Analysis-Rush to Russian assets belies 'permafrost' some investors fear

“It’s extremely exotic at the moment,” he said.

Analysts estimate the average daily volume in rouble NDF trade at $25 million to $40 million – a fraction of the $2-2.5 billion in daily pre-war rouble trading.

POOR LIQUIDITY

Investors said interest had also spiked for still-tradeable corporate hard-currency bonds issued by Russian firms – such as Gazprom, Lukoil and fertiliser company Phosagro. But poor liquidity means buyers demand a discount.

“They still pay you coupons, but tradability is very, very poor,” said Sergey Dergachev, portfolio manager at Union Investment Privatfonds.

Hard-currency debt issued by Russian corporates was once an emerging market mainstay; the nearly $100 billion outstanding accounted for 4% of indexes in 2022, and international investors held roughly a fifth of that, according to JPMorgan calculations at the time.

Proxy trades have also strengthened since Trump’s return, including the sovereign bonds and currencies of Uzbekistan and Kazakhstan – Russian neighbours with closely linked economies.

Investors say brokers in Central Asian, Middle Eastern and Latin American nations with access to Russia’s domestic markets – and deemed “friendly” by the Kremlin – have increased offers of Russian-related trades.

Brokers say investors, including U.S. and European distressed asset managers, are more interested in exposure to Russia’s still-sanctioned rouble-denominated OFZ bonds, even though sanctions on Russia’s National Settlement Depository and Moscow Stock Exchange MOEX mean direct ownership is impossible.

Ararat Mkrtchian, CEO of Armenian broker Sirius Capital, said yields of around 15% are enough to spark interest in domestic government bonds despite the hefty losses many foreign investors suffered when sanctions took effect.

“In general, 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,” said Mkrtchian.

EUROPE VS UNITED STATES

A growing gap between Europe’s approach to Russia and that of the United States under Trump could complicate hopes to trade sanctioned assets, such as Russian government bonds, more actively.

“The friendliness that we see on the highest levels between Washington and Moscow doesn’t exist between most European leaders and the Kremlin,” said Petar Atanasov, Gramercy Funds Management’s co-head of sovereign research.

While Trump has held direct talks with Putin, Europe is now making its largest defence spending push since World War II and has doubled down on sanctions.

And one of the biggest obstacles is Russian law: Amid the sanctions onslaught, Moscow passed laws restricting asset ownership and trading by parties in “unfriendly” countries.

This combination has transformed Russia’s economy, with a much larger state role, said ProMeritum Investment Management’s Pavel Mamai, and there are no clear signs yet Moscow is willing to open up again.

“I don’t believe that the Russian market and the international market will be merged again in short future.”

(Reporting by Libby George, Karin Strohecker, Alexander Marrow and Nell Mackenzie; Additional reporting by Carolina Mandl and Darya Korsunskaya; Editing by Hugh Lawson and Michael Perry)