The other catalyst could be bond market liberalisation, which is expected to trigger capital inflows and bond yield compression. Last week, Euroclear started settling trades in government bonds, at a stroke easing access for foreigners. – Reuters