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MOSCOW (Reuters) - Vladimir Putin is back and so is Kremlin capitalism, with a vengeance, leaving a dwindling band of Russia equity bulls clinging to hopes that delivery on his economic reform promises will revive one of the cheapest emerging markets.
Even with political order restored after a turbulent election cycle, Russian shares continue to underperform, market turnover has slumped and portfolio investors find themselves increasingly marginalized by politically connected boards.
A clean-up of corporate governance at the sprawling resource behemoths led by gas export monopoly Gazprom - which together make up two thirds of Russian benchmark stock indexes - could attract buyers.
But with state-controlled oil major Rosneft poised to become the world's largest listed oil firm by output through its $55 billion takeover of TNK-BP, the direction of travel is the opposite, investment analysts and strategists say.
"The overarching view on Russia is that people have given up on it," said Milena Ivanova-Venturini, an equity analyst at Renaissance Capital in Moscow.
After his return to the Kremlin in May after four years as prime minister, President Putin called for a "new economy", ordering ministers to boost investment and shake up inefficient state-run industries to diversify the economy - long the holy grail for those uneasy at Russia's dependence on commodities.
In the months since, however, failure to deliver on those promises of market-friendly reforms and the state's further encroachment into the economy have helped drag trading volumes in Russian stocks down by 30 percent.
In October, trading volume in stocks that make up Moscow's benchmark MICEX index totaled $21 billion, down 58 percent compared with October 2011. That is the lowest since the height of the global financial crisis in early 2009.
Capital flight persists, reflecting low confidence among Russia-based investors and an aversion to the country risk among foreigners. Also hitting equities, those who do want exposure to Russia can find safer, stronger returns from government bonds.
Many analysts had hoped that a restoration of calm after Russia's parliamentary and presidential elections - which sparked the largest opposition protests since Putin first became president in 2000 - would revive investor interest.
Reforms to Moscow's market infrastructure, including the commissioning of a new central securities depository to simplify trading and settlement, have meanwhile been touted as part of a drive to create an international financial hub.
But Peter Westin, chief equity strategist at Moscow brokerage Aton, is just back from three weeks of meetings with foreign investors and has concluded: "Russia remains unloved."
"People like Russia - potentially," he said. "But it has been a momentum trade for the past three or four years and a total derivative of global events and the oil price."
The recent sale of a $5-billion stake in state-controlled Sberbank did draw buyers - thanks to the stock's liquidity, strong management and restructuring potential. But those are rare qualities in a listed Russian company.
Steven Dashevsky of Dashevsky and Partners, an investment boutique, is scathing about those making the rules: "Trading has died down," he said, "Because the Russian government has made considerable efforts to demonstrate that it doesn't need a stock market and doesn't really need portfolio investors."
Stock markets worldwide have suffered declining turnover, as the fragile global economy fuels aversion to risk, but the slump in activity in Russia has been especially steep. Over the same 12 months to October, market turnover fell 34 percent in China and 22 percent in Turkey, Renaissance Capital calculates.
Russia has also seen a widening of its traditionally large valuation gap compared with emerging market peers, and now trades at a 40 percent discount on a price-earnings basis. Much of that is due to global investors shying away from risk assets.
"Russia is absolutely in the shadow of global trends," said Chris Weafer, chief strategist at Sberbank CIB. "There needs to be a reduction in global risk phobia - no matter how cheap they are, investors won't look at fringe markets."
Although the MICEX index and its dollar-denominated peer the RTS have eked out modest gains for the year, they are still down a quarter and a third respectively from the highs they set in April 2011.
For those few Russia equity bulls, like Citi strategist Kingsmill Bond, the country now offers deep value and the market could rally if Putin's "counter-reformation" makes headway in implementing a series of steps to make it easier to do business.
"Investors have been scared off by the negatives but need to recognize the positives," Bond wrote in a research note, predicting that Russia's valuation discount would halve to 20 percent by the end of 2013.
Russian indices are sensitive to shifts in the global business cycle and risk appetite, as the country's $2 trillion economy still relies heavily on energy and raw material exports.
More than 80 percent of Russian stock turnover is accounted for by the 10 most liquid stocks. Two - Rosneft and Sberbank - account for half of those volumes.
Rosneft's announcement last month of its $55 billion takeover of TNK-BP boosted its own stock, but minority shareholders in the Anglo-Russian oil venture's listed unit could lose out on the deal, adding to reasons why fund managers feel buying stocks in Russia offers poor value.
"Minorities always get the short end of the stick," said Dashevsky. "The Russian government and the majority owners of Russian companies have worked so hard to deliver the message that portfolio investors are really secondary to the business."
However, for those willing to hunt for individual bargains, there are still growth stories to buy into where politics pose less of a threat. Ivanova-Venturini, for example, picks food retailer Magnit, online groups Mail.Ru and Yandex and freight operator Globaltrans.
A bullish view on certain stocks does not translate into a positive read-across for the overall market, however: "Investors in general are cynical about the Russian market: they do not believe that Russia is changing," she said. "The common perception out there is: Russia is cheap, but so what?"
Additional reporting and editing by Jason Bush and Douglas Busvine; Editing by Alastair Macdonald