Putin's-RussiaIt is hard for us in the West to believe. But Vladimir Putin is hugely popular in Mother Russia.

His approval rating hit an all-time high of 89% in June. And in July, it is still 87%.

Part of it is due to the dominance of state-run media. There is also the rallying behind the leader factor, thanks to Western sanctions. But despite all the negatives about Putin, the average Russian’s life has improved under his leadership.

When Putin came to power, 29% of Russians were living below the poverty line. Now that has dropped to only 11%.

Economic output per person has almost doubled since 2000. However, 53% of Russians still live off the state through employment, pensions, etc.

Economic gains though have almost stopped in recent years. The last year’s plunge in oil prices and other commodities has re-enforced that stagnation.

Natural resources are key to Russia’s wealth. The World Bank says that “natural capital” accounts for 43% of overall wealth in the country.

Sanction Effects Fading

Sanctions imposed on Russia by the West have also played a role in its economic slowdown. But sanctions have become less and less of a factor for Russia. That’s thanks to a little help from its friends.

In May, the Russian Direct Investment Fund (RDIF) signed $25 billion worth of deals with China. This included a $2 billion agricultural fund investment. Last year, the two countries inked deals worth hundreds of billions of dollars involving Russia supplying energy to China.

And now Saudi Arabia is joining in. It will invest $10 billion, via the RDIF, into Russia. The sectors covered in the deal include agriculture, medicine, logistics, retail and real estate.

Russia Attracting Investors

But Russia still stinks as an investment destination, right?

Not so fast. According to Bloomberg, the top-performing BRIC emerging-market country in 2015 is Russia, when one looks at risk-adjusted returns. In nominal terms, the benchmark Micex index is up 18% this year.

And Russia remains dirt cheap. The Micex trades at less than 6 times projected earnings, which has enticed some big-name investors to invest into the Russian market. This includes billionaire David Bonderman, whose private equity firm, TPG Capital, has been quite active in Russia.

It also includes long-time Russia sceptic and famed emerging-market investor Jim Rogers. He believes the old ways of doing things in Moscow are changing. Rogers was also enticed no doubt by the 45% plunge last year in the stock index. He invested in several Russian companies, including fertilizer company PhosAgro.

Russian Investments

How should an American investor, brave enough to invest into Russia, dip their toe into the water? It’s tough to invest into a commodities-heavy market with the ongoing commodities bear market.

Currently, I would stick with consumer plays.

One stock to consider is Yandex (NASDAQ: YNDX), which is Russia’s version of Google (NASDAQ: GOOGL). It has been beaten up lately. It’s down 50% over the past year as investors fretted over the geopolitical upheaval in Ukraine.

But Yandex is dominant in Russia and benefits from Google’s struggles there. Keep in mind too that Russians are the most socially engaged Internet users in Europe. They spend about 13 hours a month on the local equivalents of Facebook (NASDAQ: FB) and other social media sites.

At the moment, I would avoid mutual funds and ETFs focused on Russia because of the heavy commodity exposure.

With one exception: the Market Vectors Small-Cap ETF (NYSEArca: RSXJ). Because of its small-cap nature, it is far more exposed to Russian consumer stocks than commodities. Its portfolio of 31 stocks has less than 30% invested into energy or mining shares. Its net expense ratio of 0.68% is very reasonable.

Putin’s Russia isn’t for every investor. But its extreme cheapness makes its stock market worth a second look.

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Published by Wyatt Investment Research at