Investors are turning to sanctions-proof bets on Russian bonds and the rouble to wager that Donald Trump’s rapprochement with Vladimir Putin will send a wave of capital rushing back into Russia’s economy.
Hedge funds and brokers have been scoping out how to trade Russian assets that have been shunned by the west but which they believe could rally sharply if the US president relaxes sanctions as part of a deal to broker a ceasefire in Russia’s war against Ukraine, investors and traders said.
The rouble has surged almost a third against the dollar this year on hopes of an end to the three-year conflict. But investors say the market is looking beyond this to a possible wider rollback of sanctions.
“Some of [Trump’s] rhetoric about Russia is erratic, and this is something you have to factor in, but this is about the lifting of sanctions,” said Paul McNamara, investment director at GAM.
While it remains very difficult for western funds to bet directly on Russian assets, some are hunting for bonds of Russian companies that were considered almost worthless following the 2022 invasion of Ukraine but which are now being marked up in some investors’ internal valuations.
“There is definitely some excitement, predominantly in the hedge fund community,” said Roger Mark, fixed-income analyst at investment firm Ninety One. Nevertheless, the rouble is still thinly traded outside Russia and the bonds are mostly off-limits to foreign institutional investors because of sanctions and their own internal rules, he added.
Since 2022, sanctions have prohibited trading in Russian sovereign debt, and many sanctioned corporate issuers from the country cannot find banks or intermediaries to handle payments to creditors. Trading roubles directly, meanwhile, is very difficult because of sanctions on Russian lenders and western banks’ internal rules.
International trading volumes in the Russian currency are barely $50mn a week, compared with the billions of dollars that changed hands prewar.
Traders have used Kazakhstan’s tenge as a proxy for the rouble, because of the country’s economic ties with Russia, with volumes reaching $100mn to $200mn a week. The tenge has rallied about 5 per cent against the dollar this year.
But these trades are hard to do in size.
Ninety One’s Mark said: “You are talking a quarter of Kazakhstan’s liquidity [in rouble trading] — so it is tiny. That is a function of sanctions and Russian capital controls themselves.”
Some banks and brokers are offering wagers on future moves in the rouble that are settled in dollars rather than in the Russian currency, so that investors can avoid direct exposure to the country. These so-called non-deliverable forwards (NDFs) are often used to trade currencies that are hard to source outside their home countries, such as those of Nigeria or Egypt.
Luis Costa, global head of emerging markets strategy at Citi, said: “Western banks are obviously bound to sanctions. The non-deliverable forward is an instrument where you don’t need to own the currency or any Russian assets.”
The bank recommended going long roubles using the tool last month as the US began talks with Russia.
“For sure, there is more interest in the NDFs recently and the banks have started quoting more actively,” said Igor Nartov, emerging markets trader at KNG, the investment bank.
“It seems to be that you phone up when you want to trade [rouble NDFs] and they will offer you levels and dates,” McNamara of GAM said. “[But] without Russian institutions in the loop, it’s very hard to do.”
International markets for Russian assets evaporated following the invasion of Ukraine, as sanctions severed Russian banks from the global financial plumbing and the country suffered a huge flight of capital.
Russia’s central bank raised interest rates as import costs surged and labour shortages mounted, particularly as the Kremlin began a crash programme of war production.
The rouble trade is a bet that this dynamic will reverse, particularly if Russians who fled the country in fear of being mobilised come back with savings that they stashed in Georgia, Armenia and other nearby nations.
Citi’s Costa said: “It allows global investors to express a view on Russian capital flows. That’s the focus here — the potential for an improvement in capital flows to Russia.”
The trade still has huge risks, for instance in the event that the US instead tightens sanctions if Moscow rejects the ceasefire terms. Even if sanctions are relaxed, Russian investors with money stuck in the country may take the opportunity to exit while many émigrés may not come back at all, Ninety One’s Mark said.
“If you are a Russian who has left a system that has gotten increasingly repressive, and you left because you were called up to fight . . . are you going to come back to your town to face the ostracism of society?”
The rouble’s recent rise has boosted the valuations of Russian bonds that were stranded in foreign investors’ portfolios after the invasion.
“At this point there is not much you can buy, as those who have the bonds generally do not want to sell them,” Nartov said. “But trades do happen. There are more inquiries from market participants asking about the implications of lifting sanctions, and whether coupons will be paid.”
Sanctions and Moscow’s restrictions on payments to “unfriendly” countries mean the Russian government’s own rouble debt remains off limits to western investors. Overall foreign holdings of the country’s bonds have dwindled and domestic banks have largely met Moscow’s recent borrowing.
“Direct exposure to the Russian market will be limited for the time being for western investors due to the restrictions of the Central Bank of Russia,” said one fund manager based outside the west. These investors “should have to find a trustworthy partner from a neutral jurisdiction to get their ticket back to the Russian market”.
