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The Russian economy is in trouble if the Kremlin can't make Russian President Dmitry Medvedev's modernisation reforms stick, as the rosy economic outlook for the next two years or so could fuel what some are calling "the mother of all bubbles" for Russian equity.

All the conditions that enabled the previous stock market boom are back. Russian stocks soared by about 50% a year between 2003 and 2007, fuelled by low international interest rates and soggy growth in developed markets. In the last decade, western stock markets failed to make investors any money at all on average, whereas Russia's leading RTS index was up by over 750%, according to fund rating company Morningstar, making it by far the best performer in all the major emerging markets.

Once again interest rates are at record lows, and Europe and the US are facing as long as a decade of low growth as they struggle to fix their battered public finances. At the same time, after governments dropped hundreds of billions of dollars into financial markets around the world, there is an enormous amount of cash sloshing about looking for somewhere to pour into. Russian stocks sold off so much they remain some of the cheapest in the world, but now Russian corporate earnings are recovering strongly they are getting cheaper by the day. The main thing holding equity valuations back are fears of a pan-European meltdown, triggered by Greece's debt woes.

"Stock markets are struggling between global fears that are pulling them down and positive economic trends on the ground. I think that the economic growth will win over the course of this year, but it's a real tussle at the moment," Andrew Howell, head of emerging market strategy at Citigroup, tells bne.

Howell points out that something very unusual is happening: yields on Russian bonds are falling steadily, but the equity market has been more or less flat since the start of the year. In normal times, the valuation of equities rise as bonds yields fall. Moreover, life on the ground is getting visibly better: in the last six months, analysts have upgraded Russian corporate earnings by 20%, says Howell. "All the main indicators are rising again - retail sales, consumer confidence - and things now look like the classic upswing at the start of a new economic cycle, but this has not been reflected in the equity prices," says Howell. "It means on a price/earnings basis, the cost of stock is falling."

The planets are aligning for a rapid upward correction in equity prices, says Renaissance Capital's head of research, Roland Nash, who believes all the conditions are there to fuel a new speculative bubble. "This could be the mother of all bubbles," says Nash. "All the conditions that drove the last bubble are back: externally interest rates are at historical lows and earnings outlook in the developed markets are poor. Here the earnings both earnings and growth are rising. But more than anything, thanks to the stimulus packages there is an enormous amount of cash floating about that has to go somewhere."