The massive turnout in favour of the presidentially-backed candidates for the Russian Duma elections in December once again raises questions as to the strategy of the Kremlin over the next five years or so. So thinks Alexei Zabotkin, chief strategist at Deutsche Bank in Moscow: 'What is important is that with the Duma elections behind us, we shall start focusing on the presidential campaign,' he says. 'We think that in the coming weeks, the visibility of the presidential succession will dramatically improve and that will have a very tangible impact on the market because investors are largely in limbo still.'

Indeed, there were few indications in the last few weeks that investors had been deterred by a wave of negative news from Russia, the detention of opposition candidates, and allegations that the vote was being manipulated. 'As an investor, predictability is what you care about,' says Peter Halloran, president of the Pharos Fund, in Moscow. 'You do have predictability here, which most westerners don't see.' But what sort of predictability?

'Russia is on a knife-edge,' says Sam Barden, head of SBI Fund Management in Moscow. 'Okay, the RTS and the MICEX (stock indices) have picked up recently, but that was largely a function of improving US sentiment, as indicated by the recent US unemployment numbers. The fact is that Russia is dodgy as hell, and everybody who needs to know, knows it.'

Intelligence sources confirm this. 'Russia is gearing up for its presidential elections, and all hell will break loose,' says Naheem Majid, head of research at Sinaco Global Analysis in Washington. In fact, he believes that we are at a climacteric point in our relationship with the sovereign state. 'Russia is getting ballsy, and we ignore it at our peril.'

Look locally to begin with. Russian gas giant Gazprom has enjoyed an upswing in its stock rating as the Federal Tariffs Service nears a decision on whether to raise domestic gas tariffs. In a time of global upsets, Russian blue chips such as this are benefiting from renewed investor interest. But all eyes remain on Norilsk Nickel, as speculation was ramped up recently regarding the prospect of a full-blown merger between Norilsk Nickel and RusAl if the aluminium giant succeeds in buying a 25% stake from Mikhail Prokhorov. Immediately, that raised concerns regarding the terms that the minority shareholders in Norilsk could hope to receive.

Additionally, UralSib issued a note on the likelihood of a reverse takeover between RusAl and Norilsk, a scenario with negative implications for minority shareholders because of the danger of their shares being diluted. Also, the bank's analysts said, the proposed tie-up terms (as far as they are known) assume a generous valuation for RusAl and a rather less generous valuation for Norilsk. While a merger between RusAl and Norilsk would create a diversified global mining company, analysts say there is still uncertainty over the real intentions of billionaire Oleg Deripaska, the majority owner in RusAl.

'Not all the minority shareholders are bullish on this deal (between RusAl and Mikhail Prokhorov),' says Valentina Bogomolova, a metals analyst at Alfa Bank. 'Some think it is a first step to convert a private company into a state company.' Prokhorov has potentially added salt to the wound, saying he would block a much-anticipated spin-off of Norilsk's energy assets, thus supporting the likelihood of a sale to RusAl.

Also, though, look internationally. Look at geo-politics, posits Jorge Parente, head of global trading for JPM Asset Management, in London. 'The Kremlin is looking to re-establish its power ahead of the next (presidential) elections. In Russia, that means you win at whatever cost.' In this respect, clearly, the gloves are off. Russia, as he says, is on a new war strategy. Only recently, for example, US interceptor missiles planned for deployment in Poland were warned that they could trigger a retaliatory strike from Russia if they are ever used, according to Russian Army chief of staff Yuri Baluevsky in Moscow. In fact, again according to intelligence sources, Russia will consider all measures 'to protect security', while it continues a dialogue with the US following 'disappointing' talks in Budapest last December.

In this regard, the US plans to station the 10 interceptors in Poland and a radar base in the Czech Republic as part of a missile defence programme. Russia has offered the use of a Soviet-era radar base in Azerbaijan and a new facility in southern Russia as a compromise. Russia has also expressed concern that the Czech base would allow the US to spy on most of the country. Although 'any new security measures will be adequate and asymmetric', according to Baluevsky, 'the US is still seeking direct confrontation with Russia'.

In this context, Russia has privately described the US plan as a threat to its security, and dismissed arguments that the missile shield is needed to counter the threat of an airborne attack from 'rogue states', such as Iran and North Korea. If used, the missiles in Poland could be mistaken for a ballistic missile aimed at Russia, which would then trigger a retaliatory strike from Russia's automated system. 'Russia suspended its participation in a Cold War-era treaty that controls levels of conventional arms in Europe on 12 December 2007, prompting a rebuke from western security organisations,' highlights Roger Nightingale, chief strategist for Sarasin Fund Management in London. 'Following the suspension, Russia won't provide information on conventional weapons to NATO or allow inspections of its military facilities.'

For their part, Buluevsky says: 'There won't be any massive arms build-up, but at least I now have the freedom to move troops within Russia, which I didn't have before 12 December.' The Treaty on Conventional Armed Forces in Europe, signed in 1990, sets limits on tanks and artillery and requires NATO and Russia to notify each other of plans to move forces and equipment. The treaty in its present form allows NATO expansion without any limitations. 'It has created a grey zone, allowing the US and NATO to accumulate arms in the Baltic states,' concludes Baluevsky. 'I don't want Russia to roll back to the Cold-War era, but we are not going to roll over here.'

If you listen to the western press, you would believe that Russia and Vladimir Putin have rolled back democracy, that the state is muzzling anyone who thinks differently from the Kremlin, and that therefore the implication is that Russia is going backwards, and really, if you had any sense, you would put your money elsewhere.

However, if you take a look at the numbers, the story is different. Let's start with popularity. Putin, by all accounts, is the world's most popular leader. He enjoys approval ratings of around 80%. And what about the stock market? It has been growing steadily since August 1998, and the pundits are falling over themselves to predict another increase of around 33% for the market in 2008. And if we look behind a few of these numbers, it is not just because oil is pushing $100 (£50) a barrel. Russia, despite the crudeness and brashness of some of its new rich, in all her forms, is a little more sophisticated than that.

As was the case in the 1990s, Russia was still incorrectly compared with the likes of Venezuela, Iran and Saudi Arabia, due to their heavy economic dependence on crude oil prices. In fact, the situation has turned around dramatically due to the tax barrier imposed by the government, which encourages cash outflows from commodity-driven sectors into other areas of the economy. As a result, the service and trade sectors have been growing at a rate of 10%-12% a year, with similar growth expected in machine engineering, utilities, telecoms, chemicals and the metals sector.

What about democracy? Well, it has never existed in Russia. However, the building blocks are being put in place. Globally, Putin has been championing multi-lateralisms. That is, effectively denouncing the US's attempt to export unilateralism, poorly disguised as freedom and democracy, and rejecting president George Bush's notion of you are either with us or against us.

Putin is not as simple as Bush, and nor can he afford such simplicity. For starters, Russia borders no fewer than 14 other countries. Putin has adopted positive engagement, or multi-lateralism. He has hosted, or been hosted, by Iran, Hamas, Israel, China, Syria, Saudi, the UAE, Qatar, North Korea, the US, the UK, Europe, Australia, to name but a few.

Domestically, however, the story is a little less clear. Reports that state employees were encouraged (ordered) to vote for Putin's party in the recent Duma elections are rife, and that state employees were paid to vote. Being paid to vote seemed to be a way to release some of Russia's oil money to the people without it hitting the books. The order to vote for Putin is more a reflection on the Russian people's lack of belief in their own thoughts and minds than a move back to Soviet-style control.

Dmitry Medvedev is apparently going to be the next president, and talk that Putin will become prime minister and hold on to power that way is frankly fanciful. More likely is that Putin will give Medvedev the support he will need in his first two years, assuming he is elected in March of course. Putin will have a much more important role to play than clinging to power. He will be the first post-Soviet president of Russia, who is young and capable, who will be able to travel the globe, promoting Russia's interests, without the shackles of the Kremlin and the presidency. It is no coincidence that the big state controlled corporations such as Gazprom, Rosneft, Rosoboronexport and Rosatom, are being strengthened.

Medvedev, on the other hand, as president, will be able to focus on Russia. Russia has already gone through a number of paradigm shifts, such as social democratisation, formation of a middle class, and immense strengthening of the government's position and standing. The anticipated development of science, infrastructure and social institutions will undoubtedly push Russia even closer to the status of an advanced economy and democratic society in the years to come. Medvedev is perfect to help achieve this. At 42, a professor, lawyer, liberalist, and a member of the intelligentsia, rather than intelligence services, he has the capability, respect, poise and desire to take the base which Putin has built and drive it to the next level.

As an investment case, Russia is going to become much more complicated. It is not going to be just a case of a rising stock market. As we know, markets do not go in straight lines. Global economic shocks are going to buffer Russia, the more she enters the global economy, and it is clear that this is Russia's desire. The current credit crunch will swing around on to Russia's shores in 2008. Some Russians are already talking about some kind of default, like 1998. That is perhaps a little pessimistic. Democratically, the government does not stop people voicing their opinion. In fact they encourage people to vote with cash payments.

The issue is the average Russian. They have to first go and vote because they want to, and secondly believe they can choose whomever they want, and not just follow the leader. This will take time of course, but let us not forget the massive changes Russia has gone through over the last 20 years. The next 20 will no doubt be as exciting, as Russia's reach globally will continue to grow, and her grip strengthen.

Simon Watkins is a freelance journalist who has recently returned to the UK from covering the Russian elections.