Large fund managers anticipate that most Russian assets will remain closed off to Western investors, despite a surge of speculative trades wagering on a thaw in relations between Moscow and Washington.
The perceived openness of former U.S. President Donald Trump toward Russia's Vladimir Putin has led to increased interest in Russian financial assets, including the rouble, Kazakhstan's tenge—viewed as a rouble proxy—and bonds issued by major Russian energy companies such as Gazprom and Lukoil.
However, seasoned investors expect a prolonged separation of key segments of Russia's economy from foreign investment rather than a rush back into the market, which has been largely cut off from the global financial system since Russia's invasion of Ukraine in 2022.
"We see maybe some asset swaps," remarked Gunter Deuber, head of research at Austria's Raiffeisen Bank International, one of the few Western banks still operating in Russia. He highlighted the complexity of assets held between Russia and the West, suggesting that asset swaps provide a method to mitigate risk for both sides.
Recently, Putin authorized U.S. hedge fund 683 Capital Partners to acquire securities in Russian companies from specific foreign stakeholders. However, the order also permitted their future sale to two Russian funds, dampening hopes that this would signal an imminent reopening.
Still, there are increasing inquiries from brokers dealing in Russia-related assets. One popular avenue is roubles via non-deliverable forwards (NDFs)—derivatives traded and settled in dollars that help shield investors from sanctions complications, while their value remains tied to Russia's economy.
The rouble has been the top performer among emerging market currencies this year, having strengthened approximately 30% against the dollar. UBS data revealed that hedge funds holding $8.7 billion in rouble NDFs in early March represented the second-largest long position across major currencies, indicating an expectation of further currency strength.
These positions allow traders to capitalize if Russia's markets surge amid a potential rapprochement between Trump and Putin. "Investors can definitely try to get exposure to some end of sanctions without having direct Ukrainian or Russian exposure," noted Anton Hauser, senior fund manager at Erste Asset Management, describing the NDF trade as "very niche."
However, for the foreseeable future, Erste is unlikely to engage, despite possessing some sanctions-frozen local Russian currency bonds. "It's extremely exotic at the moment," he commented.
Analysts estimate the average daily volume in rouble NDF trading is between $25 million and $40 million, a small fraction compared to the $2-2.5 billion in daily trading prior to the war.
Interest has also increased in tradable corporate hard-currency bonds issued by Russian firms, such as Gazprom and Lukoil. Yet, poor liquidity means that buyers often demand a discount. "They still pay coupons, but tradability is very, very poor," explained Sergey Dergachev, a portfolio manager at Union Investment Privatfonds.
Once a staple of emerging markets, hard-currency debt from Russian corporations—nearly $100 billion outstanding—comprised 4% of indexes in 2022, with international investors holding about a fifth of that, according to JPMorgan.
Proxy trades have gained traction following Trump's return, encompassing sovereign bonds and currencies of Uzbekistan and Kazakhstan, economies closely tied to Russia. Investors have reported that brokers in Central Asian, Middle Eastern, and Latin American nations deemed "friendly" by the Kremlin have ramped up offers for Russian-related trades.
Brokers indicate that U.S. and European distressed asset managers are increasingly interested in Russia's sanctioned rouble-denominated OFZ bonds, even though sanctions against Russia's National Settlement Depository and the Moscow Stock Exchange render direct ownership impossible.
Ararat Mkrtchian, CEO of Armenian broker Sirius Capital, mentioned that yields of around 15% entice interest in domestic government bonds, despite significant losses experienced by many foreign investors due to the sanctions. "There is a desire from foreign capital to return because this is a highly depreciated but high-quality financial asset—if you forget about politics," he stated.
The diverging approaches of Europe and the United States toward Russia could hinder efforts to trade sanctioned assets, such as Russian government bonds, more actively. "The friendliness we see at the highest levels between Washington and Moscow doesn't exist between most European leaders and the Kremlin," remarked Petar Atanasov, co-head of sovereign research at Gramercy Funds Management.
While Trump has engaged in direct discussions with Putin, Europe is making its most significant defense spending push since World War II and has intensified sanctions. Furthermore, Russian law now restricts asset ownership and trading by parties from "unfriendly" nations, complicating the landscape further.
This combination represents a profound transformation of Russia's economy, with a significantly increased role for the state. Pavel Mamai of ProMeritum Investment Management noted that there are currently no clear indications that Moscow is willing to reopen its markets to international investors any time soon. "I don't believe that the Russian market and the international market will be merged again in the near future," he asserted.