At the time of writing, the Russian MICEX Index (MCX:MICEXINDEXCF) has slumped 9.3% year to date, compared to the MSCI World index, which has ticked higher by 4.2% over the same period; Russia has underperformed by 13.5% during the past five months alone. Over an extended period the performance gap only widens.

Russia Market

Russia’s underperformance

Over the past year, Russia has underperformed the MSCI World by 25.5%, and nearly 60% over the past three years.

This consistent underperformance has taken Russian stocks down to levels not seen since 2010, although they are still far off the lows reported during the depths of the financial crisis.

But for value investors, now could be the time to act. In the words of Baron Rothschild, “The time to buy is when there’s blood in the streets”, which unfortunately is exactly what’s happening within Ukraine.

According to data supplied by Saxo Bank, the Ishares Msci Russia Capped Index Fund (NYSEARCA:ERUS) as a whole is trading at a forward P/B ratio of 0.54 and the index trades at a forward P/E ratio of 3.6, a quarter of the developed world’s average.

Russia’s market is cheap

On a valuation basis then, Russia’s market as a whole is cheap. However, other considerations need to be taken into account such as economic and political factors, both of which overshadow future performance and Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DBK) has attempted to come up with an answer.

Deutsche has developed and uses a valuation methodology called “Croci”, which stands for cash returned on capital invested. While this method does not fully take into account the economic and political risks facing Russia’s market, it does put forward some interesting figures, which reveal Russia many not be as cheap as it first appears.

The cash return on capital invested model is supposed to replace the traditional P/E model, although calculating Croci is an intensive process, requiring a complete rebuild of a company’s balance sheet and income statements, to take into account economic factors and assumptions.

Gazprom, A value play?

Using this methodology, Deutsche estimates that the true P/E of Russia’s Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY), a play on Russia recommended by James Grant at this years Ira Sohn conference, stands somewhere at 28.6, a far cry from the current traditional P/E figure of 2.6. This valuation takes into account Gazprom’s ability to be able to consistently obliterate shareholder value on expensive projects, which do not yield attractive returns. For example, Gazprom’s ROIC for 2014 is slated to be in the region of 9.2%, below that of its other Russian peers (15%) and return on equity will fall in the region of 10.2%, around 30% below the Russian peer group average of 15%, and international peer group average of 16.4%.

On the other hand, Russia’s Rosneft‘ NK OAO (MCX:ROSN) (OTCMKTS:RNFTF) appears to be an attractive play thanks to its international partnerships.

Rosneft aims to complete a deal with Morgan Stanley (NYSE:MS) to buy the majority of global physical oil trading operations from the bank during the second half of this year. The company has also acquired a stake in Italian tire maker, Pirelli & C. SpA (BIT:PCP) (OTCMKTS:PPAMF) and is working in partnership with BP plc (ADR) (NYSE:BP) (LON:BP) and Exxon Mobil Corporation (NYSE:XOM), neither of which will allow their capital to be wasted on projects that yield poor returns, like those Gazprom is pursuing. Rosneft’s 5.7% dividend yield also helps.

Despite Deutsche’s view on the Russian market, for a value investor like myself, the low book value of the whole market is hard to ignore. Therefore index tracking ETFs would appear to be the best way to play the market, minimizing company specific risk. ETFs with expose to Russia are, the Market Vector Russia ETF Trust (NYSEARCA:RSX), the DB X-TRACKERS DBX MSCI RUSSIA 25% CAP’D ETF (LON:XMRC) and the Cambria Global Value ETF (NYSEARCA:GVAL), which divides its assets among stocks in the 11 countries with the lowest CAPEs.