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The Chinese celebrated the start of the "Year of the Water Dragon" on January 23, which suitably suggests we are in for a year of fiery courage or a bit of a damp squib, depending on which element prevails. As Russians drift back to work after the long holidays, the story is marked by a deep chasm of misunderstanding at the moment between the Russia-hands who live here and the rest of the world looking in from the outside.

A dragon year should be good news. It is the luckiest symbol in the Chinese horoscope, standing for good fortune and a master of authority, but can be impetuous and tactless, as well as brave and conceited. So a bit like Russia then. And even more like how we have come to see Prime Minister Vladimir Putin.

The countering element this year is water, which has a calming affect on the dragon and makes him more perceptive than others, which is just as well as all the others who share Russia with Putin have been demanding a bit more attention and he would be well advised to pay attention for once.

So together this should be a good combination (if horoscopes actually meant anything), but when VTB Capital went to test the mood of international investors in the last two weeks, they found a contrast as extreme as fire and water. "The degree of conviction remains very low. The January advance of global equities was clearly driven solely by the liquidity injection from [the ECB's Long Term Refinancing Operation] and the [Federal Reserve's] 'at zero for longer' policy stance, rather than by any improvement in the fundamental outlook of risk assessment," VTB analysts wrote in a note this week after visiting London and Asia.

The note goes on to say that investors are scared by the reappearance of politics in Russia and simply don't believe the talk of a radical reform drive after the presidential election in March.

This contrasts starkly with a growing optimism in Moscow (or at least book up-talking). Troika Dialog starts its annual investment jamboree on Tuesday, January 31 after formally being swallowed by state-owned Sberbank and just raised its year-end target for the RTS Index to 2,200 - an almost 60% gain if it happens. Many of the other banks expect no gains this year at all.

The inimitable Chris Weafer caught the mood of what used to be called the "Ra-Ra Russia Crowd" by highlighting the ongoing reforms to the capital market in a note January 30. "Russia's financial infrastructure is undergoing its greatest transformation since the beginning of the 1990s, when the country made the switch to a market economy," Weafer wrote on Monday.

Transformational change

Launched in April 2008 on the eve of the crisis, the Kremlin has stuck to its guns and real progress has been made. The landmark event was the merger of the RTS and Micex stock markets last summer followed by the appearance of a central securities depository (CSD) at the start of this year. A whole raft of smaller, more technical reforms have followed and from this summer foreign investors will be able to buy Russian domestic bonds directly on the Russian market.

Commentators like Weafer argue this could be transformational. Consider: Russia was brought low in 2008-09 by high levels of foreign borrowing; while the favourite "safe haven" securities in the world are US Treasury bonds, the US doesn't actually have any external debt, as investors all buy these bonds directly on the domestic market.

The jury is still out as to whether these reforms to Russia's capital markets will really make a difference: you can put the plate on the table, but that doesn't mean the guests will show up for the party. But given the success of the country's banking reforms - and Sberbank has replaced Gazprom as the darling of international investors - the prospects for more investment are good. What is at issue is exactly how much money will come and how soon. "Changes to Russia's financial market infrastructure could result in a massive revaluation of assets and removal of any risk premium associated with Russian equity valuations versus [emerging market] averages in the long term (two to three years)," says Weafer.

In the next six months, Weafer predicts a raft of smaller benefits that will drive that upgrade to 2,200. Wishful thinking? Well, the last time we had a Year of the Water Dragon was in 1952. Then the major events included: Queen Elizabeth II was crowned and the first great killer smog blanketed London; Britain went nuclear and the US detonated its first hydrogen bomb; "I love Lucy" broke the 10m viewer-mark for the first time ever in the US; Jewish doctors were accused of trying to murder senior party leaders in Russia; and Stalin gave his last speech in public, before his death the following year, suggesting Germany should be reunified.

So life today is just as confusing as it was the last time the water dragon took to the skies.