Last month, I caught up with an old friend in Moscow.

My friend is a banker. He has lived in Russia for 10 years… and he has seen all kinds of economic swings in what was the old Soviet Union. He has also seen an extraordinary turn of events…

These days, the Russians have the money…

I lived in Moscow for nine years. I spent my time there as an investment analyst and a hedge-fund manager. Because of that experience, I have some insight into Russia that most foreigners don’t.

[ad#Google Adsense 336×280-IA]For most Americans, Russia is still an “evil empire” we should all fear and hate.

Western media outlets like The Economist and Bloomberg often run scare stories about Russian President Vladimir Putin.

There is more Western disinformation on Russia than any country in the world.

Most Americans also still see Russia and its capital, Moscow, as a bleak, desolate place… where you’re apt to run into a gangster or an alcoholic mugger in the streets.

But as I made my way to catch up with my friend Mark, nobody from the mafia shook me down. No one called me a dirty capitalist pig. The only bread line I saw was at a high-end French pastry shop selling croissants.

Instead, I saw streets clogged with Audis, BMWs, and Mercedes. Every few blocks, sparkling shoe stores showcased the latest styles from Milan and Paris. The number of car dealerships on the road to the airport made the range of automotive options where I live in suburban Washington, D.C. seem Soviet by comparison.

Communism – and everything else about the country’s 70 lost years of socialism during the 20th century – is as dead as Lenin in his tomb in Red Square.

Today, Russia is more “capitalist” than much of the world… While it’s not the “Wild East” anymore, there’s more of a sense of individual opportunity than there is in the hyper-regulated and politically paralyzed West.

In 1995, the average Russian earned the equivalent of $2,670 per year… Today, he makes around $14,000 a year. And he needs every kopek of it.

While I was in Moscow – the world’s second most expensive city – I dropped nearly $200 for a bland dinner of over-cabbaged Greek salad, pizza, and bad French wine. A glass of freshly squeezed orange juice at a packed upscale café the next morning cost $20. A night at a Marriott hotel costs $500… if you book early. A million dollars will get you about as much apartment in Moscow as it will get you in Manhattan.

Spending on luxury goods in Russia increased nearly 10 times in the decade ended in 2010… and the number of new cars on the road increased by a factor of three. But Russians aren’t buying boxy Ladas and Volgas – the Chevys of the Soviet era. The Bentley dealership in Moscow, just off the city’s swankiest shopping lane, gets plenty of business.

According to Forbes, there are more billionaires in Moscow than in any other city on earth.

But despite the good times, Russia’s stock market is one of the cheapest in the world… on a price-to-earnings basis, it’s about 60% cheaper than other emerging markets. On top of that, it’s cheap by its own standards… about 30% cheaper than its average level for the past five years.

On a price-to-book basis – which compares the market capitalization (the price per share multiplied by total shares) of a company to its book value (which is the total cost of a company’s assets, minus depreciation) – Russia is selling at a 50% discount to its 10-year average level… and 30% below its usual discount to emerging markets generally.

The thing is, a market that’s out of favor can stay out of favor – and cheap – for a long time. But fortunately, there are some catalysts that should send Russian stocks higher in the coming year. In tomorrow’s essay, I’ll tell you what they are.

Good investing,

Kim Iskyan

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Source: DailyWealth