Russia's currency has stabilized along with the price of oil, a critical development. Market Vectors Russia ETF (NYSEARCA:RSX) is a buy.

 Market Vectors Russia ETF (NYSEARCA:RSX) is a buy. The holdings that comprise the ETF are significantly undervalued based on fundamentals and are poised to benefit in the near-term from positive trends in "problem" areas. Russia's currency has stabilized along with the price of oil, a critical development. Investors have irrationally beaten down the price of RSX and the upside potential has outweighed the downside potential for a few months now. RSX is trading at a P/E of 9.41 and a P/B of .95. With an uptick in oil prices and lowering/elimination of sanctions, the energy and financial sectors comprising a combined 43.2% of the ETF will benefit immensely. Analysts pegging Russia as a value trap have been proven wrong and the worst case scenarios have failed to materialize. There is still a looming cloud of negativity and investors have not missed the boat yet.

ETF Breakdown

Russia is a contrarian's dream opportunity. There has been so much negative news that the very worst case scenario for Russia has been priced into the country's stock market. The risk vs. reward has been tilted significantly towards the reward side. Take a look at this chart:

(click to enlarge)

Source: Yahoo Finance

Some may think they have missed the rebound in the Russian market or call it as a "dead cat" bounce. But the conditions of Russia's markets are improving along with the price of oil. While the economy is still forecast to shrink significantly, the war in Ukraine is still being waged, and western sanctions are cutting deep, the Russian market is so cheap that it should become interesting to any long-term buyer. There are a few ETFs that focus on Russia: RSX, the iShares MSCI Russia Capped ETF (NYSEARCA: ERUS), the Daily Russia Bull 3x Shares (NYSEARCA: RUSL), the Daily Russia Bear 3x Shares (NYSEARCA:RUSS), the Market Vectors Russia Small-Cap ETF (NYSEARCA: RSXJ), the SPDR S&P Russia ETF (NYSEARCA: RBL). For this analysis there will be a focus on RSX. Let's breakdown the ETF's biggest holdings:

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Source: Van Eck Global

As you can see, energy comprises a whopping 41.2% of this ETF's holdings. Obviously with this significant of a stake in energy, this ETF is partially a bet on an oil rebound in the medium- to long-term. Materials (15.7%) and financials (12%) make up another 27.7% of this ETF. Materials have been having a rough go of it with the commodities sell-off and financials haven been battered by the widespread sanctions over the Ukraine conflict.

The majority of these holdings are highly exposed to political risk, foreign-exchange risk, and country risk. This is by no means a non-risky ETF. Investors should very carefully consider the percentage of their portfolio they are willing to commit to a medium- to high-risk (and high reward) investment.

Valuation

Just looking at the YTD performance of this ETF, one might be inclined to declare Russia fairly valued adjusted for risk. But once you move past the YTD performance of the ETF and the Russian stock market, Russia still appears cheap in valuation.

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Source: Morningstar

Much of the rally has been due to the strengthening of the Ruble. Hitting a high of nearly 70 rubles per dollar in January, the Ruble has been on a tear and now trades at 49 rubles per dollar. The collapse in earnings in Russia can be attributed to both the rapid devaluation in the Ruble and the oil decline. With both recovering recently the Russian stock market has rallied. But the companies comprising RSX are still undervalued based on their fundamentals. The rally in the Ruble has blinded many investors to the continued undervaluation of the companies that comprise the majority of the Russian stock market. Even after the recent upswing, RSX is trading at a P/E of 9.41 and a price to book of .95. With a 30-day SEC yield of 3.37%, RSX also pays a hefty dividend adding to the value of the ETF. With a potential increase in fundamental strength there will be even more gains to reap.

Let's take a look at Gazprom (OTCMKTS: OTCPK:OGZPY), the biggest single holding of RSX comprising 7.83% of this ETF. Gazprom is currently trading at a 22.6 P/E because of the massive fall in earnings in 2014 due to the collapse of the Ruble and the oil shock. A better gauge would be to use the forward P/E which Gazprom trades at a multiple of 2. Gazprom has a P/B value of 0.4 and a dividend yield of 5.4%. While historically Gazprom is somewhat within its normal range on its valuation metrics, there is tremendous upside to be had if the value of its reserves turns out to be accurate, oil continues to rise, and natural gas prices begin to rise. While not extrapolating this valuation to the rest of the portfolio, the majority of the holdings comprising RSX are about the same or even better in valuation as Gazprom. Many Russian companies are significantly undervalued based on fundamentals and this article will explore the reasoning behind this undervaluation further in the following section.

"It's a Trap"

The term value trap is something that gets tossed around a lot nowadays. Analysts will point to Russia's ineffective policies, the continuation of the Ukraine conflict, and Western sanctions all as reasons that Russia is a classic value trap. But these analysts have been proven wrong in recent months and RSX has responded to the increasingly positive outlook on the negatives these analysts have been touting.

The Russian government was actually extremely effective in preventing a complete collapse in the Ruble through calculated interventions. Analysts haphazardly threw around the terms capital controls and capital flight during the collapse of the Ruble and predicted the absolute worst case scenario. These "inevitable" scenarios turned out to be false on all fronts. According toBloomberg, Russia is in fact "…stockpiling dollars again…" signaling the worst of the crisis may be over.

The Ukraine conflict has been "frozen" in recent months, representing a tremendous positive for Russia. One of the biggest concerns for those claiming Russia to be a value trap was the possibility for widespread escalation in the Ukraine conflict. This has failed to materialize and is a highly unlikely scenario as Russia has experienced one of the worst economic declines since the recent financial crisis. Ukraine does not represent enough of a strategic element to Russia to deserve crippling its own economy, losing thousands of lives, and losing the confidence of the Russian people. Putin is a former KGB agent and a shrewd leader keen to consolidate his power. Escalation of the conflict would directly contrast his own goals and those of Russia in general.

Sanctions on Russia will be expiring in July and will present a potential catalyst to many of the holdings in RSX. As long as Russia does not further escalate in Ukraine and the conflict remains on the backburner, sanctions will expire and Russian banks will inevitably profit greatly. As financials represent 12% of the holdings in RSX, this will be a boon to the ETF.