Russian markets have remained buoyant despite Europe’s sovereign debt scare, prompting many to wonder if the time is ripe for Russia to reassert itself as a regional power. We spoke with John Connor, manager of Third Millennium Russia (TMRFX), to get his take on the political climate and Russia’s economic prospects. No stranger to doing business in the region, Connor served as deputy director of the US Commerce Dept’s Bureau of East-West Trade under President Richard Nixon, heading the Moscow office of the US-USSR Trade & Economic Council. He later founded a life insurance firm in Russia and ran the Checkowski Fund, a successful hedge fund that focused on short-term Russian sovereign debt.

When investors think about Russia, political risk often springs to mind. How has this risk evolved?

Political risk is always a big part of the discount to Russian stocks. Both ends of the US political spectrum love to hate Russia and pay no penalty for dumping on country–the Russians aren’t the most adept at public relations.

But the country does have its upsides. Corporate transparency is better than one might expect; full audits by the majors instill confidence in the numbers, and investor relations teams are fairly professional.

I’m also impressed with management teams, though certain Russian idiosyncrasies are cause for concern. For example, many of the oligarchs insist on owning 50, 60 or even 80 percent of their own companies. To achieve this goal, executives leveraged their positions to such an extreme that when it hit the fan they had to dump their own stock and make a mess for the rest of us. That’s why the Russian market went down 70 percent, and a lot of these guys lost a huge portion of their personal wealth.

The question I constantly ask is, “So and so owns 47 percent of the company, but how leveraged is he against that position?”

In the US, you start off owning a quarter of your company, bring in some venture capital and build the company until you own 8 percent of a much bigger pie. If you’re in senior management, you don’t need to own 51 percent of the company to control its destiny. Our guys are much more sophisticated when it comes to the governance of public companies, but the Russians have come a long way.

Does the current debt crisis in Europe create an opportunity for Russia to broaden its sphere of influence?

I would say it creates an opportunity for Russia to maintain its sphere of influence. Some fascinating geopolitical realities are at play.

Mikhail Gorbachev gave up the Eastern European Empire and nobody died, then Boris Yeltsin gave up the Russian Empire and nobody died. Then there was a period where newly independent nations were focused on no longer being under Russia’s thumb. But keep in mind that Russian is the second most common second language in the world.

It’s very hard for Russians to be subtle. Britain has the British Council and France has the Alliance Francaise, the governments’ soft diplomacy arms. Russia just launched its soft power initiative, the Mir Institute, which essays to maintain cultural ties with other nations. The region’s foreign diplomacy is gaining subtlety and becoming more effective.

But you did have two heads of state in Mikheil Saakashvili [Georgia’s President] and Viktor Yushchenko [Ukraine’s former President] who simply lacked professionalism. Diplomacy isn’t that hard. You show a little leg to the West, you show a little leg to Russia and you play them both along.

These guys put their eggs into the North Atlantic Treaty Organization (NATO) and Western basket. I’m sure Mexico would rather share a border with France, but it’s stuck with us as its neighbors. Meanwhile, Georgia is in a remote location at the eastern end of the Black Sea, and their biggest investors and customers are Russian.

Russia is coming to grips with how to operate and reclaim its “rightful sphere of influence” à la the Monroe Doctrine. The US isn’t going to supplant Russia in that part of the world. Russia is beginning to understand that its gas lines and economic strength provide lots of levers.

If the Russians could only become more likable, they could really influence the situation. Turkey would be a great model for the Russians: The country just wants to be friendly with all of its neighbors, period, and they do it–that includes making up with Greece a little bit. The Turkish model is the way to go when you’re surrounded by dozens of countries, all of which have hated you at one time or another.

What’s the state of the country’s financial system?

Russia’s financial system is pathetic. It lacks a life-insurance sector or pension funds, so there’s no long-term money. That’s why the stock market has all of these foreigners rushing in and out. With inflation at 10 to 12 percent–though now it’s receding to 6 to 8 percent–maybe some long-term money will enter the market.

Again, the domestic financial sector is pathetic; I can’t say enough bad things about it. It’s one of those areas where the Russians just don’t get it. But if some foreigner comes in and makes a lot of money in life insurance, they’ll wake up to that.

Russia is very much a resource-based economy. Are there any other sectors that are attractive?

Russia has always been an extremely educated society, and the Ukraine has the highest percentage of college graduates in Europe. You can’t say enough about the region’s young people. They’re highly motivated, professional and Western-oriented.

Frankly, I can’t tell the difference between young people in Moscow and young people in New York. They’re definitely Europeans and want to be part of life in the mainstream. And at the end of the day, Europe needs Russia’s resources. Eventually, maybe in 20 years, Russia will be in the EU.

When the Metro system was built in Washington, DC, it was as clear as the nose on your face that the Metro stops would resemble miniature cities with enormous real estate investment potential.

A similar situation is emerging in the Black Sea area–for example, Sochi, which will host the 2014 Olympics–is very temperate. It’s the same down through Crimea and Yalta, then around through Romania and Bulgaria and back through Abkhazia. And it’s largely undeveloped.

If you go down to the coast into Crimea, it’s a great vacation spot–the kids go down and camp on the beach by the millions in the summer. The infrastructure isn’t there yet, but the Olympics will change that to some extent. There’s real development potential in southern Russia and the Ukraine.

Development in the region will attract tourists and retirees. I spend seven months of the year in Florida, and I don’t stay there for the tourist traps. Keep in mind that two-thirds of human beings who live to the age of 65 are still alive. Where will they live? In 20 years the region will be loaded with retirement homes.

One of the trends I follow is the boom in consumer spending that occurs as the middle class grows.

My best stock related to that theme is X5 Retail Group (UK: FIVE), which has huge hypermarkets that make Wal-Mart Stores’ (NYSE: WMT) locations look like a corner store. Going to the company’s headquarters is a thrilling experience; all these kids are running around who are extremely well organized and highly motivated. The number of locations and same-store sales continues to rise–it’s a very positive story.

Commodity exports are another key theme–namely, oil, gas, steel and fertilizer. Steel companies are operating at 100 percent capacity, thanks to China’s insatiable demand. Russia’s export opportunities to China are tremendous; in 10 or 15 years, Russia will sell more gas to China than it exports today.

Russia and other nations in the region generally have good relations with the Chinese. There’s a steel company in Ukraine called Azovstal (Ukraine: AZST) that has loads of potential but is below most investors’ radars.

Moscow-based Sberbank Rossii (Russia: SBER03) is a savings bank that’s done quite well for my fund. It’s a government bank that enjoyed a monopoly and had about 36,000 branches under communism, though management has reduced that number to roughly 20,000. The company has done a very good job of cost control, and it’s one of my best stocks.

What’s your best advice for investors?

I think people should invest in Russia and other foreign markets. Only 3 percent of assets under management in the US are invested internationally. It’s not that our people are timid, but our financial intermediaries are afraid of their shadows.

Investors need to buy more international names, and mutual funds are a great way to do that. It’s really hard for investors to make a call about this or that fertilizer company in Russia–for that reason, well-managed mutual funds are a great way to add international exposure.