Investors Look to Capitalize on Russia as Trump Aims for Reconciliation

Investors are now focusing on sanctions-resistant opportunities in Russian bonds and the rouble, betting that Donald Trump’s engagement with Vladimir Putin might trigger a significant influx of capital back into Russia’s economy.

Hedge funds and brokers are exploring ways to trade Russian assets that have been largely avoided by the West, yet they believe could experience a substantial rally if the US president eases sanctions as part of a diplomatic resolution to the ongoing conflict in Ukraine, according to insights from investors and traders.

The rouble has appreciated nearly one-third against the dollar this year, fueled by hopes for an end to the three-year conflict. However, investors are anticipating a more extensive rollback of sanctions beyond this initial development.

“Some of [Trump’s] rhetoric about Russia is unpredictable, and this is a factor to consider, but the focus is on potential sanction relief,” stated Paul McNamara, investment director at GAM.

While it remains challenging for Western funds to invest directly in Russian assets, some are seeking bonds from Russian companies that were deemed almost worthless post-2022 invasion of Ukraine but are now being reassessed at higher valuations by certain investors.

“There is certainly a buzz, particularly among the hedge fund sector,” observed Roger Mark, fixed-income analyst at investment firm Ninety One. Yet, the rouble trades thinly outside of Russia, and due to sanctions and internal regulations, most bonds remain inaccessible to foreign institutional investors, he noted.

Since 2022, sanctions have banned trading in Russian sovereign debt, and numerous sanctioned corporate issuers are unable to find banks or intermediaries to facilitate creditor payments. Trading in roubles remains difficult due to sanctions imposed on Russian banks as well as the regulations of Western financial institutions.

International trading volumes of the Russian currency barely average $50 million a week, in stark contrast to the billions exchanged prior to the conflict.

Traders have been using Kazakhstan’s tenge as an alternative for the rouble, given the country’s economic connections with Russia, with weekly trading volumes between $100 million and $200 million. The tenge has appreciated approximately 5 percent against the dollar this year.

However, executing these trades in large amounts remains difficult.

Ninety One’s Mark stated: “You’re looking at a quarter of Kazakhstan’s liquidity [in rouble trading] — so it’s quite insignificant. This is due to both sanctions and the capital controls in Russia.”

Some banks and brokers are providing options on future movements in the rouble that are settled in dollars, thus allowing investors to circumvent direct exposure to Russia. These non-deliverable forwards (NDFs) are commonly used for trading currencies that are difficult to acquire outside their home markets, such as currencies from Nigeria or Egypt.

Luis Costa, global head of emerging markets strategy at Citi, remarked: “Western banks are, of course, constrained by sanctions. The NDF is a financial instrument that doesn’t require ownership of the currency or Russian assets.”

The bank suggested going long on roubles using this tool last month when the US initiated discussions with Russia.

“It appears that you call in when you wish to trade [rouble NDFs], and they will present you with levels and dates,” McNamara from GAM commented. “[However], without Russian institutions being involved, it’s quite tricky.”

International markets for Russian assets vanished following the invasion of Ukraine, as sanctions disconnected Russian banks from the global financial infrastructure, resulting in a severe capital flight from the country.

Russia’s central bank raised interest rates due to rising import costs and increasing labor shortages, especially as the Kremlin initiated an accelerated war production program.

The rouble trade represents a wager that this situation will reverse, particularly if Russians who fled the country to escape conscription return with savings they have kept in neighboring nations like Georgia and Armenia.

Citi’s Costa mentioned: “It allows global investors to express perspectives on Russian capital flows. That’s the essence here — the potential for improvements in capital inflows to Russia.”

This trade still carries significant risks, especially if the US tightens sanctions further in response to Moscow’s rejection of ceasefire terms. Even with potential sanction relief, Russian investors with funds trapped in the country may seize the chance to exit, while many émigrés might not return, cautioned Ninety One’s Mark.

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“If you are a Russian who has left a system that has grown increasingly oppressive, fleeing due to a call to arms . . . are you inclined to return to your hometown and face societal ostracism?”

The recent appreciation of the rouble has raised the valuations of Russian bonds that were stranded in foreign investors’ portfolios after the invasion.

“As of now, there isn’t much available for purchase, as those holding the bonds typically do not wish to sell them,” Nartov stated. “Nonetheless, trades do occur. There are increasing inquiries from market participants regarding the implications of potential sanction relief and the likelihood of coupon payments.”

Sanctions along with Moscow’s restrictions on payments to “unfriendly” states mean that the Russian government’s own rouble debt remains inaccessible to Western investors. Overall foreign ownership of the country’s bonds has diminished significantly, with domestic banks largely fulfilling Moscow’s recent borrowing needs.

“For the time being, direct access to the Russian market will be restricted for Western investors due to the Central Bank of Russia’s limitations,” explained a fund manager based outside the West. These investors “will need to find a reliable partner from a neutral jurisdiction to regain access to the Russian market.”