Investors Struggle to Trade Russian Assets as Sanctions Hit the Country

Global investors with at least $150 billion worth of Russian bonds on their books are racing to find ways to do business after Western sanctions froze the country out of the global financial system.

Foreign investors held $20 billion in Russian dollar-denominated debt and ruble-denominated sovereign bonds worth $41 billion at the end of 2021, according to Russian central bank data. . Holdings in Russian stocks totaled US$86 billion (R$442 billion), according to Moscow Stock Exchange data.

But the exclusion of many Russian banks from the Swift payments network means that foreign investors are now stuck, unsure how they can get out without being hit by the new sanctions and without finding willing and able to buy counterparties.

“Markets have been pricing extremely conservatively overall because, frankly, the markets just pulled back and said ‘let’s wait and see what happens,'” said Rick Rieder, director of global fixed income investments at BlackRock, one of the largest holders of Russian sovereign debt, according to Bloomberg data. “There’s not a lot of real negotiation going on. Nobody wants to be on the other side.”

Over the weekend, Western countries said they would bar some Russian banks from Swift, the messaging network that underpins global payments, while also blocking the central bank’s ability to access $630 billion in foreign reserves. From Tuesday (1), the United States will ban its financial institutions from buying new Russian government bonds.

Most negotiations have stopped. The Russian central bank on Monday banned foreign institutions from selling local bonds on the Moscow Exchange and suspended trading of shares and derivatives on the Exchange for the entire day.

Meanwhile, stock exchanges abroad have suspended trading in the listings of Russia’s best-known companies. Deutsche Börse, Germany’s largest stock exchange operator, has suspended trading in shares of 16 Russian companies, including Aeroflot, Rosneft, Sberbank, VTB and VEB Finance.

Shares in Russian bank VTB were suspended on Tuesday at the London Stock Exchange, affecting traders’ ability to sell clients’ positions.

The value of London-listed bonds such as Sberbank, TCS and Gazprom tumbled on Monday, but many traders also voluntarily avoided pricing for fear of repercussions — preferring to wait for more guidance from their compliance departments.

Nasdaq and the New York Stock Exchange have temporarily halted trading in some Russian-listed groups as they seek more information on the impact of sanctions following the Russian invasion of Ukraine.

US regulations give exchanges the power to suspend stock trading and ensure that investors have full disclosure of any material information that could affect stock prices. Among the companies Nasdaq suspended are Nexters, Yandex and Ozon Holdings.

One question for brokers and investors was whether their trading counterparties would be kicked out of the Swift system. “I’m having to not deal with Russia until I get a list,” said one investment banking trader.

Some brokers were concerned that even if they managed to close a deal, there was little guarantee that it would be liquidated and the asset exchanged for cash. Most international transactions are done in US dollars, and banks are responsible for managing the currency risk of these transactions.

“It’s so confusing. If you trade something and you can’t settle it, you take the exposure,” said a trader at an American brokerage.

These concerns were exacerbated by concerns that trade payments and bond coupons would be frozen in accounts with custodian banks or international bond depositories, where trades are settled and balances between central banks and commercial banks are updated.

Belgium’s two largest depositaries, Euroclear and Clearstream, together hold around €50 trillion in assets in custody for global investors, making them a pillar of the financial system. Deals are usually concluded with the transfer of balances between customer accounts held at the depositary or between the two trading companies.

On Monday night, Clearstream said the ruble would no longer be a qualifying clearing currency, effective immediately.

Euroclear said on Tuesday it would shut down VTB, the main channel between Euroclear and Clearstream customers, and stop ruble-denominated trading taking place outside Russia from March 3. She also said she could not accept funds received from her other correspondent bank, the Dutch ING group. Correspondent banking involves one bank providing services to another, often in another country.

Some brokers pinned their hopes that Euroclear would find a new bank compliant with Russian regulations. However, this process can take time.

“Setting up a new correspondent banking relationship can take months. It’s a very onerous process. You’re often encouraged to visit the site for due diligence or explain why you didn’t,” said Virginie O’Shea, founder of the market consultancy of capital Firebrand Research.

Carsten Brzeski, global head of macro at ING, said Russia could fight the bank asset freeze by adopting a moratorium on corporate debt payments. In the second, President Vladimir Putin banned Russians from transferring foreign currency abroad, making it difficult for banks to pay foreign liabilities.

BlackRock believes Russia could default on its bonds due to an inability to make payments to investors’ accounts. “It’s the difference between the ability to pay and the willingness to pay,” Rieder said.

Translated by Luiz Roberto M. Gonçalves