© Reuters. Shmel-class battleships of the Caspian Fleet of the Russian Navy travel along the Don River in Rostov-on-Don
By Tom Arnold, Natalia Zinets and Karin Strohecker
LONDON (Reuters) – Fund managers are cutting their exposure to Russia and Ukraine out of fear that years of stress could eventually erupt into full-blown war, bringing economic destruction to Ukraine and much more. more sanctions against Russia.
But with the largest buildup of Russian troops on the Ukrainian border since Moscow’s annexation of Crimea in 2014, and the uncompromising rhetoric from the Kremlin, some investors feel market positioning. still not cautious enough.
“People are very optimistic,” said Tim Ash, EM senior strategist at BlueBay Asset Management. “I defended Ukraine for 33 years, including 2014, and it sounds pretty serious. I’m surprised that the market response is probably not really a little more drastic.”
Concerns about the escalation, including the threat of immediate sanctions, were somewhat alleviated after Tuesday’s phone call between US President Joe Biden and his Russian counterpart Vladimir Putin, in which Mr. Biden proposed a summit between the two sides and underlined the US’s commitment to Ukraine’s territorial integrity. The Kremlin says it will study Biden’s proposal.
Aberdeen Standard Investments, with about $ 640 billion in assets under management, has reduced some of its risks in rubles before the latest escalation, but is still exposed to Russian and Ukraine bonds.
Viktor Szabo, the portfolio manager at Aberdeen Standard Investments, said: “It’s not good news to see that escalation but I think the stakes on both sides are pretty high so there’s no impulse. comprehensive breakthrough ”. “We know that the occupation and rebuilding of the Donbass will pay an extremely high price for Russia, financially, in life and on sanctions.”
So far, the asset appears to be undervalued in the full-blown war, despite a number of sell-offs in recent weeks as tensions mount.
The Russian ruble on Wednesday rallied to a two-week high, while the dollar-denominated sovereign bond rebounded from a nearly 12-month low as investors bet Tuesday’s call had sanctions can be disputed.
Ukraine’s international bond and GDP warrants, which help investors pay if economic growth crosses certain thresholds, also climbed to two-week highs after falling near a five-year low. month.
The cost of securing the pair’s sovereign debt, measured in five-year credit-debt swaps, is far from reaching its peak in early 2015, the most recent outbreak of serious skirmish. important between the two countries.
(Graphics: CDS levels of Russia, Ukraine – https://fingfx.thomsonreuters.com/gfx/mkt/oakvewmadvr/Capture.PNG)
Some investors have accepted the risks.
JPMorgan (NYSE 🙂 said last week it had shifted to a market share from the proportion of Russian municipal bonds and the Russian ruble.
“I started building a short (in Russia) position,” said Peter Kisler, portfolio manager at Trium Capital.
“I’m expecting the situation to get worse before it gets better.”
Reza Karim, assistant fund manager, EM Debt, Jupiter Asset Management, said a few weeks ago, Jupiter Asset Management got out of Ukraine’s GDP holdings when negative headlines began to appear.
The volume of domestic bond holdings held by foreign investors has decreased since the end of March.
Ukraine is vulnerable to any escalation of conflict with a much smaller economy than Russia, as well as weaker reserves, weaker current account and financial positions and greater debt.
Tensions with Russia and the recent spike in COVID-19 infection threaten Ukraine’s post-pandemic economic recovery and prospects for GDP warrant holders.
In the first payment to the warrant holders, included in the 2015 government debt restructuring, Ukraine will have to pay around $ 40 million by May based on 2019 GDP growth. 3.2%.
Kyiv’s Ministry of Finance says planned domestic borrowing for 2021 is on track and does not see a liquidity risk when making any payments, including warrant obligations.
“The domestic story in Ukraine, minus its political risk side, is actually pretty good,” said Jupiter’s Karim.
Morgan Stanley (NYSE 🙂 said last week it had seen value in Ukraine’s 2024 and 2026 international bonds, calling the recent decline in guaranteed GDP a “buying opportunity”.
For Russia, risks revolve around sanctions, a familiar headache for investors in Moscow assets.
Many asset managers, such as Jupiter and BlueBay, have built defensive positions in recent months as the prospect of increasing penalties from the Biden administration in retaliation for accusations of Russia meddling in the election. US dispatch and hack the network. Moscow denies meddling.
An invasion of Ukraine would increase the threat, with everything from financial restrictions on large Russian businesses to restrictions on potential targets, analysts said. sovereign ruble debt, the analysts said.
American investors have been banned from buying new debt in Russian dollars since 2014.
Foreign investors’ ratio of OFZ treasury bond holders has fallen this year to a nearly five-year low.
And while domestic borrowing may become more complicated under further sanctions, Russia’s long-term economic growth is likely to be at the highest risk.
“It’s a slow weakening of the macro story of growth and the standard of living,” Ash said.
“Even with oil prices around $ 60-70 / barrel and strong balance sheet, Russia’s potential growth could be 2% lower because foreigners and Russians don’t invest, perhaps because concerns about geopolitics. “
(Graphics: Foreigners’ share in Russian government bonds near a 5-year low – https://graphics.reuters.com/UKRAINE-CRISIS/RUSSIA/xlbpgebbqpq/chart.png)