Investors flock to Russia in 1st working week of 2010

* Flows into Russia funds at 12-week highs

* Rouble firm, interventions cap gains

* MICEX index posts biggest weekly gain in 3 months

By Toni Vorobyova

MOSCOW, Jan 15 (Reuters) - Investors have flocked to Russia in its first working week of 2010, boosting the rouble, snapping up bonds, and sending stocks to 1-1/2-year highs on expectations of a continued economic recovery and high oil prices.

Flows into Russian equity funds hit a 12-week high of $244 million, outperforming emerging market peers China, India and Brazil, according to fund tracker EPFR Global. [ID:nTOE60E038] "As 2010 gets underway, the mood amongst international investors is increasing Russiaphilia," said Chris Weafer, analyst at UralSib.

The MICEX stocks index <.MCX> on Friday hits its highest intra-day level since August 2008 and was on track for its biggest weekly gain in 3 months -- 6.5 percent -- as investors rushed to make up for lost time once Russia returned to work on Monday, Jan. 11 after over a week of public and market holidays.

The dollar-denominated RTS performed similarly well <.IRTS>.

Russian bonds were also in demand, with prices rising and yields falling. The yield on benchmark sovereign 2030 Eurobond hovered near record lows , while yields on rouble bonds fell to multi-month lows <0#RUTSY=MM>.

The rouble started the year with its biggest ever one-day jump versus a euro-dollar basket , reflecting 15-month highs in the price of Russia's Ural oil blend . It later stabilised to end the week 2.6 percent higher at 35.36.

Dealers said the central bank had likely stepped into the market during the week, buying dollars as part of its policy to limit excessive volatility in the rouble in either direction.

CAUTION AHEAD

In a sign of returned confidence in the rouble, Russia's biggest lender Sberbank from Friday resumed giving out mortgages in foreign currency. It has halted the practice in December 2008 -- during a phase of crisis-time rouble devaluation -- due to high currency risks.

"Most foreign investors now have neutral positions or are overweight Russia, but 2009 performance and strong commodities may attract new money in 2010," Unicredit analysts said in a research note. "So far the data supports our view."

Data released this week showed consumer confidence [ID:nLDE60D0FR] and exports [ID:nLDE60D20O] at one-year highs, rail freight picking up [ID:nLDE60B1I5], the slowdown in car sales moderating [ID:nLDE60D0XM] and the budget deficit coming in smaller than expected [ID:nLDE60D0FP].

Nonetheless, the economic recovery is expected to be slow, with Russia unlikely to return to pre-crisis health before 2012.

As such, the central bank is expected to continue cutting interest rates, which may limit the future rally potential for the rouble in the longer term by slashing its yield advantage.

Non-deliverable forwards (NDFs), a barometer of market sentiment, show the rouble holding broadly steady against the dollar over the next 3 months and then weakening gradually in the second half of the year .

Some are also questioning how much further stocks can rally after Moscow's bourses more than doubled in value last year.

"I think this is already the final wave of the rally which started in the spring of last year. At most, the indexes will add another 15 percent, and already from March the correction will start," said Sergei Ryndin at Zurich Capital Management. (Additional reporting by Olga Popova and Oksana Kobzeva; Editing by Toby Chopra)