Sergio Men, managing partner at Eurasia Capital Partners, says investors enjoy plenty of freedom in Russia – but they always need to be aware of what other stakeholders want.

Although oil and gas are what Russia is most famous for, these sectors cannot be easily tapped without working with a local partner. Otherwise you are limited to small extraction projects far from existing infrastructure.

But, Men warns, you need to be the size of, say, China Investment Corporation if you want to deal directly with the top state-owned enterprises which dominate these industries.

He spoke earlier this week at AsianInvestor's and FinanceAsia's 2nd Russia Capital Raising and Investment Summit in Hong Kong.

Another way to get exposure is via distressed assets from troubled owners, which may include listed companies based in Russia or abroad. Men says these companies tend to be small but they are transparent, and an acquirer can consolidate them to achieve the scale required to deal with Russian SOEs.

However, Men says non-resource related opportunities are more interesting. Areas such as retail and fashion are not yet consolidated into market champions, and there remain opportunities to find local partners.

However, he says that most goods are actually manufactured in China. “You’re probably buying a China play with a Russia presence,” he says. This is the problem: Russian manufacturers are not competitive and are spurned by local consumers.

Nonetheless, Eurasia Capital Partners is doing a brisk business in matching local firms that can either raise money in Hong Kong to acquire Chinese manufacturers, or find Chinese partners looking to invest in Russia via China-produced goods; or Chinese manufacturers looking to penetrate the Russian market.

Local investment managers say the biggest problem Russia faces is perception: global investors digest all the bad news and overlook the good news. Typically, however, Russian listed companies are heavily discounted versus Western peers, yet provide yields of 20% per annum, notes Dmitry Malykhin, chief investment adviser to the local Da Vinci CIS Opportunities Fund.

Returns for foreign investors are high because the price of capital in Russia is higher than elsewhere, notes Victor Maslov, Moscow-based head of fund management at Raiffensenbank. In a world of generally very low interest rates, this is helpful to investors.

And there is less competition. A history of capital flight means the local institutional investment community is tiny, and there are only up to a dozen active private-equity funds. “There are hundreds active in China but they’re chasing the same yield,” notes Tim Krause, Moscow-based senior regional manager at the International Finance Corporation.

Mark Cooke, London-based director of marketing at Kazimir Partners, says that although oil and gas permeate the economy, the government is serious about diversifying, which means supporting local manufacturing and investments into infrastructure.

“It’s not just about the government, however,” says Tim Demchenko, head of private equity and special situations at VTB Capital. “The consumer is where the growth is.” The middle class has nearly quadrupled in numbers and wealth over the past decade, meaning investment opportunities exist today.

In fixed income, Richard Hainesworth, general director at RusRating, believes that Russia has been badly served by the big three credit rating agencies in the US. “I suspect a small group of sovereign analysts in New York get all of their information about China and Russia from CNN and Fox News,” he says.

Andrey Solovyev, global head of debt capital markets at VTB Capital, acknowledges Russia’s double-B rating does reflect worries about corruption, the investment climate and dependency on the price of oil. However, compared with Brazil, China and India, Russia has a better fiscal position, favourable per capita GDP and CDS spreads at historic lows.

The government needs to develop the bond market better by improving the yield curve, in both dollars and roubles. This is now happening and investors can enjoy handsome yields on investment-grade corporate bonds. In turn, investors need to see Russia as less a high-return bond market and more as a source of higher quality, stable returns, even as local and global news headlines will guarantee short-term volatility in spreads and yields.