Opportunity for US financial speculators to make money from Russia sanctions

This type of transaction is known as the “negative-basis trade” – buying Russian government or corporate bonds at cheap prices along with bad debt insurance policies, which act as insurance for the potential default on the borrower’s debt.

Normally, this type of transaction makes no sense, but when institutional investors want to quickly remove their portfolios from anything Russia-related, bond prices fall rapidly.

Trading volume corporate bonds Russia has risen to its highest level in two years since Russia launched a military operation in Ukraine, according to Bloomberg.

Data from the MarketAxess website shows that Russia’s sovereign debt traded at $7 billion between February 24 and April 7, up from $5 billion in the same period in 2021, or a 35% increase.

Philip M. Nichols, an expert on Russia and corporate social responsibility and a professor at the Wharton School of the University of Pennsylvania (USA), said that Russian bonds are being traded very quickly. “There are a lot of speculators who are buying bonds that are severely undervalued and are on the verge of becoming junk,” he said.

Nichols says he keeps getting calls from analysts interested in whether the potential trade makes sense. “The disparity in Russia’s sovereign debt is now staggering,” he said. They are making an unusually large amount of money.”

The cost of insuring Russia’s debt rose to 4,300 basis points on April 5, up from 2,800 the day before. At the same time, bond yields dropped significantly. According to The Economist, it may take just over $4 million to insure $10 million in Russian securities.

Hedge funds such as Aurelius Capital Management, GoldenTree Asset Management and Silver Point Capital have increased their bond purchases, mainly Russian corporate bonds, the Financial Times reported in late March.

American financial institutions such as JPMorgan Chase and Goldman Sachs are facilitating these transactions.

“This is Wall Street,” said Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research. I’m not surprised when they see a loophole that they can exploit for money.”

JPMorgan representatives said they were acting as a middleman, simply looking to assist customers. A JPMorgan spokesperson said: “As a market maker, we have helped clients mitigate risk and manage losses with Russia in the secondary market. There were no transactions in violation of sanctions. punish or benefit Russia”.

Robert Tipp, investment strategist and head of Global Bonds at PGIM Fixed Income, said that if clients want to remove their risk quickly, they can look to Russian oligarchs, who will happy to buy again government bonds. Sell ​​Russian debt to American hedge funds, keeping any accrued interest out of Russian hands.

These transactions are legitimate and lucrative, but highly speculative and subject to big swings based on news of Russia’s hostilities in Ukraine and other sanctions, Nichols said.

It also reveals an alarming disconnect between Wall Street and the real state of the global economy: Often, investors will value their Russian debt based on whether they will be repaid. whether or not to pay and their ability to be repaid will depend on the strength and durability of the Russian economy, but that is not the case. New US Treasury sanctions block Russia’s access to any dollars it deposits in US banks, significantly increasing the likelihood of Russia defaulted on debt.

Last week, the US Congress voted stripped of most favored nation status with Russiaa major economic downgrade would pave the way for deeper sanctions and import controls on essential Russian products such as chemicals and steel.