Can U.S. Citizens Buy Russian Stocks or Should You Short Them Instead?

Russia and its long-time president Vladimir Putin have been making global headlines after the country invaded Ukraine. Putin’s actions have led to a sell-off in global markets and Russian stocks have especially fallen hard. Can U.S. citizens buy Russian stocks or should you short them instead?

Russia is a major economy and is among the top 15 countries in terms of GDP. The country’s stock markets present several opportunities for diversification, especially in the natural resource space.

U.S. citizens can buy Russian stocks through brokers that let you trade in the Russian stock markets. If anything, despite all of the tension between Russia and the U.S., Russian stocks are popular among U.S. investors. Over half of the total foreign investment in Russian stocks is from U.S. funds and the percentage has only been going up over the last few years.

Given the ever-looming threat of sanctions on Russia, the massive investment of U.S. funds in Russian stocks might sound counterintuitive. However, there are a few reasons why U.S. funds find Russian stocks attractive. First, the valuations of Russian stocks are the lowest among major stock markets.

In a world where it's tough to find bargains, and even the legendary Warren Buffett admitted in his annual letter that there's little "exciting" in terms of new investment opportunities, Russian stocks might seem like a bargain with their low single-digit PE multiples.

Also, over the last few years, Russian stock markets have benefited from the commodity supercycle. Russia is among the major energy and aluminum producers globally and the spike in commodity prices has boosted the earnings of Russian commodity companies.

Finally, while the dividend yield of the S&P is near all-time lows, stocks in the MSCI Russia Index have a double-digit dividend yield.

Retail investors might be better off buying ETFs that invest in Russian stocks to gain exposure to the Russian stock markets. Investors can also consider actively managed funds that have high exposure to Russia. You can invest in Russian ADRs listed in the U.S. or the Russian companies that trade in the OTC markets. Yandex N.V., Ozon Holdings, and QIWI are among the popular Russian stocks that trade on U.S. markets.

These stocks cratered following Russia’s invasion of Ukraine and there's a fear that the U.S. might look at delisting Russian stocks from the U.S. markets. However, as is the case with delisting Chinese companies, U.S. investors would be hit more than the delisted company.

However, investing in Russian stock markets, especially individual stocks, could be risky at this point. The West might impose more sanctions on the country, which would cripple its economy. Russia has barred foreigners from selling Russian stocks, a decision that highlights the risks of investing in Russian stocks.

If you think that Russian stocks have room to fall more, you might choose to short Russian stocks. You can either short the Russian ETFs like the Market Vectors Russia ETF Trust or short individual stocks.