Oil tax reform. We view the recent changes to the oil taxation in Russia (the so called 60-66-90 tax regime) as just the first step in the painful adjustment process of the – still – inefficient and backward-looking regulatory regime. Future changes are likely to include a continuing reduction in the export duty on crude; greater benefits for greenfield developments; and a revamp of the oil products regulation to stimulate much needed upgrades of the existing refining capacity. The end outcome of this process, we believe, will be more profitable upstream and less profitable downstream operations. We like LUKOIL as a play on brownfield redevelopment, Rosneft as having the best portfolio of greenfield assets, and Tatneft as having the lowest downstream exposure.

Corporate governance improvements. As a typical representative of the "old economy", the Russian oil & gas sector still suffers from one of the worst corporate governance records on the local stock market. Three companies in particular – Gazprom, Transneft and Surgutneftegas – have the capacity to show the biggest gains. In the case of Gazprom and Transneft, these could come from improved dividend policies and better strategic management; while Surgutneftegas should benefit from the improvement in Russian financial regulation, particularly with respect to the shareholding disclosure rules and consolidated reporting.

Improving gas fundamentals. We believe the change in Russia‘s political cycle will create opportunities to speed up much needed reforms of the domestic gas sector, which should ultimately result, among other things, in significantly higher-than-currently-expected domestic gas prices, and improved regulation of the gas pipeline network and access rights. We view Gazprom as a revaluation play on the improvements in corporate governance, domestic gas sector reforms and a changed perception of the European gas markets.

Eoin Treacy's view Russia has perhaps the most impressive portfolio of resources-in-the-ground globally but governance issues have been a concern for at least a decade. Corporations run as personal fiefdoms, little or no respect for minority shareholder right, fickle government policy and the slow pace of reform have all taken their toll on valuations.

The Ruble collapsed in 2008 as oil prices fell. It recovered approximately two thirds of the decline by mid 2011 but the Dollar rally from August broke the progression of lower rally highs. The greenback subsequently found support in the region of the 200-day MA and returned to test the RUB32 level. A sustained move below RUB30 would be required to question medium-term scope for additional upside.

The US Dollar denominated RTS Index remains in a medium-term downtrend and will need to sustain a move above 1600 to question supply dominance. The Ruble denominated MICEX Index outperformed between 2009 and earlier this year and has been somewhat steadier than the RTS over the last couple of days, probably due to currency differentials.