Time to invest in Russia?

If you thought Vladimir Putin's annexation of Crimea was quick, just look at how fast investors have changed their tune on Russia.

FORTUNE -- It wasn't too long ago that Russia was considered one of the BRIC powerhouses among emerging markets, along with Brazil, India, and China. Toward the end of 2013, many respected money managers were excited about Russia -- if not bullish. David Darst, then the chief investment strategist of Morgan Stanley Wealth Management, said Russia was one of his top three best ideas (along with Japan and gold mining stocks). The global investing team at First Eagle Investment Management had just returned from a due diligence trip to meet companies in the former Soviet Union, whose shares were trading at tempting valuations of just five or six times earnings, a fraction of U.S. stock valuations, and among the cheapest in emerging markets. "Russia is a beguiling geography," Giorgio Caputo, portfolio manager of First Eagle's Global Income Builder Fund, said at the time.

They weren't the only ones to find Russia alluring. By December 2013, American institutions had poured more than $37 billion into Russia, nearly double what they had invested in the country just three years earlier, according to eVestment. The number of new owners in Russian grocery store chain Magnit had grown 200% from the previous quarter, according to Morningstar. "We just didn't know what Russia was going to do two months ago. We just didn't know," explained Nico Marais, head of multi asset investments at Schroders, while addressing journalists at a recent event in New York.

Then protests broke out in Ukraine, ousting the president. But investors really squirmed after Russian forces entered Crimea and the Kremlin swiftly drew up the paperwork to formally annex the region. Since the beginning of the year, the Russian stock market index MICEX has fallen 12%. The value of all publicly traded stocks domiciled in Russia is now about $430 billion, according to FactSet -- less than the market cap of Apple (AAPL), Darst points out.

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It's too early to measure the full impact of U.S. investors' reaction to the news coming out of Russia and Ukraine, as many funds only report their holdings quarterly, and that could still be some weeks away. But worries about the next Cold War have already had a significant effect. Equity mutual funds that reported holdings for both December and February had about $9.1 billion in Russian stocks at the end of 2013; that amount had dropped 13% to $7.9 billion at the end of February, estimates Morningstar senior research analyst, Annette Larson. The funds' average allocation to Russia declined by a fifth, to 0.76%.

Now, some investors who thought Russian stocks looked incredibly cheap before think they're practically irresistible bargains now. Companies in the MSCI Russia Index have traded as low as three or four times earnings in recent weeks -- though that could also mean that the companies are so risky, even the discounts don't justify the danger.

"To me that is screaming, if you could close your eyes, and not look again, you might be very pleasantly surprised a few years from now -- maybe. Maybe," says Darst, now a senior advisor to Morgan Stanley (MS).

Indeed, Luz Padilla, head of DoubleLine's emerging markets fixed-income group and manager of its Emerging Markets Fixed Income fund, says Russian bonds still look great. When Western sanctions against Putin scared the market, she increased her already significant Russian exposure by about one percentage point. In fact, she would have bought more, except prices bounced back so quickly "there wasn't much of a buying window," she says. The fund currently holds corporate bonds issued by Russian banks including VTB and Sberbank, and by state-controlled energy company Gazprom. Even when government interference has ruined companies in the past, Padilla adds, bondholders got paid in full. "Russia, for us, is a different calculus," she says. "This is not the Russia of 1998."

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Still, for many portfolio managers, the answer to investing in Russia right now sounds more like "hell no."

Back in 2005 and 2006, Rudolph-Riad Younes, the former portfolio manager at Artio Global Investors (before it was sold to Aberdeen Asset Management) who has recently launched R Squared Capital Management, had invested nearly $16 billion in about 50 companies across Russia and Eastern Europe. "We were one of the largest, if not the largest investor in Russia," he says. But a few months ago, he sold the last of the shares he owned in Sberbank -- before the tensions in Ukraine escalated -- because he was not satisfied with how the companies were behaving. "They were getting less shareholder-friendly than before," he says. "When you go from good to less good, or bad to more bad, usually it's not a good time to make money."

So for now, he's sitting on the sidelines, but he's keeping a close eye on a few names (he won't say which), especially private companies, as opposed to those controlled by the Russian state. "We feel like [the prices] have come down a lot, and we are waiting for the right entry point, to have a foot in the door, or a toe in the water," he says.

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