The excitement of the Winter Olympics in Sochi is certainly being over shadowed by various issues in Russia. And no, I’m not talking about the various construction woes plaguing the games. This time it’s all about the Russian stock market.

As investors have fled emerging markets and funds like the iShares Core MSCI Emerging Market (NASDAQ:IEMG) in spades, Russia has been hit particularly hard. A falling rubble, corruption and the general distain for the nation has caused investors to dump the BRIC-nations from their portfolios. Overall, the Russian stock market is sitting near historic lows.

However, as they say “be greedy, when others are fearful.”

For investors, the cheapness of Russian stocks is certainly tempting. And for those with longer timelines, the time to buy in could be now.

Worst Start In Six Years

The last few years hasn’t been kind to investors in Russia. As the BRICs began to crack, Russia has seen prices for its equities fall pretty hard. According to index provider MSCI (NASDAQ:MSCI), over the last three years, Russian stocks have lost about a third of their money. Small-caps in the nation have fared even worse-plunging about 60% in the same time frame.

Those returns continue to get worse for Russian stocks. Since the start of 2014, the Moscow-based MICEX Stock Market Index has fallen by more than 4.8%. That’s the worst yearly start for the stock market index since the crash of 2008.

The culprit has been a combination of various forces working against Russian equities. First, economic growth in the nation didn’t live up to expectations in 2013. Overall, GDP growth in Russia was half of what it accomplished in 2012 and was significantly under analyst estimates. Meanwhile, Bloomberg reports that the ruble has fallen around 7.2% this year. That makes imports rather expensive for Russian retailers. Finally, the Fed’s recent decision to abandon its easing programs isn’t helping risk assets like Russian stocks.

With those negatives in place, it’s easy to see why investors have pulled roughly $600 million from Russian mutual funds since 2011.

Yet for those willing to think outside the box, Russian equities might make a bit of sense. While commodities may have taken a breather, the long-term demand picture is still up. The nation is one of the largest producers of oil and natural gas. Not to mention it is rich in coal, various metals and timber. Aside from commodities, Russia is one of the largest consumer markets on the planet- with a huge growing middle class population. Adding in recent infrastructure spending and policies designed to spur innovation, Russia is quickly becoming more than a one trick pony.

And its dirt cheap. The Russian stock market can be had for a forward P/E of just 5. The rest of the world- as represented by the iShares MSCI ACWI Index (NASDAQ:ACWI) -can be had for 13 times earnings. Meanwhile, Russian stocks are currently trading at a 70% discount to book value.

Buying Hated Russian Equities

Given that the rewards certainly outweigh the risks at this current time, investors may want to consider adding Russia to their portfolio. The easiest way is through the Market Vectors Russia ETF (NYSE:RSX).

The $900 million ETF is still the most popular option for adding Russian exposure and tracks 48 different stocks- including internet search engine Yandex (NASDAQ:YNDX) and steel producer Mechel OAO (NYSE:MTL). Over the last five years, RSX has managed to produce a decent 20% annual return. However, the recent sell-down in Russian equities has the fund hitting new all-time lows. Expenses for the ETF run 0.62% a year. Another option, is more concentrated iShares MSCI Russia Capped Index (NASDAQ:ERUS) -at just 23 holdings. That concentrated portfolio means each stock has more weight on ERUS’ returns.

Perhaps the biggest values can be found in Russia’s energy giants. According to J.P. Morgan (NYSE:JPM), a 10% decline in the ruble, increases Russian energy stocks earnings by 7% and net income by 11-13%. That means natural gas giant Gazprom (OTCBB:OGZPY) and oil producer Rosneft (OTCBB: RNFTF) could be huge buy. The duo currently trade for peanuts- with P/E’s of 2.46 and 4.02, respectively. However, they won’t stay that cheap for long.

The Bottom Line

Returns for investors in Russia have been a complete disappointment over the last few years. The recent asset flight has only exacerbated the situation. Yet, stocks within the nation are approaching ridiculously cheap levels. For contrarian investors, the nation’s equities could be one of the best bargains and offer a great risk-to-reward ratio. The previous picks- along with SPDR S&P Russia ETF (NYSE:RBL) –make ideal selections to play Russia.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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