Investors struggle to trade Russian assets as sanctions hit market plumbing

Global investors with at least $150 billion in Russian stocks on their books are scrambling to find ways to make deals after Western sanctions shut the country out of the financial system. Global.

According to data from Russia’s central bank, foreign investors hold $20 billion of Russian dollar debt and $41 billion worth of ruble sovereign bonds by the end of 2021. Moscow data Exchange shows that Russian stock ownership amounted to $86 billion.

But exclude many Russian banks from Swift payments The network means that foreign investors are currently trapped, it is unclear how they can get out without being affected by new sanctions, and cannot find willing partners and able to buy.

“The markets have priced in an extremely cautious level because, quite frankly, the markets have just retreated and said that,” said Rick Rieder, global head of fixed income investment at BlackRock. ‘we’ll see what happens,’ according to data from Bloomberg. “There’s not much actual trading going on. No one wants to be on the other side.”

Over the weekend, Western countries said they would ban some Russian banks from Swift, the messaging network that underpins global payments, and block their access to $630 billion in foreign exchange reserves. center. From Tuesday, The US will ban its financial institutions from the purchase of new Russian government bonds.

Most trading has stopped. Russia’s central bank on Monday banned overseas institutions from selling local securities on the Moscow Exchange, and suspended trading of shares and derivatives on the stock market all day.

Meanwhile, foreign stock exchanges have suspended trading on lists of the most famous Russian companies. Deutsche Börse, the operator of Germany’s largest stock exchange, has suspended trading in shares of 16 Russian companies, including Aeroflot, Rosneft, Sberbank, VTB and VEB Finance. Meanwhile, shares of VTB, the Russian bank, were on Tuesday suspended from the London Stock Exchange, affecting traders’ ability to sell out of their clients’ positions.

The value of London-listed securities such as Sberbank, TCS and Gazprom plummeted on Monday, but many traders also voluntarily withdrew from the valuation for fear of the consequences – choosing instead to wait for more direction. leads from their compliance departments.

Regional chart showing foreign investors' exposure to Russian assets

Nasdaq and the New York Stock Exchange have suspended trading on some Russian-listed names as they seek more information about the impact of sanctions following Russia’s invasion of Ukraine.

U.S. regulations allow exchanges to suspend stock trading and ensure that investors are fully disclosed any material information that could affect stock prices. Among the companies that Nasdaq paused were Nexters, Yandex and Ozon Holdings.

One question for brokers and investors is whether their trading partners will be excluded from Swift. “I won’t trade Russia until I get the listing,” said a trader at an investment bank.

Some brokers are concerned that even if they reach an agreement, there is little guarantee that it will be settled and assets exchanged for cash. Most cross-border transactions are settled in US dollars, and banks are responsible for managing the currency risk for those transactions. “It was messy. If you trade something and you can’t settle it, you’re left with risk,” said a trader at a US broker.

Those concerns were exacerbated by concerns that payments for bond transactions and coupons would be frozen in accounts at international custodian or custodial banks, where Transactions are settled and balances between central banks and commercial banks updated.

The two largest depositories, Belgium’s Euroclear and Clearstream, jointly hold around 50 billion euros in assets for global investors, making them the mainstay of the financial system. Transactions are usually completed by transferring balances between client accounts held in custody, or between two market utilities.

At the end of Monday, Clearstream said the ruble will no longer be a qualifying payment currency, effective immediately.

Euroclear said it would disable VTB, the main conduit between both Euroclear and Clearstream customers, on Tuesday and stop ruble transactions taking place outside Russia from March 3. It also said it was unable to receive funds to his other correspondent bank, Dutch. ING group. Correspondent banking requires one bank to provide services to another, usually in a particular country.

Some brokers are pinning their hopes on Euroclear finding a new regulatory-compliant bank in Russia. However, such a process can take time.

“Setting up a new correspondent banking relationship can take months. It was a very difficult process. In general, you are encouraged to make on-site visits to appraise or explain why you haven’t,” said Virginia O’Shea, founder of Firebrand Research, a capital markets consulting firm for know.

Carsten Brzeski, ING’s head of global macro, said Russia could counter a bank asset freeze by Western powers by introducing a moratorium on corporate debt payments. On Monday, Vladimir Putin banned Russians from transferring foreign currency abroad, hindering the repayment of foreign debt by banks.

BlackRock believes it is possible that Russia could default on its bonds due to its inability to pay investors’ accounts. “It’s the difference between ability to pay and desire to pay,” says Rieder.

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